KOREA – MEASURES AFFECTING TRADE IN COMMERCIAL VESSELS (WT/DS273)
Document: Report of the Panel
Date: 7 March 2005
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)

KOREA – MEASURES AFFECTING TRADE
IN COMMERCIAL VESSELS
(WT/DS273)

Report of the Panel

I. INTRODUCTION
A. COMPLAINT OF THE EUROPEAN COMMUNITIES
1.1 On 21 October 2002, the European Communities requested consultations with Korea pursuant
to Article 4 of the Dispute Settlement Understanding ("the DSU"), Article XXIII:1 of the General
Agreement on Tariffs and Trade 1994 (" GATT 1994"), and Articles 4, 7 and 30 of the Agreement on
Subsidies and Countervailing Measures ("the SCM Agreement "), with regard to measures affecting
trade in commercial vessels.1
1.2 The European Communities and Korea held the requested consultations on 22 November and
13 December 2002, and 7 May 2003, but failed to r each a mutually satisfactory resolution of the
matter.
1.3 On 11 June 2003, the European Communities re quested the establishment of a panel to
examine the matter.2
1.4 On 10 July 2003, the European Communities requ ested that the above request be placed on
the agenda of the meeting of the Dispute Settlement Body ("the DSB") scheduled for 21 July 2003.
The European Communities further requested that, at the same meeting, the DSB initiate the
procedures provided for in Annex V of the SCM Agreement pursuant to paragraph 2 of that Annex.
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL
1.5 At its meeting of 21 July 2003, the DSB established a panel in accordance with Article 6 of
the DSU and pursuant to the request made by the European Communities in document
1.6 At that meeting, the parties to the dispute al so agreed that the Panel should have standard
terms of reference. The terms of reference are, therefore, the following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the European Communities in document , the matter referred to the
DSB by the European Communiti es in that document, and to make such findings as
will assist the DSB in making the recommendations or in giving the rulings provided
for in those agreements."
1.7 On 11 August 2003, the European Communities re quested the Director-General to determine
the composition of the Panel, pursuant to paragraph 7 of Article 8 of the DSU. This paragraph
provides:
"If there is no agreement on the panelists within 20 days after the date of the
establishment of a Panel, at the request of either party, the Director-General, in
consultation with the Chairman of the DSB and the Chairman of the relevant Council
or Committee, shall determine the com position of the panel by appointing the
panelists whom the Director-General consid ers most appropriate in accordance with
any relevant special or additional rules or procedures of the covered agreement or
covered agreements which are at issue in th e dispute, after consulting with the parties
to the dispute. The Chairman of the DSB shall inform the Members of the
composition of the panel thus formed no later than 10 days after the date the
Chairmen receives such a request."

1 WT/DS273/1.
2 WT/DS273/2.

1.8 On 20 August 2003, the Director-General accordingly composed the Panel as follows:
Members: Mr. Gilles Gauthier
 Ms. Ana Novik Assael

1.9 China, Japan, Mexico, Norway, Chinese Taipei and the United States reserved their third-
party rights.
3
1.10 On 11 April 2004, Mr. El-Naggar, Chairman of the Panel, passed away. On 6 May 2004, the
parties jointly requested that th e Director-General appoint a new Chairman to the Panel. On
11 May 2004, the Director-General appointed Mr. Julio Lacarte-Muró as the new Chairman of the
Panel.4
C. INFORMATION GATHERING PROCEDURE UNDER ANNEX V OF THE SCM AGREEMENT
1.11 In its 10 July 2003 communication to the DS B requesting initiation of the information-
gathering procedure under Annex V of the SCM Agreement, the European Communities stated that in
order to facilitate the DSB's task of designating a representative pursuant to paragraph 4 of Annex V,
it had proposed names and consulted with Korea. The European Communities indicated that it and
Korea had not reached agreement in this respect , and thus requested that the DSB designate a
representative to facilitate the in formation-gathering procedure.5 At its meeting of 21 July 2003, the
DSB designated Mr. András Szepesi as its representative for this purpose.
1.12 The date of 21 July 2003 was considered by the parties to be the date on which the matter was
"referred to the DSB" in the sense of paragraph 5 of Annex V, such that the 60-day period established
in that paragraph for completion of the info rmation-gathering pro cess would have ended on
19 September 2003. The parties agreed that the co mplaining party's first submission should be due
six weeks after the end of the Annex V procedure, and the responding party's first submission six
weeks after that, so that all information develope d through the Annex V procedure could be used in
the preparation of these submissions. The Panel established its timetable accordingly.
1.13 At a late stage in the 60-day period the 19 September 2003 date was modified, with the
agreement of the parties, to allow the parties additional time to tran slate certain voluminous
documentation into one of the three WTO working languages. The amended deadline for completion
of the Annex V procedure was 10 November 2003. The Panel was immediately informed of these
modifications and the causes thereof. The Panel revised its timetable accordingly.
1.14 On 10 November 2003, the Designated Representative submitted his report to the Panel. This
report is set forth in Attachment 1.
D.
ADDITIONAL PROCEDURES FOR THE PROTECTION OF BUSINESS CONFIDENTIAL INFORMATION
1.15 As indicated in the report of the Designated Re presentative the Panel, at the request of the
parties, adopted additional procedures for the prot ection of business confidential information. These
procedures ("the BCI procedures"), are set forth in Attachment 2.

3 WT/DS274/6.
4 WT/DS273/7.
5 WT/DS273/3.

E. PANEL PROCEEDINGS
1.16 The Panel met with the parties on 9-10 March 2004, and 17-18 June 2004. The Panel met
with third parties on 9 March 2004.
1.17 The Panel submitted its Interim Report to th e parties on 24 November 2004. The Panel
submitted its final report to the parties on 22 December 2004.
II. FACTUAL ASPECTS
2.1 This dispute concerns the following measures, alleged by the European Communities to
constitute prohibited subsidies and/or actionable subsidies in the sense of Parts II and III of the
SCM Agreement:
• The Act Establishing the Export-Import Bank of Korea ("KEXIM"), any
implementing decrees and other regulations, alleged to specifically allow and enable
KEXIM to provide Korean exporters of cap ital goods with financing at preferential
rates.

• The pre-shipment loan ("PSL") and adva nce payment refund guarantee ("APRG")
schemes established by KEXIM.

• The individual granting of pre-shipme nt loans and advance payment refund
guarantees by KEXIM to Korean shipyards, including Samho Heavy Industries
("Samho-HI" or "SHI"), Daedong Shipbu ilding Co. ("Daedong"), Daewoo Heavy
Industry ("DHI"), Daewoo Shipbuilding a nd Marine Engineering ("Daewoo-SME",
or "DSME"), Hyundai Heavy Industries (" Hyundai-HI", or "HHI"), Hyundai Mipo
("MIPO"), Samsung Heavy Industries ("Samsung") and Hanjin Heavy Industries &
Construction Co ("Hanjin").

• Corporate restructuring measures including de bt forgiveness, debt and interest relief
and debt-to-equity swaps, affecting Daewoo-SME, Samho-HI, and Daedong).

• The Special Tax Treatment Control Law ("STTCL"), in particular the special taxation
on in-kind contribution (Article 38) and the special taxation on spin-off (Article 45-2)
scheme.

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
A.
THE EUROPEAN COMMUNITIES
3.1 The European Communities asks the Panel to find that Korea has granted subsidies
inconsistent with its obligations under the SCM Agreement, because:
• "Korea, through the KEXIM Act, KEXIM Decr ee and Interest Rate Guidelines provides
prohibited subsidies, inconsistent with Article 3.1 and 3.2 of the SCM Agreement";

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

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

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

3.2 The European Communities considers that the above violations of the SCM Agreement have
nullified and impaired benef its accruing to it under the Marrakesh Agreement Establishing the World
Trade Organization (" WTO Agreement ") and accordingly asks the Panel to recommend that Korea
withdraw these subsidies or remove the adverse eff ects of the actionable subsidies in accordance with
Articles 4.7 and 7.8 of the SCM Agreement.
B.
KOREA
3.3 Korea requested the Panel to issue a number of preliminary rulings. The Panel's reasoning
and conclusions in respect of Korea's requests for preliminary rulings are set forth in section VII.A,
infra.
3.4 Korea also requests the Panel to dismiss all of the claims of the European Communities.
IV. ARGUMENTS OF THE PARTIES
4.1 The arguments of the parties are set out in th eir submissions to the Panel. The parties'
executive summaries of their submissions are attached as Annexes to this report (see List of Annexes,
page viii), and constitute an integral part of this Report.
V. ARGUMENTS OF THE THIRD PARTIES
5.1 The arguments of third parties China, Japan, Norway, Chinese Taipei and the United States,
are set out in their submissions to the Panel and are attached to this Report as Annexes (see List of
Annexes, page viii), and constitute an integral part of this Report. Mexico made no submissions to
the Panel.
VI. INTERIM REVIEW
6.1 On 24 November 2004, we submitted the interim report to the parties. Korea submitted a
written request for interim review of certain aspects of the interim report. The EC did not request
interim review. The EC also submitted written comments on Korea's request. Neither party requested
an interim review meeting.
6.2 Korea's communication concerning interim revi ew contained two pa rts, a cover letter
containing general comments, and an annex cont aining specific comments on certain identified
paragraphs of the interim report. We address these two parts of Korea's comments separately, in
sections VI.A and VI.B, respectively.
6.3 We also have made certain technical revisions and corrections to the report.
A. KOREA'S GENERAL COMMENTS IN ITS COVER LETTER
6.4 The cover letter to Korea's submission requesting review of aspects of the Panel's interim
report sets forth "some reservations regarding some procedural issues and certain aspects of the
prohibited subsidies analysis of the Panel". We note at the outset, however, that these comments are
quite general, lacking specific references to particular paragraphs or sections of the interim report, and

failing to indicate any changes that Korea requests th e Panel make to the report. We therefore doubt
whether these comments meet the requirement of Artic le 15.2 that a party's request for interim review
identify "precise aspects" of the report. In any event, as discussed below, we see no need to make any
changes to the report on the basis of the comments in Korea's cover letter.
6.5 Korea states that the Panel misallocated the burden of proof "in places", shifting the burden
from the EC to Korea, but identifies no specific pl ace in which this allege d misallocation of burden
occurred. We believe that the a ppropriate burden of proof was mainta ined in respect of both parties
throughout the dispute. Korea also argues that the EC was permitted to introduce new factual
information at a late stage of the proceedings, not as rebuttals but to establish wholly new points. We
disagree with Korea's implication that it lost due process rights, as we recall that at various stages of
the proceedings, the Panel requested certain inform ation from both parties, and the parties requested
certain information from each other, and that af ter each of these submissions, each party was given
full opportunity to comment on the new factual inform ation submitted by the other party. Concerning
Korea's general objection to the benchmarks offered by the EC for APRG transactions, and the Panel's
analysis of country risk spread, we believe that our findings adequately explain our overall approach
and reasoning.6 As for Korea's general disagreement with our approach to defining a public body in
the sense of Article 1.1(a)(1), as discussed in our fi ndings, in our view Korea's approach confuses the
concepts of financial contribution and benefit. Concerning actionable subsidies, Korea states that it
disagrees with certain of our conclusions, but pr ovides no specifics whatsoever. Finally, concerning
Korea's statement that the EC "was permitted wit hout remark to manifestly abuse the Annex V
process", we recall that Korea originally raised this issue in its first written submission, and that we
ruled on it on 12 March 2004.7
B. KOREA'S SPECIFIC COMMENTS ON CERTAIN IDENTIFIED PARAGRAPHS OF THE INTERIM REPORT
Footnote 75 (footnote 77 of the Final Report)
6.6 Korea requested that we change the reference to "Exhibit EC – 21" to refer to "Exhibit EC –
26". We have made the change requested by Korea.
Paragraphs 7.136 and 7.137
6.7 Korea argues that Exhibits KOREA – 58 and 59 were provided in response to Question 69
from the Panel, which sought "an example (with su pporting documentation) of two instances in which
different Korean shipyards were not able to select the APRG provider itself". Korea asserts that the
Panel did not ask Korea to rebut the specific APRG benchmarks offered by the EC. Korea supposes
that the Panel adopted this appr oach because it was looking at the i ssue from a systemic general point
of view. Korea asserts that if it showed that there were questions about the choice of source of
APRGs, it would be up to the EC to show who made that choice, and establish that the benchmarks
proposed by the EC were appropriate. Korea asserts that had the Panel demanded that Korea rebut the
specific instances offered by the EC, the Panel shoul d not have asked for examples in a manner that
indicated to Korea that the Panel was taking a gene ral perspective. Korea submits that, by doing so,
the Panel prohibited Korea from offeri ng evidence that it might have been able to generate to rebut
specific instances rather than just providing examples as the Panel requested.
6.8 Korea also disagrees with the Panel's statemen t that the examples in Exhibit KOREA – 83
"are APRGs provided to shipyards that fall outside the scope of the EC's pr ohibited export subsidies
claims". Korea asserts that there were no limitations on the scope of the EC's claims. Korea submits

6 In section VI.B, infra. we take up Korea's detailed, specific comments (in the Annex to part of its
interim review submission) in relation to precise aspects of particular paragraphs of our report pertaining to
certain benchmarks.
7 The text of our ruling is reproduced in full at paragraph 7.5.

that the information in Exhibit KOREA – 83 is therefore relevant, probative and directly responsive to
Question 69 from the Panel.
6.9 The EC submits that Korea's comment is based on the erroneous view that Korea needed only
to rebut specific evidence advanced by the Europ ean Communities where specifically “demanded” to
do so by the Panel and that, as a result, the Panel “prohibits Korea from offering evidence that it might
have been able to generate to rebut specific instan ces rather than just providing examples as the Panel
requested.”
6.10 Regarding Exhibit KOREA – 83, the EC asserts that Korea misrepresents or misunderstands
the Panel’s reasoning. The EC argues that the Panel is dealing in this part of the Report with the EC's
complaint that individual APRG transactions constitu ted export subsidies. The EC asserts that it is
therefore irrelevant that the Panel accepted the admissibility of the EC's per se claim against
KEXIM’s export subsidy regimes. The EC suggests that the Panel could take account of Korea’s
point and avoid others misunderstanding the issu e in the same way by amending the penultimate
sentence to paragraph 7.137 to read:
The evidence contained in Exhibit Korea- 83 relates to APRGs provided to shipyards
that fall outside the scope of the EC's
 these prohibited export subsidy claims.
6.11 First, we note that para. 213 of Korea's First Written Submission states that:
Shipyards do not always select the APRG provider by itself. Sometimes, they are
compelled to make use of the financial in stitutions, domestic or foreign, designated
by the ship owners for issuing the APRGs regardless of whether the premium rates by
such institutions are higher than those offered by other financial institutions.
(emphasis supplied)
6.12 Korea's own submission therefore makes it clear that Korea was not approaching this issue
from a "general perspective". Instead, Korea argued that APRG providers were "sometimes"
designated by buyers. Korea's argument could not, th erefore, have operated as a general defence, or
response, to the benchmarks proposed by the EC. Rather, the onus was on Korea, as the party
alleging a fact, to prove that the providers of the specific APRGs identified by the EC were designated
by the relevant buyers of the ships in question.
6.13 Second, it was up to Korea to decide how it wi shed to respond to the claims, arguments and
evidence of the EC. It was not up to the Panel to instruct Korea in this regard. Nor did the Panel
"prohibit" Korea from offering any evidence that it chose. Korea had numerous opportunities to
present whatever evidence it wished in response to the claims, arguments and evidence presented by
the EC. The Panel addressed Question 69 to Korea in order to clarify Korea's argument regarding
buyer designation. It did not do so in order to dictate how Korea should respond to the claims,
arguments and evidence presented by the EC. The fact that the Panel phrased Question 69 in a
particular manner did not prevent Korea from decidi ng for itself how it wished to respond to the
claims, arguments and evidence presented by the EC.
6.14 Regarding Exhibit KOREA – 83, we note that our findings regarding individual APRG
transactions were necessarily limited to those transac tions specifically identified by the EC. We had
no basis to make findings in respect of other i ndividual APRG transactions for which no evidence had
been submitted by the EC. We have made the cha nge suggested by the EC in order to clarify this
matter.

Paragraph 7.167
6.15 Korea asserts that the value of Yangdo Dambo is (at least) 50 per cent of the value of Physical
Collateral such as government bonds. Korea submits th at it clearly showed that differences existed as
regards different types of collaterals and that th e value of the Yangdo Dambo exceeds that of cash
deposits for foreign APRGs which was 10 to 30 per cent of the amount covered by the APRGs in
terms of collateral value.
6.16 The EC asserts that Korea's comment is a ddressed in para. 7.169 and footnote 95 of the
Interim Report.
6.17 We maintain the view we expressed in footnote 95 that "at a certain point the value of a
smaller portion of credit coverage by a stronger form of collateral will equal, or exceed, the value of a
larger portion of credit coverage by a weaker form of collateral". We also recall our statement in
para. 7.167 that, in order for Korea's argument to pr evail, "Korea would need to demonstrate that the
collateral value of the Yangdo Dambo exceeds that of the cash deposits". Korea has failed to show
this, since Korea has failed to est ablish the collateral value of the cash deposits, i.e., it has failed to
establish how much the credit spread was adjusted in order to reflect the value of the 10 – 30 per cent
cash deposits.
Paragraph 7.234
6.18 Korea asserts that, contrary to the Panel's finding in para. 7.234, it did provide sufficient
information to rebut the EC's argument regarding the [BCI: Omitted from public version]
guarantee. Korea refers in this regard to its res ponse to Question 17 from the EC, read in light of the
information provided by the EC in Exhibit EC – 118.
6.19 The EC asserts that the evidence referred to by Korea is not sufficient to rebut the EC's
argument.
6.20 Korea's reply to Question 17 from the EC refe rs to a "payment guarantee". It does not
provide the value of that guarantee. Nor does it indicate the terms of that guarantee. Nor is this
information to be found in Exhibit EC – 118. Acco rdingly, there is no basis for us to change our
finding in para. 7.234.
Paragraph 7.237

6.21 Korea asserts that there is a difference in the value of the types of collateral referred to in
para. 7.237 (i.e., factory and Yangd o Dambo). Korea asserts that the value of the factory is greater
than the value of the Yangdo Dambo.
6.22 Korea's comment does not address the issue raised in para. 7.237 of the Interim Report. The
fact that the different types of collateral may have different values is not denied in para. 7.237.
Instead, we indicate that we have no information regarding what those values might be. Korea's
comment does not address this issue, since it does not identify any evidence submitted during the
Panel proceedings regarding the values of the types of collateral at issue. In any event, we note that
para. 7.237 also provides additional reasons (unrelated to the value of the relevant collaterals) for
rejecting the STX/Daedong corporate bond data submitted by Korea.
Paragraph 7.240
6.23 Korea asserts that it provided information rega rding the interest rates for the Hyundai/Mipo
corporate bonds at para. 238 of its First Written Submission.

6.24 We do not disagree with Korea. However, Korea's comment does not address the issues
raised in para. 7.240 of the Interim Report. In particular, Korea's comment does not point to record
evidence indicating whether or not the relevant bonds were guaranteed or collateralized.
Paragraph 7.243

6.25 Korea asserts that the reference to "collateral" in Exhibit KOREA – 22 was an error. Korea
identifies record evidence indicating that the HHI corporate bonds were not collateralized.
6.26 The EC does not respond to Korea's comment. In the absence of any objection by the EC,
and on the basis of the explanation provided by Ko rea, we shall amend para. 7.243 of the Report to
remove references to the issue of collateralization. However, we note that para. 7.243 will still reflect
the fact that the bond rates cannot be used as market benchmarks because of differences in maturity.
Footnote 154 (footnote 156 of the Final Report)
6.27 Korea asserts that the Panel failed to acknowle dge that joint and several guarantees do have
certain values. Korea asserts that the fact that joint and several guarantees have certain values is clear
from paragraphs 15 and 16 of Exhibit KOREA – 90.
6.28 The Panel did not state that jo int and several guarantees do not ha ve any value. Rather, in
footnote 154 the Panel quoted Korea's explicit statement that KEXIM treated such guarantees as if
they had no value. Korea has not denied this. The Panel also stated that "[i]n any event, since Korea
has failed to quantify the alleged value of such co llateral, there is no basis for us to make any
adjustment". This statement remains valid, since Korea has failed to identif y any evidence regarding
the value of the joint and several guarantees at issu e. Paragraphs 15 and 16 of Exhibit KOREA – 90
do not indicate the value of such guarantees.
Footnote 174 (footnote 176 of the Final Report)
6.29 We have corrected a clerical error identified by Korea.
Paragraphs 7.290 and 7.291
6.30 Korea asserts that it did establish that the value of collateral was reflected in KEXIM's interest
rate calculations. Korea also asserts that it iden tified Attachment 1 to the KEXIM Interest Rate
Guidelines as the statutory basis fo r the application of different credit risk spreads depending on the
types of security interests provided.
6.31 We note that Attachment 1 to the KEXIM In terest Rate Guidelines does not contain any
reference to [BCI: Omitted from public version] . Nor was any other evidence presented by Korea
regarding the amount of any interest rate adjustment made in respect of such collateral. Accordingly,
there is no need for us to amend our statement (para. 7.292) that "[e]ven if an additional adjustment
were necessary, therefore, there is no basis for the Panel to determine what exactly that adjustment
should be".
Footnote 182 (footnote 184 of the Final Report)
6.32 Korea asserts that the references to "Samho" should be replaced by "STX/Daedong".
6.33 We disagree with Korea's comment, as the foot note is dealing with the EC's treatment of
Samho PSLs in Figure 17 of the EC's first Written Subm ission. This is what Korea is referring to in
para. 235 of its First Written Submission. We have slightly amended footnote 184 of the Final Report
to clarify this point.

VII. FINDINGS
A. KOREAN REQUESTS FOR PRELIMINARY RULINGS
1. 29 August 2003 request for suspension of the Annex V information-gathering procedure
7.1 On 29 August 2003, Korea requested the suspen sion of the Annex V information-gathering
procedure. On 3 September 2003, the Panel sent the following communication to the parties
regarding this matter:
I am writing to you in respect of Korea's request for preliminary rulings dated
29 August 2003. This letter concerns only Korea's request regarding the suspension
or adaptation of the Annex V procedure pending issuance of the preliminary rulings
sought by Korea. It does not address the substance of any of the requested
preliminary rulings.
In Section II.D of its request, Korea submits that the Annex V procedure should be
immediately suspended until such time as the Panel has issued preliminary rulings on
the issues raised by Korea in its request. In the alternative, Korea asks (Section I,
para. 6) that replies to the Facilitator's questionnaires should only be submitted to the
Panel (through the Facilitator), but not to th e parties, until such time as the Panel has
had the opportunity to make the preliminary rulings requested by Korea. In its
comments dated 2 September 2003, the Eur opean Communities submits that there is
no basis to suspend or otherwise interrupt the Annex V procedure.
First, the Panel notes that, in accordance w ith paragraph 2 of Annex V, the Annex V
procedure in the present case was initiated by the Dispute Settlement Body ("DSB").
There is no provision in Annex V which envisages the suspension of that procedure,
either by the DSB itself or by any other body. In the absence of any provision
explicitly authorising the Panel to suspe nd a procedure initiated by the DSB, the
Panel has no authority to grant Korea's request for suspension of the Annex V
procedure.
Second, we understand paragraph 4 of Annex V to mean that the Annex V procedure
is under the control of the Facilitator. In light of paragraph 4, we do not see any
scope for intervention by the Panel in procedural issues relating to Annex V. We
further note that Korea already asked the F acilitator to suspend or adapt the Annex V
procedure in the third paragraph of a le tter dated 8 August 2003, and that Korea's
request was rejected by the Facilitator in a letter to the parties dated 11 August 2003.
For the above reasons, we reject Korea's request that the Panel should suspend or
adapt the Annex V procedure.
2. Other preliminary rulings requested by Korea on 29 August 2003
7.2 On 19 September 2003, the Panel addressed the following communication to the parties
regarding other preliminary issues raised by Korea:
1. On 29 August 2003, Korea submitted a request for a number of preliminary
rulings by the Panel. At the request of the Panel, the European Communities
submitted comments on Korea's request, on 2 and 5 September 2003.
2. One of the preliminary rulings requ ested by Korea concerned the suspension
of the Annex V information-gathering procedure. The Panel sent a communication to

the parties regarding that matter on 3 September 2003. The present communication
addresses the remainder of the preliminary rulings requested by Korea, concerning
the scope of the claims contained in the request for establishment, the conformity of
that request with Article 6.2 of the DSU, and a number of issues characterized by
Korea as substantive in nature.
A. THE SCOPE OF THE KEXIM CLAIMS INCLUDED IN THE REQUEST
FOR ESTABLISHMENT
1. Arguments of Korea
3. Korea submits that the European Co mmunities has sought to extend the scope
of these dispute settlement proceedings beyo nd the measures specified in the request
for consultations, and beyond the scope of the consultations held between the parties,
contrary to Articles 4.2, 4.4, 7.2 and 7. 4 of the SCM Agreement, and Articles 4 and
6.2 of the DSU.
4. First, Korea asserts that the scope of the European Communities' request for
establishment of a panel is unduly broad si nce it includes the KEXIM Act itself, as
applicable to all capital goods, and preferentia l financing at large outside the scope of
the APRGs and pre-shipment financing fo r commercial vessels, which according to
Korea had never been included in the "m atter" referred to in the European
Communities' request for consultations.
5. Second, Korea claims that the European Communities' request for
establishment is unduly broad since it includ es serious prejudice claims in respect of
assistance provided by KEXIM under the APRG and PSL programmes. Korea
asserts that no KEXIM assistance was included in the serious prejudice claim set
forth in the request for consultations, a nd that APRG and PSL assistance was only
cited in respect of the prohibited subsidy claim. Korea further submits that the
European Communities' request for establis hment is unduly broad since it cites as the
legal basis both Articles 3 and 5 of the SC M Agreement for the same measures, i.e.,
the corporate restructuring packages, tax concessions and KEXIM programmes.
Korea asserts that the request for estab lishment should only have challenged the
KEXIM measures as prohibited subsidies under Article 3, and the corporate
restructuring subsidies and tax programmes as actionable subsidies under Article 5.
According to Korea, a challenge of the same measures as both prohibited and
actionable subsidies is legally and factually impossible.
6. Third, Korea asserts that the KEXIM Act and implementing decrees and
regulations referred to in the request for establishment do not constitute the basis for
any claim in and of themselves, since th ey do not mandate the providing of export
subsidies.
7. In respect of the above, Korea asks the Panel to issue preliminary rulings
that:
• "un-specified KEXIM programs for capital goods at large are not legitimately
in front of the Panel in accordance with Articles 4.2, 4.4, 7.2 and 7.4 of the
SCM Agreement as well as Articles 4 and 6.2 of the DSU";
• "only the KEXIM APRGs and the pre-shipment loans for commercial vessels
as prohibited subsidies and the corporate restructuring and tax subsidies as
actionable subsidies are legitimately in front of the Panel"; and

• "the KEXIM Act and its implementi ng decrees and regulations do not
mandate the adoption of prohibited an d actionable subsidies and cannot be
challenged as such; only the implementing measures specified for
commercial vessels are the measures at issue."
2. Arguments of the European Communities
8. The European Communities submits th at all of the KEXIM measures covered
by its request for establishment were s ubject to consultations. The European
Communities asserts that because the KEXI M Act "as such" is applicable to all
capital goods, it consequently covers more than just commercial vessels. The
European Communities asserts that the reference to capital goods other than
commercial vessels only arises in respect of the per se challenge to the KEXIM Act
as a prohibited subsidy. With regard to the scope of its serious prejudice claims, the
European Communities submits that KEXIM subsidies were included in that claim
during the course of consultations. The European Communities submits that Korea's
objections regarding the mandatory nature of the KEXIM legal instruments, and the
European Communities' reliance in the re quest for establishment on both Articles 3
and 5 of the SCM Agreement as concurrent or alternative legal bases, are substantive
in nature, and should be addressed in the li ght of the submissions to the substantive
meetings of the Panel.
3. Assessment by the Panel
9. We begin our consideration of these i ssues by noting that Articles 4.2, 4.4,
7.2 and 7.4 of the SCM Agreement are iden tified as "special or additional rules and
procedures" in Appendix 2 of the DSU. If possible, these provisions should therefore
be read so as to complement the relevant provisions of the DSU, including Article 4.2
– 4.7.
8 As regards the relationship between these SCM and DSU provisions, we
agree with the finding by the panel in Canada – Aircraft that:
"In our view, a panel's terms of reference would only fail to be
determinative of a panel's jurisdicti on if, in light of Article 4.1 - 4.4
of the SCM Agreement applied together with* Article 4.2 - 4.7 of the
DSU, the complaining party's request for establishment were found
to cover a "dispute" that had not been the subject of a request for
consultations. Article 4.4 of th e SCM Agreement permits a Member
to refer a "matter" to the DSB if "no mutually agreed solution" is
reached during consultations. In our view, this provision
complements Article 4.7 of the DSU, which allows a Member to
refer a "matter" to the DSB if "consultations fail to settle a dispute".
Read together, these provisions prevent a Member from requesting
the establishment of a panel with re gard to a "dispute" on which no
consultations were requested. In our view, this approach seeks to
preserve due process while also recognising that the "matter" on
which consultations are requested will not necessarily be identical to
the "matter" identified in the request for establishment of a panel.
The two "matters" may not be identical because, as noted by the
Appellate Body in India - Patents, "the claims that are made and the
facts that are established during consultations do much to shape the

8 See Appellate Body Report, Guatemala – Anti-Dumping Investigation Regarding Portland Cement from
Mexico ("Guatemala – Cement I "), WT/DS60/AB/R, adopted 25 November 1998, DSR 1998:IX, 3767, paras 64-
66.

substance and the scope of s ubsequent panel proceedings."*
9
(* footnotes omitted)
This principle was reaffirmed by the Appellate Body in Brazil – Aircraft.10
10. We do not consider that the scope of the request for establishment need be
identical to the scope of the request for consultations. Rather, the scope of the request
for establishment is governed by, and may not exceed, the scope of the consultations
that actually took place between the parties. Provided the request for establishment
concerns a dispute on which consultations had been requested, there is no need for the
matter
11 identified in the request for establishm ent to be identical to the matter on
which consultations were requested. Subj ect to our comments below regarding the
European Communities' claims against the KEXIM legal instruments "as such", the
request for establishment and the request for consultations clearly relate to the same
dispute, namely whether or not Korean measures affecting trade in commercial
vessels are prohibited by provisions of the SCM Agreement, and/or give rise to
adverse effects thereunder. Thus, in order to address Korea's objections regarding the
scope of the KEXIM claims included in the request for establishment, we must
consider whether or not the scope of the request for establishment exceeded the scope
of the consultations that actually took place between the parties.
11. In respect of the issue of whethe r or not the European Communities was
entitled to include the entirety of the "A ct Establishing the Export-Import Bank of
Korea ("KEXIM"), any implementing decrees and other regulations" in its request for
establishment, we note that the Statement of Available Evidence attached to the
European Communities' request for consulta tions referred expressly to "the KEXIM
Act and its Enforcement Decree". We further note that on 15 November 2002 the
European Communities submitted a number of questions to Korea concerning the
KEXIM Act and the implementation thereof.
12 This evidence alone is sufficient for
us to conclude that the parties consulted on the entirety of the KEXIM Act, including
any implementing decrees and other regula tions, and that the European Communities
was therefore entitled to include those measures in its request for establishment.
12. Turning to the question of whether the European Communities' request for
establishment properly included the abovem entioned measures insofar as they apply
to Korean exporters of "capital goods" gene rally, rather than commercial vessels in
particular, we note that the questions refe rred to in the preceding paragraph were not
restricted to the KEXIM measures insofar as they applied to commercial vessels only.
The questions referred to the KEXIM meas ures generally. Furthermore, we note the
European Communities' argument that because the KEXIM Act "as such" is
applicable to all capital goods, it consequent ly covers more than just commercial
vessels. To the extent that a claim is brought against the KEXIM Act "as such", and
to the extent that the KEXIM Act does not differentiate between assistance in respect
of commercial vessels and assistance to cap ital goods more generally, the KEXIM

9 Panel Report, Canada – Measures Affecting the Export of Civilian Aircraft ("Canada – Aircraft "),
WT/DS70/R, adopted 20 August 1999, as upheld by the Appellate Body Report, WT/DS70/AB/R,
DSR 1999:IV, 1443, at para. 9.12.
10 Appellate Body Report, Brazil – Export Financing Programme for Aircraft ("Brazil – Aircraft "),
WT/DS46/AB/R, adopted 20 August 1999, DSR 1999:III, 1161, at para. 132.
11 We recall that the term "matter" was defined by the Appellate Body in Guatemala – Cement I to
mean the specific measures at i ssue and the legal basis of the complaint (WT/DS60/AB/R, para. 72).
Accordingly, there is no need for the measures and legal claims identified in the request for establishment to be
identical to the measures and legal claims identified in the request for consultations.
12 See, for example, Questions 2, 3, 8, 9, 10, 11 and 12.

Act as a whole is under review. Thus, we see no basis at present to restrict our
findings to the KEXIM Act "as such" only as applicable to commercial vessels.
13
13. Regarding the inclusion in the European Communities' request for
establishment of Article 5 / serious prejudice claims in respect of assistance provided
under the KEXIM APRG and PSL programmes, and the inclusion of Article 3 /
prohibited export subsidy claims in respect of restructuring assistance and tax
programmes, we recall that provided the requ est for establishment concerns a dispute
on which consultations had been requested, there is no need for the matter identified
in the request for establishment to be iden tical to the matter on which consultations
were requested. Since c onsultations took place in respect of all of the
abovementioned measures, in the context of a dispute concerning the application to
those measures of certain disciplines under th e SCM Agreement, we consider that the
European Communities was entitled to formul ate its request for establishment on the
basis of any combination of those measures and legal provisions. Furthermore, we
note that in a letter to Korea dated 3 Ap ril 2003, the European Communities referred
to the need to "clarify ... the effects of KEXIM financing and restructuring measures
on the shipbuilding market". Attached to th at letter were six questions under the title
"Impact of KEXIM programmes on the market". In our view, this letter provides
sufficient factual evidence to conclude that issues regarding serious prejudice
allegedly caused by KEXIM programmes we re consulted on, and were therefore
properly included in the request for establishment.
14. The issue raised by Korea of whether or not the challenge of the KEXIM
programmes and the corporate restructuring and tax subsidies under both Articles 3
and 5 of the SCM Agreement as prohibited and actionable subsidies is legally and
factually impossible is substantive in natu re. We will therefore only consider this
issue in light of the submissions of the pa rties and third parties to the substantive
meetings of the Panel.
15. We also consider that Korea's argu ment that the KEXIM legal instruments do
not mandate the provision of export subsidies is similarly substantive in nature, since
it brings into question the very substance of those legal instruments. Again,
therefore, it is only appropriate for us to consider this issue in light of the submissions
of the parties and third parties to the substantive meetings of the Panel.
16. For the above reasons, we are unable to grant Korea's request for preliminary
rulings that (i) "un-specified KEXIM programs for capital goods at large are not
legitimately in front of the Panel in accordan ce with Articles 4.2, 4.4, 7.2 and 7.4 of
the SCM Agreement as well as Articles 4 and 6.2 of the DSU", and (ii) "only the
KEXIM APRGs and the pre-shipment loans for commercial vessels as prohibited
subsidies and the corporate restructuring a nd tax subsidies as actionable subsidies are
legitimately in front of the Panel".

13 By contrast, with respect to the European Communities' claims regarding the actual application of
the KEXIM legislation and schemes thereunder, it is clea r that the request for establishment relates only to
financing under the APRG and PSL programmes, and only in respect of commercial vessels.

B. CONFORMITY OF THE REQUEST FOR ESTABLISHMENT WITH
ARTICLE 6.2 OF THE DSU
1. Arguments of Korea
17. Korea submits that the European Co mmunities' request for establishment fails
to meet the requirements of Article 6.2 of the DSU by not defining sufficiently the
specific measures at issue and by not pr oviding a sufficient brief summary of the
legal basis of the complaint so as to present the problem clearly.
18. First, Korea asserts that the request for establishment failed to meet the
standard of clarity required by Article 6.2 of the DSU because it failed to choose
between prohibited and actionable subsidy claims in respect of the same measures.
According to Korea, the Eu ropean Communities should not have claimed that one
and the same measures are either prohibited or actionable subsidies.
19. Second, Korea asserts that the European Communities' claims are
impermissibly vague and contradictory b ecause the European Communities failed to
specify (i) the product scope and geographical market of its serious prejudice and
injury claims, and (ii) which of the ci rcumstances indicating serious prejudice under
Article 6.3 of the SCM Agreement it is alleging to exist as a result of Korean
subsidies.
20. Korea submits that the European Co mmunities’ failure to specify the legal
basis of its claims violates Korea’s rights of defence.
21. Korea requests that the Panel issue preliminary rulings that:
• "the request for establishment of the Panel violates Articles 6.2 of the DSU
and the corresponding provisions of th e SCM Agreement in several (…)
respects by not defining sufficiently the specific measures at issue and not
providing a sufficient brief summary of the legal basis of the complaint so as
to present the problem clearly, in part icular, as regards the absence of the
specific legal basis relied upon and the absence of clear indication of the
geographical and product scope of the measures challenged"; and
• "by failing to specify the subparagr aphs relied upon with respect to
Article 6.3, the European Communities ' panel request in this regard is
inconsistent with the requirements of Article 6.2 of the DSU and hence these
claims are inadmissible, or at least that Article 6.3(a), (b) and (d) are outside
the terms of reference of the Panel."
2. Arguments of the European Communities
22. The European Communities submits th at its request for establishment meets
the requirements of Article 6.2 of the DSU because it clearly delineates the specific
provisions and paragraphs that make up the legal basis of the complaint. The
European Communities also asserts that Korea’s argum ent that a subsidy cannot
qualify simultaneously as both an actiona ble and prohibited subsidy, and its
contention regarding the relationship between actionable and prohibited subsidies, is
a question of substance and not subject to preliminary ruling.
23. Regarding the product scope of its claims, the European Communities
submits that it has never demonstrated any in terest in developing a serious prejudice

claim outside of the shipbuilding industry. As for Korea’s argument that the panel
request is vague with respect to the “marke t” at issue in this case, the European
Communities asserts that it has made clear that its focus is on a world, or global
market. By referring to SCM Article 6.5, a nd in listing the adverse effects referred to
in Article 6.3(c), the European Communiti es asserts that its request for establishment
has clearly identified which particular provisi on of Article 6.3 forms the basis of this
claim. Moreover, through this reference to Article 6.3(c) of the SCM Agreement, and
its reference, in turn, to the negative eff ects of a subsidy "in the same market", the
European Communities asserts that its request for establishment clearly indicated that
it was not concerned with any one geographi c or national market in particular, but
with the global market in which shi pbuilders of the European Communities and
Korea compete.
24. The European Communities denies that Korea’s right to defend itself has
been prejudiced.
3. Assessment by the Panel
25. Article 6.2 of the DSU provides in relevant part:
The request for the establishment of a panel (…) shall (…) identify
the specific measures at issue and provide a brief summary of the
legal basis of the complaint sufficient to present the problem clearly.
26. In its request for establishment, th e European Communities stated that the
relevant measures:
are in breach of Korea's obligations under the provisions of the SCM
Agreement, in particular, but not necessarily exclusively of:
– Articles 3.1(a) and 3.2 of the SCM Agreement, because, inter
alia, the KEXIM Act, the advance payment refund guarantees and
the pre-shipment loans provide d by KEXIM and the corporate
restructuring packages and tax concessions are specific subsidies
within the meaning of Articles 1 and 2 of the SCM Agreement and
are de jure or de facto export contingent.
- Article 5(a) of the SCM Agreement , because, inter alia , the
above-mentioned KEXIM subsidies, the corporate restructuring
packages and tax concessions are specific subsidies within the
meaning of Articles 1 and 2 of the SCM Agreement and are causing
injury to the Community industry.
– Article 5(c) of the SCM Agreement , because, inter alia , the
above-mentioned KEXIM subsidies, the corporate restructuring
packages and tax concessions are specific subsidies within the
meaning of Articles 1 and 2 of the SCM Agreement and cause serious
prejudice to the interests of the Eu ropean Communities, in particular
through significant price underc utting, price suppression, price
depression or lost sales within the meaning of Articles 6.3 and 6.5 of
the SCM Agreement.

27. We note the finding of the Appellate Body in Korea – Dairy Products that:
"There may be situations where the simple listing of the articles of
the agreement or agreements involved may, in the light of attendant
circumstances, suffice to meet the st andard of clarity in the statement
of the legal basis of the complaint. However, there may also be
situations in which the circumstances are such that the mere listing of
treaty articles would not satisfy the standard of Article 6.2. This may
be the case, for instance, where th e articles listed establish not one
single, distinct obligation, but rath er multiple obligations. In such a
situation, the listing of articles of an agreement, in and of itself, may
fall short of the standard of Article 6.2."
14
28. We first consider Korea's assertion that the European Communities failed to
satisfy the requirements of Article 6.2 of the DSU because it failed to choose between
prohibited and actionable subsidy claims in respect of the measures at issue. Given
its view that it is "legally and factually impossible" for a given measure to be at the
same time both a prohibited and an actionable subsidy, Korea apparently believes that
the European Communities is identifying the provisions at issue as alternative claims.
Korea then seems to suggest that it is impe rmissible to raise alternative claims in a
WTO dispute. In our view, the question of whether it is permissible to raise
alternative claims is substantive, and it is neither necessary nor appropriate to address
it at this time. We would note as a factual matter, however, that citing multiple
provisions in respect of a given measure, both as complementary and as alternative
claims, is very common in WTO dispute settlement.
15
29. Leaving aside the substantive question, and returning to the requirements of
Article 6.2 of the DSU, we can only concl ude that if a complaining party wishes to
pursue claims in respect of a given measure under multiple provisions, whether
complementarily or alternatively, not only is it permitted by Article 6.2 of the DSU to
refer to all of those provisions in its request for establishment, but it is required to do
so. In this respect, we find that the Eu ropean Communities' request for establishment
meets this requirement, as it identifies quite clearly which provisions are at issue,
namely Articles 3.1(a), 3.2, 5(a) and 5(c) of the SCM Agreement, and it explicitly
states the European Communities' view that, pursuant to these provisions, the relevant
measures are specific subsidies that are export contingent, and that cause serious
prejudice to the interests of the European Communities. There is thus no doubt as to
which provisions are cited by the European Communities in respect of which
measures, and on what basis. As for the substantive issues, including whether it is
possible to demonstrate that the relevant measures could constitute at one and the
same time both prohibited and actionable subsidies, these should only be addressed in
light of the submissions of the parties and th ird parties to the substantive meetings of
the Panel.
30. Concerning the question of which subparagraph of Article 6.3 forms the basis
of the European Communities' claim of ser ious prejudice, Korea asks the Panel to
rule "at least that Article 6.3(a), (b) and (d ) are outside the terms of reference of the
Panel". In this regard, the European Comm unities has asserted that "the focus of the

 14 Appellate Body Report, Korea – Definitive Safeguard Measure on Imports of Certain Dairy
Products ("Korea – Dairy "), WT/DS98/AB/R, adopted 12 January 2000, DSR 2000:I, 3, at para. 124.
15 See, e.g., the Canada – Dairy dispute (WT/DS103/R-WT/DS113/R), in which alternative claims
were raised in respect of the measures at issue, and the Indonesia – Autos dispute (WT/DS54/R-WT/DS55/R-
WT/DS59/R-WT/DS64/R), in which complementary claims were raised in respect of the measures at issue.

claim is, in fact, on Article 6.3(c) of the SCM Agreement , as demonstrated by the
inclusion of Article 6.5 (which specifically refers to Article 6.3(c)) in the panel
request, [and] in the reference to 'signi ficant price undercutting, price suppression,
price depression, or lost sales within the meaning of Articles 6.3 and 6.5 of the SCM
Agreement'.”16 On the basis of this statement, and the language in the request for
establishment that it cites, we see no need to issue, at this stage, the ruling sought by
Korea on this point.
31. In respect of product scope, we understand Korea to argue that the European
Communities' request for establishment is not sufficiently clear for the purpose of
Article 6.2 of the DSU because it fails to sp ecify that the actionable subsidy (serious
prejudice and injury) claims relate only to commercial vessels, and further, that in any
event such a reference is overl y broad. In this regard, we first note the European
Communities' assertion that "its actionable subsidy claim relates to commercial
vessels".
17 Since the European Communities u sed the heading "Korea – Measures
Affecting Trade in Commercial Vessels" in its request for establishment, we are in no
doubt that the request for establishment w as sufficiently specific for the purpose of
Article 6.2 of the DSU insofar as it a pplies to measures affecting trade in
"commercial vessels". Since the European Communities has indicated that there will
be no actionable subsidy claims in respect of products other than commercial vessels,
there is simply no need for us to consider whether or not the request for establishment
was sufficiently specific in respect of othe r products. Furthermore, we find the
reference to "commercial vessels" as used in the request for establishment to be a
sufficiently precise specification of the prod uct scope of these claims to satisfy the
standard of Article 6.2 of the DSU.18
32. Korea also asserts that the Europ ean Communities' failure to specify a
geographic market in its serious prejudice a nd injury claims is inconsistent with
Article 6.2 of the DSU. With respect to the serious prejudice claims, we note that the
request for the establishment of a panel exp licitly refers to "price undercutting, price
suppression or lost sales within the meaning of Article 6.3 and Article 6.5 of the SCM
Agreement”. As discussed above, it is readily apparent to the Panel, as it should be to
the parties, that the specific provision at i ssue is Article 6.3(c), which refers to "the
same market", that is, a market where Korean and European Communities producers
of commercial vessels compete and where the alleged adverse effects of the subsidies
on prices or sales will need to be substantiate d. Given this, we do not consider that a
further elaboration as to geographic market is necessary in the request for
establishment, in respect of the serious prej udice claims. As for the injury claims, it
is clear from the text of Article 5(a), the c ited provision, that the alleged injury is to
the "domestic industry" of the complaining party, coupled with which the request for
establishment explicitly refers to injury to the "Community industry". Given this, we
find a simple citation to the provision to be sufficient. In sum, we recall that the
requirement under Article 6.2 of the DSU is to "provide a brief summary of the legal
basis of the complaint", and we believe th at this requirement does not extend to a
further elaboration, beyond that implicit or explicit in the provisions cited in this case,
of the geographical locus of the alleged adverse effects.

16 European Communities' submission of 5 September 2003, para. 41.
18 Here, in any case, we note that the European Communities has clarified, in its 5 September 2003
submission, at para. 43, that its actionable subsidy claims relate to only certain ki nds of commercial vessels.
Thus we would not expect to recei ve arguments from the European Co mmunities regarding other kinds of
vessels in the context of these claims.

33. For the above reasons, we decline to rule that “the request for establishment
of the Panel violates Articles 6.2 of the DSU and the corresponding provisions of the
SCM Agreement in several [] respects by not defining sufficiently the specific
measures at issue and not providing a sufficient brief summary of the legal basis of
the complaint so as to present the problem clearly, in particular, as regards the
absence of the specific legal basis relied upo n and the absence of clear indication of
the geographical and product scope of the measures challenged.”
34. Korea has asserted that the European Communities’ failure to specify the
legal basis of its claims violates Korea’s right of defence. Since we do not find that
the European Communities’ request for establishment fails to meet the requirements
of Article 6.2 of the DSU, there is no n eed for us to consider whether or not the
alleged violation of that provision prejudiced Korea’s right of defence.
C. OBJECTIONS CHARACTERIZED BY KOREA AS SUBSTANTIVE IN
NATURE
35. In its request for preliminary ruli ngs, Korea has also raised a number of
issues which it expressly characterizes as "s ubstantive" objections . In particular,
Korea submits that in the context of ship s and trade in commercial vessels a claim of
serious prejudice cannot be entertained in the context of a “world market” under the
SCM Agreement, and that the European Communities cannot be permitted in the
context of this case and the EC’s request fo r the establishment of a Panel, to rely on
both Article 3 and Article 5 of the SCM Agre ement as concurrent or alternative legal
bases for its claims against the same Korean measures. As already noted, the Panel
does not deem it appropriate to consider substantive issues before receiving the
submissions of the parties and third parties to the substantive meetings of the Panel.
We therefore decline to make any prelimin ary rulings in respect of those issues
characterized by Korea as substantive in nature.
3. Exclusion of certain Annex V information
7.3 At para. 68 of its first written submission, Ko rea asserts that the EC abused the Annex V
procedure, by using that procedure to obtain info rmation for (Part II) claims in respect of which the
Annex V procedure does not apply. In particular , Korea asserts that the EC used the Annex V
procedure (reserved for Part III claims) to obtain information regarding non-shipbuilding sectors, even
though its Part III claims were limited to the shipbui lding sector. Korea asserts that the EC did so in
order to obtain information to support its Part II claims, which do extend beyond the shipbuilding
sector, but which fall outside the scope of the Annex V process.
7.4 Korea submits that the Panel should exclude from its consideration under Part II of the
SCM Agreement any evidence or information obtained under the Annex V procedure. Korea also
submits that the Panel could decide to exclude an y and all evidence obtained in the context of the
Annex V process from the evidence considered by th e Panel in reaching its decision as to the EC’s
claims under both Part II and Part III of the SCM Agreement.
19
7.5 On 12 March 2004, the Panel issued the following ruling regarding this matter:
1. Korea asserts that the EC abused the Annex V procedure by using it to obtain
information for (Part II) claims in respect of which the Annex V procedure does not

19 Korea also asserts (at para. 74 of its first written submission) that the EC's alleged lack of prima facie
evidence before bringing its case may be inconsistent with Article 3.7 of the DSU. Since Korea does not request
a ruling from the Panel regarding this matter, we need not consider it further.

apply. In particular, Korea asserts that th e EC used the Annex V procedure (which it
claims is reserved for Part III claims ) to obtain information regarding non-
shipbuilding sectors, even though its Part III claims were limited to the shipbuilding
sector. Korea asserts that the EC did so in order to obtain inform ation to support its
Part II claims, which do
 extend beyond the shipbuilding sector, but which in Korea's
opinion fall outside the scope of the Annex V process.
2. Korea submits that the Panel shoul d exclude from its consideration under
Part II of the SCM Agreement any evidence or information obtained under the
Annex V procedure. Korea also submits that the Panel could decide to exclude any
and all evidence obtained in the context of the Annex V process from the evidence
considered by the Panel in reaching its decision as to the EC’s claims under both
Part II and Part III of the SCM Agreement.
3. We note that the information at the heart of Korea's preliminary objection
relates to the individual APRG and PSL tran sactions identified in paragraphs 170 and
172 of the EC's first written submission. In requesting transaction-specific APRG
and PSL information from Korea, the Facilita tor carefully limited the scope of the
request to APRG and PSL transactions rela ting to "companies (involved (directly or
indirectly) in trade in commercial vessels)". In conformity with that request, the
transaction-specific information provided by Korea did not extend beyond the
commercial vessels sector. As a result, th e transaction-specific information at issue
does not extend beyond the commercial vessel sector. Furthermore, the relevant
information concerns the existence of subs idization, and was relied on by the EC in
respect of its Part III claims. We note that paragraph 2 of Annex V envisages the
gathering of such information as necessar y "to establish the existence and amount of
subsidization". In addition, paragraph 5 of Annex V states that the designated
representative's report to the Panel should include "data concerning the amount of the
subsidy in question". In our view, therefore, the information relied on by the EC in
support of its Part III claims regarding th e existence of subsidization was properly
gathered under the Annex V procedure. The EC therefore did not abuse the Annex V
procedure in seeking that information.
4. We must now consider whether or not the EC was entitled to use that
information for the additional purpose of suppor ting its Part II claims. In particular,
the question is whether information properly gathered under the Annex V mechanism
regarding the existence of alleged subsidi zation, which was properly relied on by the
EC in support of its Part III serious prejudi ce claims against certain alleged subsidies,
could also be used in the context of Part II claims concerning the same alleged
subsidies.
5. In the context of the EC's Part III claims, we must determine whether or not
the relevant APRG and PSL transactions cons titute subsidies. In doing so, we are
bound by the provisions of Article 1 of the SCM Agreement. At paragraphs 170 and
172 of the EC's first written submission, the EC is requesting us to perform the same
analysis of subsidization
20 in respect of the same measures in the context of its Part II
claims. We see nothing in Annex V that would require us to ignore our Part III
analysis of subsidization when reviewing the EC's Part II claims which concern
allegations of the same subsidization in respect of the same measures. Nor indeed do

20Article 3.1(a) claims necessarily i nvolve an additional analysis of expo rt contingency. We note that
the EC's allegation of export contingency is not based on the Annex V information set forth in paragraphs 170
and 172 of the EC's first written submission.

we see any requirement in the SCM Agreement to perform this analysis more than
once for any given measure alleged to be a subsidy.
6. In any event, even if we were precluded from relying on the relevant
Annex V information when determining the ex istence of subsidization in the context
of the EC's Part II claims, at the very least any finding of the existence of
subsidization in respect of the EC's Part III claims would compel us to "seek" that
very same information (i.e., regarding the same alleged subsidies) from Korea under
Article 13.1 of the DSU. In other words, the very same information would in any
event be brought before the Panel, but only much later in the proceedings, after the
Panel had made findings regard ing the existence of subsidization in respect of the
EC's Part III claims. We recall that there is no textual basis for requiring us to rule
that the relevant Annex V information is not directly admissible in respect of the EC's
Part II claims. We therefore see no basis for ruling that the relevant information
should only enter the record indirectly, and much later in the proceedings, via
Article 13.1 of the DSU.
7. For the above reasons, we decline to rule that the EC was precluded from
using information that was properly ga thered under the Annex V mechanism
regarding the existence of a lleged subsidization, and prope rly relied on by the EC in
respect of its Part III serious prejudice claims against certain alleged subsidies, in
support of additional Part II claims concerning the same alleged subsidies.
4. Prejudice to Korea's earlier preliminary ruling request
7.6 At para. 76 of its first written submission, Kor ea submits that "it would appear reasonable for
the Panel to reconsider" its 19 September 2003 preliminary ruling concerning the alleged
impermissible ambiguity of the EC's serious prejudice claims. Korea suggests that reconsideration of
the ruling would be necessary subject to two conditi ons: (1) that the EC's statement (in its 5
September 2003 submission) that it had "never" inte nded its serious prejudice claims to cover a wider
product scope than commercial vessels is inaccurate; and (2) that this may have had a bearing on the
Panel's decision to decline Korea's preliminary ruling request on this point.
7.7 Although Korea does not explicitly say so, we understand that Korea is referring to the
Panel's preliminary ruling regarding the conformi ty of the EC's request for establishment with
Article 6.2 of the DSU. The relevant ruling is found at para. 31 of the abovementioned
communication dated 19 September 2003. It is appare nt from the text of that communication that the
Panel's ruling was not based on the EC's statement that it had "never" intended its serious prejudice
claims to cover a wider product scope than commerc ial vessels. The Panel only took into account the
EC's assertion that "its actionable subsidy claim rela tes to commercial vessels". In other words, the
Panel focused on what was included in the EC's se rious prejudice claim, and not whether or not the
EC had ever demonstrated an interest in de veloping a serious prejudice claim outside of the
shipbuilding industry. Since the second condition identif ied by Korea is not fulfilled, there is no need
for the Panel to reconsider its earlier ruling.
5. Withdrawal of Article 5(a) claim
7.8 Korea asserts that the EC has failed to pursue its claim under Article 5(a) of the
SCM Agreement, and that it has not presented a prima facie case of any alleged injury in its first
submission. Korea therefore requests that the Panel formally find that this claim has been effectively
withdrawn.
7.9 This issue is addressed by the Panel at para. 7.521 infra.

6. Price suppression and price depression / Article 6.3(c)
(a) Exclusion of price undercutting claim
7.10 Korea notes that the EC's Article 6.3(c) clai m rests solely on price suppression and price
depression, and not price undercutting. Korea submits that the EC has failed to pursue its claim on
price undercutting, and that it has not presented a prima facie case of any such price undercutting in
its first submission. Korea therefore requests that the Panel formally find that this claim has been
effectively withdrawn.
7.11 This issue is addressed by the Panel at para. 7.521 infra.
(b) Scope of serious prejudice claim
7.12 Korea asserts that the product scope of the EC’s serious prejudice claims must be restricted to
commercial vessels pursuant to the EC’s latest assertion of 5 September.
7.13 We understand that Korea's assertion regarding th e scope of the EC's serious prejudice claim
relates to Korea's original request for a prelim inary ruling in respect of Article 6.2 of the DSU. Korea
appears to be asking the Panel (although there is no e xplicit request) to rule that the scope of the EC's
serious prejudice claims be restricted to commercial vessels.
7.14 At para. 31 of the abovementioned 19 Sept ember 2003 communication, the Panel stated
inter alia:
Since the European Communities has indi cated that there will be no actionable
subsidy claims in respect of products othe r than commercial vessels, there is simply
no need for us to consider whether or not the request for establishment was
sufficiently specific in respect of other products.
7.15 It is clear, therefore, that the Panel already indicated its understanding that the scope of the
EC's serious prejudice claim is limited to commercial vessels.
7. The extent of the record
7.16 At para. 82 of its first written submission, Korea disputes the EC's argument that the
responses provided in the context of the Annex V process should be considered the “record” on the
basis of which the panel should reach its conclusions in this case.
7.17 Since Korea has not requested a preliminary ruling on this issue, there is no need for the Panel
to consider this matter further.
8. Continued relevance of Korea's 29 August 2003 request for preliminary rulings
7.18 At para. 84 of its first written submission, Korea submits that a number of issues raised in its
29 August 2003 request for preliminary rulings rema in applicable. In our view, these issues have
already been addressed in our communications dated 19 September 2003 a nd 12 March 2004. We
therefore do not consider it necessary to revisi t the issues raised in Korea's submission of
29 August 2003.
B.
ALLEGED PROHIBITED EXPORT SUBSIDIES
7.19 The EC claims that Korea has provided and c ontinues to provide its shipbuilding industry
prohibited export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement.

7.20 First, the EC claims that such subsidies were and are provide d pursuant to the Export-Import
Bank of Korea ("KEXIM") Act, the KEXIM Decree, and the KEXIM Interest Rate Guidelines (the
"KEXIM legal regime", or "KLR"). The EC asserts that these measures "as such " (i.e., by their very
existence, irrespective of their application in a given case) violate Articles 3.1(a) and 3.2 of the
SCM Agreement.
7.21 Second, the EC claims that Korea provides and has provided prohibited export subsidies
pursuant to the KEXIM Advance Payment Refund Guarantee ("APRG") and Pre-shipment Loan
("PSL") programmes. Again, the EC claims that th ese measures "as such" violate Articles 3.1(a) and
3.2 of the SCM Agreement.
7.22 Third, the EC claims that individual APRGs and PSLs (i.e., the application of the APRG and
PSL programmes in individual cases) violate Articles 3.1(a) and 3.2 of the SCM Agreement.
1. Kexim Legal Regime
7.23 Before turning to the substance of the EC's clai ms, we observe that a measure is generally to
be treated as a prohibited export subsidy if it is a subsidy (as defined by Article 1 of the
SCM Agreement) that is “contingent … upon export perfo rmance” (in the meaning of Article 3.1(a) of
the SCM Agreement). While the EC's claims do not raise many issues regarding the notion of export
contingency, the parties have made extensive arguments on the question of whether or not the
measures at issue constitute subsidies. A subsidy ex ists if there is a “financial contribution” by a
government or public body (or a private body entrusted or directed by the government) that confers a
“benefit”.
7.24 We shall begin our analysis of the EC's cl aim against the KLR by determining whether
measures taken under the KLR constitute financial contributions, and whether KEXIM is a public
body. If so, we shall then determine whether or not the KLR confers a benefit. We shall then
consider whether or not measures taken under the KLR are contingent on export performance.
(a) Does the KLR Provide for Financial Contributions?
(i) Arguments of the parties
7.25 The EC submits that the KEXIM Act provides for direct transfers of funds within the meaning
of Article 1.1(a)(1)(i) of the SCM Agreement . The EC asserts that Article 18 of the KEXIM Act
provides for loans and loan guarantees, among other typ es of financing. The EC states that loans and
loan guarantees are identified as types of direct tr ansfer of funds in Article 1.1(a)(1)(i) of the
SCM Agreement.
7.26 Korea submits that the KLR does not provide for "financial contributions" in the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement because KEXIM does not engage in "government
practice". Korea asserts that even if a body is a pu blic body, it does not make a financial contribution
if it is not involved in a “government practice”. Korea states that the term “government practice”
means the exercise of government authority, e.g., regulatory powers and taxation authority. According
to Korea, this is confirmed by the context of Article 1.1(a)(1)(iv) of the SCM Agreement ,
 which
provides that there is a “government practice” only when a body carries out a function “which would
normally be vested in the government” and “the pr actice, in no real sense, differs from practices
normally followed by governments”. Korea argues that the panel in US – Export Restraints looked at
the negotiating history of the term “normally vested in the government” in Article 1.1(a)(1)(iv) of the
SCM Agreement and concluded that the term “was a genera l reference to the de legation to private

parties of the particular government functions of taxation and expenditure of revenue and not a
reference to government market intervention in the general sense, or the effects thereof.”21
7.27 Korea asserts that KEXIM is set up for the speci fic purpose of meeting needs of an industrial
or commercial nature, i.e., activities involving the extension of financing facilities on markets where it
competes with other public or private operators based on market-oriented principles. Korea argues
that in extending financing facilities such as APRGs or PSLs, KEXIM operates in a traditional
banking capacity, performing functions normally performed by banks – not by governments.
(ii) Evaluation by the Panel
7.28 We do not accept Korea's argument that there is only a "financial contribution" in the
meaning of Article 1.1(a)(1(i) if the relevant gove rnment or public body is engaged in "government
practice" such as regulation or taxation. Article 1.1(a)(1) states in relevant part that the term
"government" refers to both "g overnment" and "public body". Since the phrase "government
practice" in Article 1.1(a)(1)(i) therefore refers to the practice of both governments and public bodies,
the practice at issue need not necessarily be purel y "governmental" in the narrow sense advocated by
Korea. In this regard, we consider that the concep t of "financial contribution" is writ broadly to cover
government and public body actions that might invol ve subsidization. Whether the government or
public body action in fact gives rise to subsid ization will depend on whether it gives rise to a
"benefit". Since the concept of "benefit" acts as a screen to filter out commercial conduct, it is not
necessary to introduce such a screen into the concept of "financial contribution".
7.29 In our view, the phrase "government practice" in Article 1.1(a)(1)(i) is simply a grammatical
construction, or series of words, chosen because sub- paragraph (i) of Article 1.1(a)(1) could not have
been drafted in the direct form. 22 As such, it refers to cases ("practice") where governments or public
bodies provide direct or potential direct transfers of funds. The phrase "government practice" is
therefore used to denote the author of the action, ra ther than the nature of the action. "Government
practice" therefore covers all acts of governments or public bodies, irrespective of whether or not they
involve the exercise of regulatory powers or taxatio n authority. If the phrase "government practice"
fulfils the filtering role advocated by Korea, this phrase would presumably also have been included in
sub-paragraphs (ii) and (iii) of Ar ticle 1.1(a)(1). In particular, we would have expected it to be
included in sub-paragraph (iii), such that only the provision of goods and services pursuant to the
exercise of regulatory powers or taxation aut hority would be covered by that provision. 23 However,
sub-paragraph (iii) is not drafted in this way.
7.30 We note Korea's argument that Article 1.1(a)(1)(iv) of the SCM Agreement refers to functions
"normally (...) vested in the government" and "prac tice [that] in no real sense, differs from practices
normally followed by governments". We note that this language was addressed by the panel in US –
Export Restraints. That panel referred to the report of the Group of Experts on the Calculation of the
Amount of a Subsidy, which in turn referred to a 1960 panel report. 24 Like that panel, we too "find
very significant the Group of Experts' interpretation that the 1960 Panel's reference to 'practice . . . in
no real sense different from those normally followed by governments' was a ge neral reference to the
delegation to private parties of the particular governme nt functions of taxation and expenditure of

21 Panel Report, US – Export Restraints, para. 8.72.
22 It is grammatically inconceivable that sub-paragraph (i) could have been drafted as "a government
provides a direct transfer of funds or a potential direct transfer of funds", since it makes no sense to refer to a
government concretely providing a potential, or hypothetical, direct transfer of funds.
23 We also note that there has never been any suggestion in any previous panel or Appellate Body
reports addressing Article 1.1(a)(1) of the SCM Agreement that the scope of that provision (or parts thereof) is
confined to government or public body measures taken pursuant to the exercise of regulatory powers or taxation
authority.
24 See MTN.GNG/NG10/W/4, "Subsidies and Counterv ailing Measures – Note by the Secretariat",
28 April 1987, Section 4.1.A.

revenue, ...".
25 The Panel notes that the reference to func tions "normally vested in the government"
textually mirrors the reference to "practices norma lly followed by governments". Accordingly, the
Panel considers that the reference to functions "n ormally vested in the government" should also be
understood to mean functions of taxation and revenue expenditure. Thus, a function may be said to be
"normally vested in the government" if that function involves the levy of taxation or the expenditure
of revenue. Accordingly, since loans and loan guarantees involve revenue expenditure, they may be
treated as functions "normally vested in the government", whether or not they are provided pursuant
to the exercise of regulatory powers or taxation authority.
26
7.31 In light of the above, and since Korea does not dispute the EC's assertion that loans and loan
guarantees fall within the scope of Article 1.1(a)(1)(i ), we find that the KLR provides for "financial
contributions" in the meaning of Article 1.1(a)(1) of the SCM Agreement.
(b) Is KEXIM a Public Body?
(i) Arguments of the parties
7.32 The EC submits that KEXIM is a public body because (i) it is created and operates on the
basis of a public statute giving the Government of Korea ("GOK") control over its decision-making,
(ii) it pursues a public policy objective, and (iii) it benefits from access to state resources.
7.33 Concerning governmental control over decision-ma king, the EC submits that as of December
2002 KEXIM was owned 51.6 per cent by the GOK, 42.8 per cent by the Bank of Korea, and
5.6 per cent by the Korea Development Bank ("KDB"), both of which latter are wholly subscribed by
the Government of Korea. The EC further asserts that KEXIM’s key management is appointed and
dismissed by the GOK, and its operati ons and budget are subject to the approval and control of the
GOK. The EC also submits that KEXIM's annual Operation Plans are formulated under the control of
the GOK.
7.34 Concerning public policy objective, the EC asserts that pursuant to Article 1 of the KEXIM
Act, KEXIM was created to fulfil the public purpose of promoting “the sound development of the
national economy and economic cooperation with foreign countries.”
27 According to the EC, KEXIM
itself acknowledges that it is a public body that acts in the interests of the country by serving as “an
official export credit agency providing comprehe nsive export credit and project finance to support
Korean exporters and investors” and facilitating “the development of the national economy and
enhanc[ing] economic cooperati on with foreign companies as a financial catalyst.”28 The EC further
notes that KEXIM’s annual reports specifically refer to KEXIM as “a special governmental financial
institution”,29 and as “an agent of the Government”. 30 Similarly, the EC asserts that KEXIM’s
website describes KEXIM as a “special government fi nancial institution under the guardian authority

25 US – Export Restraints, para. 8.72.
26 We also note that Korea agrees (see Korea's Firs t Written Submission, para. 163) with the statement
by the US – Export Restraints panel that "the difference between subparagraphs (i) – (iii) on the one hand and
subparagraph (iv) on the other has to do with the identity of the actor and not the nature of the action". Since we
have already concluded that the text of subparagraph (i) is not limited to the exercise of regulatory powers or
taxation authority, the above statement suggests that the same must also be true of subparagraph (iv) (because
the only difference between sub-paragraphs (i) – (iii) a nd (iv) is the author, not the nature, of the action).
Subparagraph (iv) cannot therefore be relied on by Korea to limit the scope of actions covered by subparagraph
(i).

27 See Exhibit EC – 10.
28 See KEXIM 2002 Annual Report, at “Profile” (Exhibit EC-14).
29 KEXIM Annual Report 2000, at “Profile” (Exhibit EC-15).
30 KEXIM 2002 Annual Report, p. 35 (Exhibit EC-14); KEXIM 2000 Annual Report, p. 31 (Exhibit
EC-15); KEXIM 2001 Annual Report, p. 32 (Exhibit EC-16).

of MOFE [ i.e., the Ministry of Finance and Economy]” 31, and as “a government institution [that]
supports the Government’s policies on inte rnational trade and overseas investment.” 32 According to
the EC, other KEXIM materials confirm that KEXI M “is a special government financial institution
whose purpose is to promote the development of the Korean economy and economic cooperation with
foreign countries ... [and] expand appropriate fi nancing activities to conform with government
policies.”33
7.35 Concerning access to state resources, the EC submits that the GOK is required to guarantee
any net loss incurred by KEXIM. In this regard , the EC asserts that GOK, and government-owned
banks, injected over 1.6 trillion Korean Won ("KRW") between 1998 and 1999 into KEXIM, and at
least an additional KRW 270 billion since January 2 000. The EC asserts that an unlimited guarantee
for losses and massive capital injection provide ev idence of government influence and control over
KEXIM.
7.36 In the alternative, the EC submits that KEXIM is a private body "entrusted" or "directed" by
the Korean Government within the meaning of Article 1.1(a)(1)(iv) of the SCM Agreement.
7.37 Korea asserts that KEXIM is not a public body, as it is a body that carries on a business
equivalent to that of a private operator. Korea submits that an organization is a public body only
when it acts in an official capacity, or is engaged in governmental functions. Korea submits that the
term "public" in Article 1.1(a)(1) of the SCM Agreement should be defined as "[a]cting in an official
capacity on behalf of the people as a whole; as a public prosecutor".
34
7.38 According to Korea, the pursuit of a public policy objective does not confer on a body the
status of a public body when su ch body is set up for the specifi c purpose of meeting needs of an
industrial or commercial nature through the suppl y of goods or services on markets which are open to
other public or private operators under fully comp etitive conditions. Korea submits that a general
public policy purpose reflected in sectoral focuses is characteristic of many privately owned companies,
particularly in the financial sector. By way of example, Korea asserts that investment trusts are limited
in their activities in many countries, home mortgage lending is often a separate specialty, and often it is
required that merchant banking be legally separate from retail banking. Korea asserts that it is a matter
of focusing expertise, protecting consumers (corporate as well as natural), and protecting the integrity of
the overall financial markets from errors caused by financial institutions venturing into substantive areas
where they have insufficient expertise.
7.39 Korea refers to the International Law Co mmission's Articles on State Responsibility in
support of its position. According to Korea, Article 5 of the Articles on State Responsibility 35
provides for a two-step analysis th at helps clarify whether an entity is a public body. First, Korea
submits that, pursuant to Article 5, the entity will be a public body if it “is empowered by the law of
the State to exercise elements of the governmental au thority.” Korea asserts that this is a simple and
logical test, based on the substance of what an entity is required to do rather than on questions of form

31 KEXIM “On-line Road Show” <http://www.koreaexim.go.kr/web/eng/index.jsp>, p. 2 (Exhibit EC-
17).
32See “The Bank in Outline”
 <http://www.koreaexim.go.kr/web/eng/about/M01/m1_01.html> (visited 21 November 2002) (Exhibit
EC-18).
33 See Brief Guide to Korea Eximbank (March 2000), p. 1 (Exhibit EC-19).
34 Webster's New Twentieth Century Dictionary, unabridged second edition at page 1456.
35 Article 5 of the Articles on State Responsibility provides:

"The conduct of a person or entity which is not an organ of the State under article 4 but which
is empowered by the law of that State to exerci se elements of governmental authority shall be
considered an act of the State under international law, provided the person or entity is acting
in that capacity in the particular instance."

such as whether a statute is a “ public statute” or not. Regarding th e second step, Korea submits that
the acts in question will be considered acts of Stat e only if such entities are acting pursuant to such
authority in the particular instance. Thus, Korea ass erts that it is not the case that an entity is a public
body for all purposes simply because it might have been given authority to act for the State in some
matters. Korea asserts that one must still determine that the acts in question were undertaken pursuant
to the specific grant of governmental authority. Acco rding to Korea, if financing is offered as part of
a commercial program by a para-statal entity, it is presumptively non-governmental and therefore
should not be considered a financial contribution.
7.40 Korea submits that in extending financing fac ilities, KEXIM is not acting in an official or
governmental capacity. Korea asserts that KEXIM has no authority to regulate, and manufacturers
and borrowers are free to seek financing from other financial institutions. According to Korea, the role
played by KEXIM in its financing activities is the sa me as that of other financial institutions offering
private financing. Korea argues that, even though KEXIM may have been established in the general
interest of the public for the promotion of the growth of the national economy,
36 it supplies financial
services in markets that are open to other public or private operators under full competitive conditions
in accordance with Article 18 of the KEXIM Act.
7.41 In addition, Korea asserts that Article 26 of the KEXIM Act provides that KEXIM must
operate to cover its expenses and fees so as to includ e a profit element. As regards guarantees such as
the APRGs, Korea argues that this means that the premium rates must cover the long-term operating
costs and losses of the programmes. 37 According to Korea, even if a body disposes of governmental
resources, it does not necessarily mean that the receiving body is a public body. Instead, Korea asserts
that it could well be that the provision of government al resources simply constitutes a subsidy to that
body which still is a private body. Korea asserts that GOK injected capital into KEXIM not to cover
KEXIM's losses, but to avoid negative credit rati ngs and maintain a sound Bank of International
Settlements ("BIS") adequacy ratio. Korea rejects the EC's argument that KEXIM is not required to
repay capital contributions made by the GOK, even during years in which KEXIM achieves a profit,
since Article 36(2) of the KEXIM Act provides for the payment of dividends to the KEXIM
shareholders, including the GOK, even if part of the profits will first be paid out to (non-GOK)
preferential shareholders. Korea asserts that this preferential treatment was intended to help persuade
commercial financial institutions and other entities to participate in capital contributions into KEXIM.
7.42 Regarding government control, Korea argues that the daily operations of KEXIM are under
the ultimate responsibility of, and thus decided by, the Board of Directors, without any form of
control by the Government. Korea asserts that although KEXIM is to submit for approval by the
Ministry of Finance and Economy the annual Opera tion Plans, which include the schedules/plans in
broad perspectives as to administering loan provis ions as well funding requirements therefor, the
annual Operation Plan does not pertain to any term s or conditions prescribed for APRGs, nor does the
Government require such terms or conditions for APRGs to be included.
7.43 Korea also refers to paragraph 5(c)(i) of the GATS Annex on Financial Services , which
provides that the term "public entity" does not in clude "an entity principally engaged in supplying
financial services on commercial terms". Korea argu es that this definition is context for the
interpretation of "public body" under Article 1.1 of the SCM Agreement in the present case, since

36 Korea asserts that, among other things, KEXIM was set up to provide extra liquidity. According to
Korea, this was very common in developing countries (which Korea was when KEXIM was set up), as capital
markets are undeveloped and funding for commercial enterprises may be limited in a manner not always
familiar to those Members with highly developed and liquid capital markets.
 37 Korea asserts that Article 26 has never been applied in practice. According to Korea, it was set forth
with the concept of "matching" in the OECD Arrang ement on Guidelines for Officially Supported Export
Credits in mind and, in any event, it is normal commercial behavior to occasionally sell goods or services below
cost in order to meet competition so as to strengthen the firm's competitive position and, therefore, overall to
strengthen profitability.

KEXIM is engaged in the provision of financial services. According to Korea, since KEXIM is
demonstrated to be an entity principally engaged in supplying financial services on commercial terms,
the GATS Annex on Financial Services indicates that KEXIM should not be treated as a "public
body".
(ii) Evaluation by the Panel
7.44 By asserting that an entity will not constitute a "public body" if it engages in market (non-
official) activities on commercial terms, Korea is essentially arguing that we should apply the
"benefit" test (whereby a "financial contribution" only confers a "benefit" if it was made available on
terms more favourable than the recipien t could have obtained on the market).
38 The Appellate Body
ruled in Brazil – Aircraft that "the issues – and the respective definitions – of a 'financial contribution'
and a 'benefit' [are] ... two separate legal elements". 39 Likewise, we consider that the concepts of
"public body" and "benefit" should also be treated as separate legal elements. Thus, the question
whether an entity is a public body should not depe nd on an examination of whether that entity acts
pursuant to commercial principles. Rather, it is the fact that a financial contribution is provided by a
public body (or pursuant to entrustment or direction by a public body) that gives rise to the possibility
that the financial contribution might be provided on below-market terms in order to advance public
policy goals.
7.45 We cannot accept Korea's approach because it woul d mean that at different times, the same
financial entity could be both a public and a pr ivate body, depending on how that entity were
conducting itself in the market. Thus, on one day the entity could provide financing on market terms
and constitute a "private" entity, whereas on the next day it could make cash grants and then constitute
a "public" body. This would make the "private"/ "public" body determination entirely dependent on
the existence of benefit, despite Article 1.1 of the SCM Agreement clearly referring to "public body"
and "benefit" as separate concepts.
7.46 Korea denies that its argument fails to prope rly distinguish between the concepts of public
body and benefit. Korea asserts that the issue of lending on a commercial basis is, at the outset, a
general one. According to Korea, therefore, if th ere is a general practice of lending on a commercial
basis, then the entity is not a public body. We understand Korea to mean that one would assess
whether or not an entity were lending on a comme rcial basis generally, rather than conducting the
type of transaction-specific analysis that might be required for a "benefit" determination. We are not
convinced by this argument, since it immediatel y raises the issue of how one would determine
whether or not an entity were engaging in a "gen eral practice of lending on a commercial basis".
40
Would this only be the case if 100 per cent of to tal lending were on a commercial basis, or would
80 per cent suffice? And how would one determin e that the lending is on a "commercial basis"
without looking at the sort of factors envisaged in a "benefit" analysis? In our view, it is precisely
because of the uncertainty surrounding such issues that it is important to maintain a clear distinction
between the concepts of benefit and financial contribution / public body.
7.47 We have the same concerns regarding Ko rea's reliance on paragraph 5(c)(i) of the GATS
Annex on Financial Services .
41 That is to say, Korea again fails to distinguish between the concepts

38 Korea also argues that KEXIM is not a public body because it supplies financial services in markets
that are open to other public or private operators under full competitive conditions. We are unable to accept this
argument, however, because it is ta ntamount to asserting that the SCM Agreement only applies when the
government or public bodies are monopoly suppliers.
39 Appellate Body report, Brazil – Aircraft, para. 157.
40 See Korea's oral statement at the second substantive meeting with the parties, para. 45.
41 Paragraph 5(c) provides in relevant part:
 "'Public entity' means:

of "public body" and "benefit". By defining "public body" on the basis of whether or not an entity
operates on commercial terms, Korea is introducing cons iderations of benefit into the analysis of the
private / public status of an entity. Furthermore, we question the relevance of the GATS Annex on
Financial Services to an interpretation of Article 1.1(a)(1) of the SCM Agreement.
42
7.48 Korea also relies on part of a dictionary defi nition that assimilates "public body" with an
entity that acts in an "official capacity". However, it is not clear to us that an entity will cease to act in
an official capacity simply becau se it intervenes in the market on commercial principles if that
intervention is ultimately governed by that entity's obligation to pursue a public policy objective. For
example, a police officer patrolling a football matc h as part of his/her police work does not cease to
act in an official capacity simply because the home f ootball club is required to pay a market rate for
that service.
7.49 The SCM Agreement envisages a more straightforward approach, based on a clear distinction
between public and private bodies. On the basis of this clear distinction, one may establish with
relative certainty whether or not an entity is a public body whose financial contributions fall within
the scope of the SCM Agreement. Only then need one address the more complex issue of whether or
not a benefit is conferred (on the basis of a mark et benchmark). Korea's approach would blur the
clear distinction between public and private bodies, and introduce complex considerations of benefit
into the initial filtering process.
7.50 In our view, an entity will constitute a "public body" if it is controlled by the government (or
other public bodies). If an entity is controlled by the government (or other public bodies), then any
action by that entity is attributable to the government, 43 and should therefore fall within the scope of
Article 1.1(a)(1) of the SCM Agreement. We consider that KEXIM is a "public body" because it is
controlled by GOK. This is evidenced primarily by the fact that KEXIM is 100 per cent owned by
GOK or other public bodies. 44 Evidence suggesting governmental control over KEXIM also lies in
the fact that the operations of KEXIM are presided over by a President (Article 9(1) of the KEXIM
Act) appointed and dismissed by the President of the Republic of Korea (Article 11(1) of the KEXIM
Act), and that the KEXIM President shall be assisted by a Deputy President and Executive Directors
(Article 9(2) and (3) of the KEXIM Act) to be a ppointed and dismissed by the Minister of Finance
and Economy upon the recommendation of the Presid ent of KEXIM (Article 11(2) of the KEXIM
Act). Government control is also exercised th rough the Ministerial approval of the annual KEXIM
Operation Programs (Article 21 of the KEXIM Act).
7.51 Although there is some flexibility for the KEXI M President to change the Operation Program
pursuant to resolutions passed by the Board of Di rectors, the circumstances in which the KEXIM
President may do so are exhaustively set forth in the Operation Program, and therefore subject to
Government control. In addition, we recall that the KEXIM President is a Government appointee.

 (i) a government, a central bank or a monetary authority, of a Member, or an
entity owned or controlled by a Member, that is principally engaged in carrying out
governmental functions or activities for governmental purposes, not including an
entity principally engaged in supplying financial services on commercial terms".
42 In any event, this provision seems to indicate that "an entity principally engaged in supplying
financial services on commercial terms" might be treated as a "public entity" absent this clarification in the last
phrase of that provision ("not including ..."). Were this not possible, there would be no need for such
clarification. This could undermine Korea's argument that a public entity acting on commercial terms could not
be treated as a "public body".
43 This approach is consistent with the fact that Article 1.1(a)(1) provides that both governments and
public bodies shall be referred to as "government".
44 The relevant public bodies are KDB and BOK. We find below (para. 7.172 infra) that KDB is a
public body. Korea acknowledged in response to Question 76 from the Panel that BOK is a public body.

7.52 The Operation Programs provide detailed dir ection on the allocation of KEXIM financing
between different financing activities and, thereafter, between different sectors. Thus, the Operation
Programs generally identify three types of "financing supply" to be provided by KEXIM, and state the
proportion of total financing for which each type of "financing supply" should account. Furthermore,
the Operation Programs go so far as to stipulate how much of one specific type of "financing supply"
should be directed towards specifically identified activities and industrial sectors.
7.53 Korea asserts that the Operation Program do es not pertain to any terms or conditions
prescribed for APRGs and PSLs. While this may be true, GOK nevertheless enjoys extensive control
over the parameters within which KEXIM must oper ate. Thus, if the Operation Program were to
require KEXIM to cease providing financing in the shipbuilding sector, it would appear that KEXIM
would be required to do so, even if that sector were the most profitable one in which KEXIM
operated. The ability of the Government to issue such instructions is established by virtue of certain
"basic directions" set forth in the Operation Programs. 45 For example, the "basic directions" of the
1999 Operation Program required KEXIM to "support the export of capital goods such as ships,
industrial plant, machinery, et c., which creates high net export earnings and industrial backward-
forward effect".
46 Such "basic directions" necessarily have an impact on the day-to-day operations of
KEXIM, since they stipulate th e areas in which KEXIM should focus its day-to-day operations
(irrespective of purely commercial considerations).
7.54 We consider that the "public" nature of KEXIM is further confirmed by KEXIM's own
perception of itself as a "special governmental financ ial institution". In addition, we note that Korea
describes KEXIM as an "export credit agency" (see Ko rea's reply to Question 52 from the Panel).
This phrase is generally reserved for official export credit agencies, and not for private providers of
export financing or insurance. Since the term "age ncy" suggests a relationship of agent and principal,
one could reasonably assume that the relevant prin cipal on whose behalf KEXIM acts as agent is the
Government of Korea.
7.55 The EC also refers to KEXIM's public polic y objective in support of its argument that
KEXIM is a public body. Although a public policy ob jective or creation through public statute might
also be indicative of the public nature of an entity , this may not always be the case. For example, the
fact that a private philanthropist may pursue public policy objectives should probably not cause that
person to be treated as a "public body". In addition, the privatization of a company might be finalized
through a public statute. In all cases, though, we c onsider that public status can be determined on the
basis of government (or other public body) control.
7.56 Since we find that KEXIM is a "public body", there is no need to consider the EC's alternative
argument that KEXIM is a private body entrusted or directed by the government.
(c) Subsidization
7.57 The EC's claim that the KLR confers a benefit is based on a number of provisions of the KLR.
We shall examine the parties' arguments concer ning these provisions below. Before doing so,
however, we must first decide whether or not to apply what is known as the traditional mandatory /
discretionary distinction in reviewing the KLR provisions at issue.

45 Earlier Operation Programs provided that KE XIM "shall make efforts to accomplish" specified
"basic directions". The requirement on KEXIM to "make efforts" to accomplish the specified "basic directions"
was strengthened further in the 2003 Operation Program, which provided that KEXIM "shall do the Operation
Program 2003 in accordance with the following basic directions" (see Exhibit EC – 95).
46 KEXIM 1999 Operation Program, Exhibit EC – 95.

(i) Application of the Traditional Mandatory/Discretionary Distinction
Arguments of the parties

7.58 According to the traditional mandatory / discr etionary distinction, only measures mandating
WTO-inconsistent conduct could be condemned as such (i.e., on their face, rather than as applied in
particular cases). Under this traditional distincti on, therefore, the KLR could only be challenged as
such if it mandated inter alia subsidization. The EC considers th at this traditional distinction is no
longer applicable, and claims that its applica tion was excluded by the Appellate Body in
US – Corrosion Resistant Steel Sunset Review . According to the EC, therefore, it is no longer
necessary that legislation must mandate export subs idization in order for it to be condemned under
Article 3.1(a) of the SCM Agreement. The EC asserts that it is enough that legislation specifically
envisages export subsidization in order for it to be c ondemned. The EC also argues that Article 3.2 of
the SCM Agreement confirms that Members may not maintain the discretionary power to provide
export subsidies. The EC relies on the panel report in Brazil – Aircraft to support an argument that a
legal framework that provides for the provision of fu ture export subsidies may be subject to an "as
such" attack.
7.59 Korea argues that the traditional mandatory / di scretionary distinction remains applicable, and
has not been overruled by the Appellate Body.
Evaluation by the Panel
7.60 There is no dispute between the parties regard ing the fact that the traditional mandatory /
discretionary distinction has been applied by both GATT and WTO dispute settlement panels. The
only dispute is whether or not that distinction continues to apply. Since the starting point for the EC's
analysis is that "[t]he Appellate Body has recently laid to rest the notion that non-mandatory measures
cannot be the subject of dispute settlement in US – Sunset Review (Japan)" ,47 we shall focus
principally on whether or not the Appellate Body in that case really did rule against the continued
application of the traditional mandatory / discretionary distinction.
7.61 In order to do so, we shall first consider the Appellate Body's treatment of this issue in the
earlier US – Section 211 Appropriations Act case. The Appellate Body analysed the panel's
application of the traditional mandatory / discretionary distinction in the following terms:
259. ... the Panel relied on prev ious rulings addressing the issue of legislation that
gives discretionary authority to the execu tive branch of a Member's government. As
the Panel rightly noted, in US – 1916 Act , we stated that a distinction should be
made between legislation that mandates WTO- inconsistent behaviour, and legislation
that gives rise to executive authority that can be exercised with discretion. We quoted
with approval there the following statement of the panel in US – Tobacco:
… panels had consistently ruled that legislation which mandated
action inconsistent with the Genera l Agreement could be challenged
as such, whereas legislation which merely gave the discretion to the
executive authority of a contracting party to act inconsistently with
the General Agreement could not be challenged as such; only the
actual application of such legisla tion inconsistent with the General
Agreement could be subject to challenge.

Thus, where discretionary authority is v ested in the executive branch of a WTO
Member, it cannot be assumed that the WT O Member will fail to implement its

obligations under the WTO Agreement in good faith. Rely ing on these rulings, and
interpreting them correctly, the Panel conc luded that it could not assume that OFAC
would exercise its discretionary executiv e authority inconsistently with the
obligations of the United States under the WTO Agreement. Here, too, we agree.48
7.62 Although the Appellate Body went on to rever se the panel's application of the traditional
mandatory / discretionary distinction to the facts of that case, the above extract indicates clearly to us
that the Appellate Body was not rejecting the use of the traditional mandatory / discretionary
distinction per se. To the contrary, the Appellate Body e xplicitly found that "where discretionary
authority is vested in the executive branch of a WTO Member, it cannot be assumed that the WTO
Member will fail to implement its obligations under the WTO Agreement in good faith. " This is
generally understood to be the very rationale behind the traditional mandatory/discretionary
distinction.
7.63 In US – Corrosion-Resistant Steel Sunset Review , the Appellate Body examined two issues.
First, it considered whether certain types of m easures could not, as such, be subject to dispute
settlement proceedings. Second, th e Appellate Body considered whether the measure at issue in that
case could be inconsistent with the AD Agreement. The Appellate Body treated the first issue as a
jurisdictional matter. Thus, having found that ther e was "no reason for concluding that, in principle,
non-mandatory measures cannot be challenged 'as such'", 49 the Appellate Body stated that panels are
not "obliged, as a preliminary jurisdictional matter, to examine whether the challenged measure is
mandatory".50 However, this does not mean that the A ppellate Body was excluding the application of
the traditional mandatory / discretionary distinc tion, since it went on to acknowledge that the
distinction might be relevant as part of the second issue, i.e., the panel's assessment of whether the
measure at issue was inconsistent with particular obligations. 51 In addressing that second issue, the
Appellate Body "caution[ed] against the application of [the traditional mandatory / discretionary]
distinction in a mechanistic fashion".
52 In particular, the Appellate Body condemned the panel for
having taken a "narrow approach", and failing to cons ider other indications as to whether or not the
measure at issue was "binding"53 or of a "normative nature". 54 The use of such phrases suggests to us
that the Appellate Body ultimately resolved the case on the basis of whether or not the measure at
issue was mandatory (i.e., "binding", or "normativ e" in nature). Furthermore, we note that the
Appellate Body stated that it was not "undertak[ing] a comprehensive examination of this distinction".
Having explicitly applied the traditional ma ndatory / discretionary distinction in US – Section 211
Appropriations Act, we fail to see how the Appellate Body co uld be understood to have excluded the
continued application of that distinction in a s ubsequent case in which it was not even conducting a
"comprehensive examination" of the distinction.
7.64 The EC also argues that SCM Article 3.1(a) prevents a Member from maintaining the
discretion to provide export subsidies. We not e, however, that such an approach would be
inconsistent with the principle – confirmed by the Appellate Body in US – Section 211 Appropriations
Act, that "where discretionary authority is vested in the executive branch of a WTO Member, it cannot
be assumed that the WTO Member will fail to implement its obligations under the WTO Agreement
in good faith".55

48 See Appellate Body Report, US – Section 211 Appropriations Act, para. 259 (footnotes omitted).
49 US – Corrosion-Resistant Steel Sunset Review, para. 88
50 Ibid, para. 89
51 Ibid, para. 89.
52 Ibid, para. 93.
53 Ibid, para. 97.
54 Ibid, para. 98.
55 See Appellate Body Report, US – Section 211 Appropriations Act, para. 259.

7.65 The EC has also relied on the following statement by the Brazil – Aircraft panel to argue that
measures that provide for the provision of future export subsidies may be subject to an "as such"
attack:
the effective operation of the SCM Agreement requires that a party be able in some
manner to obtain prospective discipline on the provision of subsidies in cases where it
can be established in advance, based upon the legal framework governing the
provision of those subsidies , that they would be inconsistent with Article 3 of the
SCM Agreement.
56 (Emphasis added)
7.66 We consider that, contrary to the EC's ar gument, this statement actually supports the
application of the traditional mandatory / discretionary distinction, since it relates to circumstances in
which one can establish in advance that a provision or measure "would" be inconsistent with Article 3
of the SCM Agreement . The word "would" (as opposed to "could") suggests to us a degree of
certitude that is only be found in mandatory (as opposed to discretionary) provisions.
7.67 For the above reasons, we reject the EC's argume nt that the Appellate Body ruled against the
application of the traditional mandato ry / discretionary distinction in US – Corrosion-Resistant Steel
Sunset Review. We shall therefore resolve the EC's "as such" claims on the basis of whether or not
the measure at issue mandates the provision of (export) subsidies.
(ii) Benefit
7.68 The relevant arguments of the parties in respect of whether the KEXIM legal regime
mandates (export) subsidies concern the KEXIM Ac t non-competition clause, the alleged absence of
any obligation on KEXIM to take market conditions into account, the availability of government
funding, the Market Adjustment Rate, the KEXIM Act provision concerning international
competitiveness, and KEXIM documentation.
Non-competition clause
7.69 Article 24 of the KEXIM Act provides:
[KEXIM] shall not compete with other fi nancial institutions in performing the
operations provided for in Article 18.
7.70 Article 25(2) of the KEXIM Act provides in relevant part:
[KEXIM] may lend funds, discount drafts or notes, or guarantee obligations under
paragraph (1) of Article 18 only when the term of repayment, payment or discharge is
six (6) months or more but twenty five (25) years or less.
- Arguments of the parties
7.71 The EC asserts that the non-competition clause m eans that KEXIM is specifically directed to
perform functions and provide financing in situa tions in which no commercial bank would act, and
therefore to make available loans and guarantees in financial circumstances that the market would not
support.
7.72 Korea states that in fact KEXIM is perm itted to compete with commercial financial
institutions, as confirmed by an earlier amendmen t of Article 18 of the KEXIM Act, whereby an
obligation on KEXIM not to engage in operati ons "normally conductible by other financial

56 Panel Report, Brazil – Aircraft, para. 7.2 n. 187.

institutions" was removed. Korea asserts that KE XIM is currently "in competition with commercial
banks in all areas of financial services, except the long-term export credits with deferred payment
terms that are regulated by the OECD Arrangement". 57 Korea argues that this is consistent with
Article 25(2) of the KEXIM Act, whereby the maturity of KEXIM loans should be between
six months and 25 years, and therefore of a maturity offered by commercial institutions. Korea argues
that Article 24 “must be read together”
58 with Article 25(2) to appreciate the limited scope of this
prohibition. Korea further states that Article 24 shou ld have been repealed, and that in fact "KEXIM
has been contemplating proposing the repeal or amendment of Article 24".59
- Evaluation of the Panel
7.73 We are not persuaded by Korea's arguments regarding the alleged interaction between
Articles 24 and 25(2) of the KEXIM Act. First, we note that there are no cross-references between
these provisions. Second, the fact that the limits under Article 25(2) on the maturity of KEXIM
financing coincide with the maturity of commercial financing does not necessarily mean that KEXIM
competes with commercial institutions, since it is still possible for KEXIM to comply with both
provisions and offer financing with a maturity of between six months and 25 years in respect of which
there is no competition from commercial financial institutions.
7.74 Furthermore, even if Korea may be correct in stating that KEXIM does compete with private
financial institutions in practice, we note that the EC's argument regarding Article 24 is made in the
context of an "as such" claim against the KEXIM Act. Thus, because Article 24 continues to impose
a legal obligation on KEXIM not to compete with othe r financial institutions, the fact that Article 24
may not be respected in practice is not relevant. The EC's "as such" claim concerns the KEXIM legal
regime on its face, and not as applied in practice.
7.75 That being said, we are not persuaded that th e language of Article 24 of the KEXIM Act is
sufficiently clear to conclude that it necessarily requi res KEXIM to confer a benefit, i.e., offer terms
that are more favourable than tho se available to the recipient on the market. In particular, does the
non-competition clause mean that KEXIM is only required to provide financing when market
operators are unable to do so? Or does it mean th at KEXIM is not permitted to take business away
from market operators? We consider that the terms of Article 24 are far too imprecise to draw the
specific conclusion that it requires KEXIM to act in a below-market manner.
No obligation to take market conditions into account

- Arguments of the parties
7.76 The EC claims that the KEXIM legal regime confers a "benefit" as such because the KEXIM
Act imposes no obligation on KEXIM to take market conditions into account when disbursing funds.
7.77 Korea submits that KEXIM is required to operat e on a market-oriented basis. In particular,
Korea asserts that the KEXIM legal regime requires KEXIM to appropriately assess the credit risks of
the borrower, to apply interest rates or guarant ee premia commensurate to the credit rating of the
borrower/applicant, to take into account market situ ations when setting up interest rates/premium, to
properly manage risks associated with the KEXIM business, and to ensure soundness of
management.60

57 See Korea's Second Written Submission, para. 99.
58 See Korea's First Written Submission, para. 120.
59 See Korea's response to Question 53 from the Panel.
60 See Korea's reply to Question 103 from the Panel.

- Evaluation by the Panel
7.78 We do not consider that a legal instrument may be found to mandate subsidization simply
because it neither prohibits subsidization nor requires market conditions to be taken into account. The
fact that a legal instrument is silent on subsidiza tion should not lead to a conclusion that the resultant
discretion will of necessity be exercised in a manner th at results in subsidization. As stated by the
Appellate Body in US – Section 211 Appropriations Act , "where discretionary authority is vested in
the executive branch of a WTO Member, it cannot be assumed that the WTO Member will fail to
implement its obligations under the WTO Agreement in good faith".
61
Government funding
- Arguments of the parties
7.79 The EC asserts that KEXIM need not act on market terms or with proper regard to risk, as the
Government of Korea provides virtually unlimited funds to KEXIM. In this regard, the EC notes that
Article 19 of the KEXIM Act provides that KEXI M “may borrow funds from the Government [and]
the Bank of Korea . . . ”. The EC also argues th at Article 36(2) of the KEXIM Act indicates that
KEXIM is not required to pay . . . capital contribu tions made by the Government of Korea, even
during years in which KEXIM achieves a profit. In this regard, the EC notes that Article 36(2)
provides that KEXIM shall distribute its profits “on a preferential basis” “to capital contributors other
than the Government.” According to the EC, this provides further support for the understanding that
KEXIM need not act in the same manner as a commercial bank, as it has access to funds of an
important shareholder that does not demand to be treated in the same manner as shareholders
operating pursuant to market considerations. The EC submits that KEXIM therefore receives a
subsidy that it can pass on to its customers.
7.80 The EC further asserts that Article 37 of th e KEXIM Act provides that any net loss incurred
by KEXIM that cannot be covered by its reserves sh all be covered by funds from the Government of
Korea. The EC argues that KEXIM need not ther efore act in the same manner as a commercial bank,
as it has no risk of insolvency. According to the EC, combining (a) the guarantee by Article 37 that
the Government “shall provide funds to cover such net loss” and (b) the specific exclusion of the
Government in Article 36(2) from the capital contri butors that shall benefit from KEXIM’s net profit,
underscores the fact that KEXIM need not act on ma rket terms. The EC acknowledges that KEXIM
must first attempt to cover net losses with its reser ves, but argues that the ultimate guarantee of losses
by the Government reduces the incentive for KEXI M to maintain a sufficient reserve and allows
KEXIM to act otherwise than would a body subject to market forces.
7.81 Korea asserts that there is no logical inference from Articles 19, 36(2) and 37 of the KEXIM
Act that KEXIM need not act on market terms or w ith proper regard to risk. Korea argues that
although these provisions indicate that the Government may provide funds, this is not the same as
stating that KEXIM’s financing facilities need not be market-oriented. According to Korea, KEXIM
is explicitly required by law to operate on a market-oriented basis.
7.82 Korea asserts that the Government's capital contributions into KEXIM were necessary to
allow KEXIM to maintain a good credit rating as we ll as a sound Bank of International Settlements
("BIS") adequacy ratio. Korea also asserts that Article 36 of the KEXIM Act was intended to
encourage other entities to participate in capital contributions into KEXIM. Korea asserts that it is not
uncommon in private corporations that the major sh areholders receive less dividends and take more
risks than other minor shareholders.

61 Appellate Body Report, US – Section 211 Appropriations Act, para. 259.

7.83 Korea submits that the source of KEXIM's funds is not legally relevant , as the legal standard
for subsidization is "benefit" to the recipient, rath er than cost to the government. Korea submits that
whatever the source of KEXIM’s funds, there is no indication in particular that any of these funds are
used in loans or guarantees which bestow a benefit onto their recipient or were envisaged as such.
- Evaluation by the Panel
7.84 Given that it is now well established that the le gal standard for "benefit" is benefit to the
recipient, and not cost to the government, the source of KEXIM's funds is irrelevant to the issue of
whether or not the KEXIM legal regime mandates (export) subsidization. The fact that KEXIM may
receive subsidized government funding does not m ean that it will inevitably provide subsidized
financing to its customers. It is possible that KEXIM might charge market rates and increase its profit
margin instead.
7.85 Furthermore, Articles 19, 36(2) and 37 of the KEXIM Act are relied on by the EC in support
of an argument that KEXIM "need not" act on market principles. However, the EC has neither argued
nor demonstrated that these provisions prevent
 KEXIM from acting on market principles. In other
words, the EC has not argued that these provisions mandate subsidization.
Market Adjustment Rate
- Arguments of the parties
7.86 According to the EC, the KEXIM Interest Rate Guidelines clarify that market conditions are
not taken into account even in situations where KEXIM has specifically determined that its rates
would be better than those available in the market. According to the EC, Articles 17(2) and 25(6) of
the KEXIM Interest Rate Guidelines explicitly prev ent, under certain situations, full market-based
adjustments of KEXIM’s interest rates even when it has been determined that the rates are below
those available in the market. According to th e EC, the KEXIM Guidelines establish an explicit cap
on the “Market Adjustment Rate” that would otherwise be applied to bring KEXIM’s rates into accord
with the market’s rates.
7.87 The EC notes that a new translation of Articles 17(2) and 25(6) of the KEXIM Interest Rate
Guidelines recently submitted by Korea reads [BCI: Omitted from public version] .62 According to
the EC, Korea’s modified translation indicates that the Market Adjustment Rate is only a downward
adjustment. The EC argues that if the Market Adju stment Rate can only be used to adjust the cost-
based rate downwards, this provision will often lead to interest rates that are below the market rate.
The EC asserts that in any event, these provisions do not, by their terms, ensure that KEXIM provides
loans at market rates, since the Market Adjustment Ra te is an adjustment to the cost based rate that
takes account not only of lower offers by other banks but also of the “business relationship with the
borrower and the distinctive features of the transactions, etc.”63
7.88 Korea submits that the Market Adjustment Rate in Articles 17(2) and 25(6) of the Interest
Rate Guidelines operates on a market-oriented basis to take into account the PSL interest rates and the
APRG premia offered by other financial institutions, the track record and relationship of the applicant
with KEXIM and other considerations including the particulars of the project concerned.
7.89 Korea asserts that a “market rate” exists in the form of “range” or “band”, not a single rate.
Korea explains that the Market Adjustment Rate is one of the spreads (discounts or premia) that are to
be applied upward or downward to the base rate in addition to other spreads such as “credit risk

62 Responses to Questions from the Panel by Korea, 22 March 2004, Question 57, citing Exhibit Korea-
56.
63 Article 17(2) of the KEXIM Interest Rate Guidelines, Exhibit EC – 13.

spread” and “target margin”. According to Korea, this Market Adjustment Rate may be applied by
the KEXIM loan managers when determining the rat es for a specific applicant in a specific individual
transaction. Korea asserts that the following factor s are to be taken into account when determining
whether and to what extent to apply this Market Adjustment Rate: the APRG premia offered by other
financial institutions; the track record and relati onship of the applicant with KEXIM; and other
considerations including particulars of the project concerned.
7.90 Korea also submits that while the Market Adju stment Rate allows the KEXIM loan managers
to react to the market, the loan manager is neve rtheless prohibited, when he applies the Market
Adjustment Rate for ‘downward’ adjustment of an ARPG fee, from applying it beyond a certain limit
[BCI: Omitted from public version] . In contrast, there is no limitation when the loan manager
applies it for upward adjustment. Korea asserts that in this sense, the Market Adjustment Rate is a
“floor”, not a “cap”. Korea submits that the Market Adjustment Rate does not cause the final fee rate
to be set below the market rates.
- Evaluation by the Panel
7.91 According to Korea, Article 17 of the KEXI M Guidelines for Interest Rates and Fees
Amended provides:
[BCI: Omitted from public version.]
7.92 According to Korea, Article 25 of the KEXI M Guidelines for Interest Rates and Fees
Amended provides:
[BCI: Omitted from public version.]

[BCI: Omitted from public version.]
7.93 The above translation of Articles 17 and 25 was attached to Korea's reply to Question 57 from
the Panel, and amends the transl ation initially provided by Korea during these proceedings. The EC
has not contested the accuracy of the amended translation.
7.94 We do not consider that the EC's argument that Articles 17(2) (Market Adjustment Rate in
respect of loan interest rates) and 25(6) (Market Adjustment Rate in respect of guarantee premia) only
allow a downward adjustment is correct. In our vi ew, the fact that these provisions do not explicitly
refer to upward adjustments does not mean that th ey should be interpreted to mean that upward
adjustments are precluded. Indeed, we note that Ko rea has provided evidence of situations in which
upward adjustments have been made in practice (s ee Korea's reply to Question 58 from the Panel).
Furthermore, we note that Articles 17(2) and 25( 6) do not impose limits on the amount of upward
adjustment. The possibility of upward adjustment, and the absence of any limit on the amount of such
upward adjustment, means that KEXIM is not auto matically locked into providing below-market
financing.
7.95 In addition, we note the EC's argument that the above Market Adjustment provisions do not
"ensure" that KEXIM provides services at market rat es. As noted above, we do not consider that the
absence of an obligation on KEXIM to apply market rates permits a finding that the KEXIM legal
regime mandates below-market rates, and theref ore subsidization. We also recall that in Canada –
Aircraft – Article 21.5 the Appellate Body expressed reservations regarding the application of an
"ensure" standard, noting that such a standard coul d "be very difficult, if not impossible, to satisfy".
64

64 See Appellate Body Report, Canada – Aircraft – Article 21.5, para. 38.

We further recall that the panel only applied an "ensure" standard because it was proposed by the
parties in that case.65
7.96 For the above reasons, we reject the EC's ar guments concerning Articles 17(2) and 25(6) of
the KEXIM Interest Rate Guidelines.
KEXIM On-Line Road Show
- Arguments of the parties
7.97 The EC submits that KEXIM has itself ac knowledged its role as providing financial
contributions to Korean exporters in cases and on terms that would not be provided by commercial
banks. In this regard, the EC notes that KEXIM’s 2003 “On-Line Road Show” stated that one of the
core missions of KEXIM’s business was to serve “a complementary but pioneering role and function
for the national economy, which would be hard for commercial banks to shoulder.” 66 The EC asserts
that KEXIM has therefore acknowledged its role as providing financial contributions to Korean
exporters in cases and on terms that would not be provided by commercial banks.
7.98 Korea asserts that the “On-Line Road Show” contains a description of the specialized role and
function being performed by KEXIM as an export credit agency. Korea submits that export credit
agencies, such as KEXIM, generally provide specialized trade-related financing involving longer-term
project-related loans (e.g., mid- and long-term expor t loans), special payment terms (e.g., deferred or
specially structured payments) or specialized co llateralization methods. Korea submits that it is
important to remember the context of the establishm ent of KEXIM, i.e., the fact that Korea was a
developing country with inadequately formed cap ital markets, among other things. According to
Korea, it is quite typical in such situations for sp ecialist banks to be set up to provide such pioneering
expertise. Korea submits that the “On-Line Road Sh ow” is irrelevant to the question of below-market
financing by KEXIM.
- Evaluation by the Panel
7.99 We note that the EC refers to the On-Lin e Road Show as evidence that "KEXIM has
acknowledged its role as providing financial contri butions to Korean exporters in cases and on terms
that would not be provided by commercial banks". 67 The On-Line Road Show describes KEXIM's
alleged practice, rather than its legal obligations under the KEXIM legal regime. Since the On-Line
Road Show relates to practice, ra ther than the KEXIM legal regime per se, it has no bearing on our
findings regarding the EC's claim against the KEXIM legal regime "as such".
Maintenance of international competitiveness
- Arguments of the parties
7.100 The EC asserts that Article 26 of the KE XIM Act demonstrates that KEXIM values the
“international competitiveness” of Korean export-oriented industries over its own financial condition,
a situation that increases KEXIM’s ability to provide support on terms better than those available in
the market.

65 See Panel Report, Canada – Aircraft – Article 21.5, para. 5.66.
66 Exhibit EC – 17.

7.101 Article 26 provides:
Except where inevitable for maintaining the international competitiveness to facilitate
the export, or for promoting the overseas investment or overseas exploitation of
natural resources, the interest rates, discount rates and fee rates applicable to loans,
discounts and guarantees ... shall be so set as to cover the operating expenses,
commissions for undertaking of delegated operations, interest on borrowed funds, and
depreciation of assets which [KEXIM] incurs.
7.102 The EC asserts that although Article 26 of the KE XIM Act states that interest rates and fees
imposed with respect to loans and guarantees are to be set so as to cover the operating costs of
KEXIM, there is no requirement that KEXIM establish rates that comport with market rates. The EC
notes that Article 26 permits KEXIM to avoid the requirement to cover its operating costs where
“inevitable for maintaining the international competitiveness to facilitate . . . export . . . .”.
7.103 Korea submits that Article 26 has no purpose other than to provide that all fees and rates must
cover “at least” the costs when KEXIM provides fi nancing. Korea asserts that Article 26 does not
prohibit KEXIM from earning profits and, instead, effectively requires it to carry on profitable
operations. Korea argues that othe r relevant provisions of the KEXIM Decree, such as Articles 17-3
through 17-13 (providing parameters for sound and profitable management of KEXIM), also
effectively require KEXIM to carry on its business fo r profit. Korea further asserts that the Interest
Rate Guidelines of KEXIM provide that KEXIM in terest rates and fees are always aligned with
market rates.
7.104 Korea submits that the phrase "inevitable for ma intaining the international competitiveness to
facilitate ... export" was included in Article 26 of the KEXIM Act in order to allow KEXIM the option
to provide financing at below-cost levels in ex ceptional situations when KEXIM faces severe ‘rates’
competition from foreign financial institutions, as in the context of “matching” under the
OECD Arrangement. Korea submits that because “matching” would be exceptional, Article 26 uses
the term “inevitable”, which means that under normal or ordinary circumstances this exception must
not be applied. Korea notes that this "exception" under Article 26 has never been applied in practice
thus far. Further, Korea asserts that KEXIM has interpreted this matching mechanism in such a
restrictive manner that it can be applied only for matching of “country risk premium”, not the total
interest rate applied by the competing export cred it agencies. Korea also submits that even if
KEXIM’s interest rates had in exceptional circ umstances gone below its operating expenses (which
Korea claims they have never done), this has nothing to do with the finding of a benefit or a subsidy.
According to Korea, as long as Article 26 permits KE XIM to match the low interest rates applied by
other competing export credit agencies, KEXIM w ill always end up applying the market benchmark
(i.e., the prevailing conditions in the market), whet her or not the KEXIM rate is below or above its
operating expenses.
7.105 The EC notes Korea's argument that this provi sion allows KEXIM to finance at below-cost
when "matching" under the OECD Arrangement . However, the EC considers that this explanation
does not justify the provision. First, the EC asserts that there is absolutely no mention of either the
OECD Arrangement or “matching” in this provision. A lthough Article 43 of the KEXIM Interest
Rate Guidelines does refer to matching, the EC subm its that there is nothing in these Guidelines that
indicates that this Article should be read together with Article 26 of the KEXIM Act. Second, the EC
notes that the panel in Canada –Aircraft Credits and Guarantees concluded that “matching” under the
OECD Arrangement does not provide a valid affirmative defence for measures that violate the terms
of the SCM Agreement.
68

68 The EC refers in this regard to Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.180.

- Evaluation by the Panel
7.106 Leaving aside the question of whether or not "matching" under the OECD Arrangement is in
conformity with the SCM Agreement, we would simply note that the EC again applies the incorrect
legal standard in pursuing its arguments regarding Ar ticle 26 of the KEXIM Act. First, the EC states
that there is no requirement that KEXIM rates com port with market rates. As noted above, however,
the fact that there is no requirement to act on market terms does not mean ipso facto that KEXIM is
required, or mandated, to provide below-market terms. Second, the EC asserts that Article 26 permits
KEXIM to avoid the requirement to cover its operating costs in certain circumstances, and increases
KEXIM’s ability to provide support on terms better than those available in the market. Again,
however, the EC does not argue that Article 26 requi res KEXIM to provide below-market financing.
Providing a public body with the lega l and financial ability to subsidize is not the same as requiring it
to do so.
Conclusion

7.107 For the above reasons, the EC has failed to establish a prima facie case that the KEXIM legal
regime mandates subsidization. Although certain provisions of the KLR might indicate that it was
intended as a means of providing subsidies, a conclusion that the KLR could be applied in a manner
that confers a benefit would not be a sufficient basi s to conclude that the KLR as such is mandatory
legislation susceptible of inconsistency with Article 3.1(a) of the SCM Agreement.69
(d) Export contingency
(i) Arguments of the parties
7.108 The EC submits that, pursuant to Article 18 of the KEXIM Act, financial contributions by
KEXIM are “[f]or the purpose of facilitating exports of products” and, therefore, contingent on export
within the meaning of Article 3.1(a) of the SCM Agreement.
7.109 Korea has not taken a position on whether or not the KLR is export contingent.
(ii) Evaluation by the Panel
7.110 In light of our finding that the EC has faile d to establish a prima facie case that the KLR
mandates subsidization, we do not consider it neces sary to determine whether or not then KLR is
"contingent ... upon export performance" within the meaning of Article 3.1(a) of the SCM Agreement.
(e) Conclusion
7.111 Given our finding that the EC failed to establish a prima facie case that the KEXIM legal
regime mandates subsidization, we reject the EC's claim that the KEXIM legal regime "as such" is
inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.
2. APRG programme
7.112 An APRG provides foreign buyers with a guara ntee that they will be refunded any advance
payments made to an exporter, including any accr ued interest on the advance payments, in case the
Korean company defaults under the relevant export contract. In exchange, the Korean exporter pays a
premium consisting of (1) a minimum base rate, and (2) additional spreads ( e.g., credit and market
risk spreads).

69 We note that a similar approach was adopted by the panel in Brazil –Aircraft, Second Recourse by
Canada to Article 21.5 of the DSU, WT/DS46/RW/2, adopted 23 August 2001, para. 5.43, DSR 2001:XI, 5481.

(a) Arguments of the Parties
7.113 The EC asserts that the KEXIM APRG progra mme "as such" provides for the grant of
subsidies that are contingent on export, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement .
The EC submits that the APRG programme provides for financial contributions because (i) KEXIM is
a public body, and (ii) APRGs constitute a “poten tial direct transfer of funds” pursuant to
Article 1.1(a)(1)(i) of the SCM Agreement . The EC submits that the APRG programme confers a
benefit because, although KEXIM levies a premium when granting APRGs, the premium fails to
reflect the degree of creditworthiness, or lack thereo f, of the Korean exporters. According to the EC,
KEXIM issues guarantees without proper considerati on of the risk involved in the transaction – in
many cases, granting guarantees to financially troubled companies that would not have been able to
obtain a guarantee from a commercial bank. The EC submits that the APRG programme is de jure
export contingent because KEXIM APRGs are provided for the specific purpose of guaranteeing the
down payments for Korean goods intended for export.
7.114 Korea asserts that the EC's description of the measure is incomplete and inadequate to support
its claim regarding the KEXIM APRG programme. A ccording to Korea, whilst a definition is given
of what the guarantees denominated as APRGs enta il for the manufacturers of the capital goods and
their purchasers, the EC fails to identify what preci sely constitutes the so-called "APRG programme".
Korea submits that the measure at issue is therefore un-defined and cannot as such be the subject of a
detailed factual or legal analysis.
7.115 Korea also denies that the APRG programme c onstitutes a prohibited export subsidy. Korea
asserts that the APRG programme does not constitu te a financial contribution covered by the
SCM Agreement because KEXIM is not a "public body". Korea also denies that the APRG
programme confers a "benefit". Korea asserts that the EC must provide a benchmark to define
whether the APRG program "as such" yields premium rates that confer a benefit. Korea considers
that the EC has failed to meet this burden, since it only refers to certain individual APRGs extended to
shipyards alone rather than to th e basic conditions of the program as such irrespective of the sector of
industry. In the alternative, Korea submits that the APRG programme benefits from a safe haven
pursuant to item (j) of the Illustrative List of Export Subsidies.
(b) Evaluation by the Panel
7.116 We shall first address Korea's arguments regarding the identification of the measure. We
shall then turn to the substance of the EC's claim against the APRG programme.
7.117 Regarding the identification of the measure at issue, the Panel sought clarification from the
EC regarding the extent to which its claim ag ainst the APRG programme differed from its claim
against the KEXIM legal regime. In response to Qu estion 138 from the Panel, the EC stated that the
APRG and PSL programmes are linked to the KEXIM legal regime, in the sense that they are a
consequence of the KEXIM legal regime. Accord ing to the EC, the APRG and PSL programmes are
also distinguishable from the KEXIM legal regime since, although the KEXIM legal regime envisages
the provision by KEXIM of financial services, these financial services do not necessarily need to be
the APRG and PSL programmes, as KEXIM could provi de financial assistance to exporters in other
forms.
7.118 Furthermore, in its first written submission, the EC stated that the APRG programme was
introduced immediately after the establishment of KE XIM, and has been administered since that time
pursuant to Article 18 of the KEXIM Act.
70 The EC also submits that KEXIM is authorised to issue

70 See Responses to Annex V Questions (Non-confidential Version), Answer 1.2(26), pp. 14-15
(Exhibit EC-39).

“performance guarantees related to contracts for export” pursuant to Article 23(1) of the KEXIM
Operating Manual.71
7.119 In our view, the EC has done enough to identify an APRG programme "as such". We
consider that the legal basis for that programme is set forth in Article 18 of the KEXIM Act and
Article 23(1) of the KEXIM Operating Manual. We shall conduct our analysis of subsidization and
export contingency on the basis of those provisions.
7.120 We recall that a measure is only a subsidy covered by the SCM Agreement if it is a "financial
contribution" by a government or public body that confers a "benefit". We have already found that
KEXIM is a "public body" in the meaning of Article 1.1(a)(1) of the SCM Agreement.
72 Regarding
the "financial contribution" element, we accep t the EC's argument that the APRG programme,
pursuant to Article 23(1) of the KEXIM Operating Ma nual, provides for a "potential direct transfer of
funds" within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement. We therefore find that the
APRG programme constitutes a "financial contribution" covered by the SCM Agreement.
7.121 As to whether the APRG programme "as such" confers a "benefit", however, we recall that
we are applying the traditional mandatory / discretionary approach. The issue before us, therefore, is
whether or not the APRG programme mandates the conferral of a benefit by requiring the provision of
APRGs on terms more favourable than Korean sh ipyards could obtain on the market. We do not
consider that the EC has established a prima facie case to this effect. 73 Neither Article 18 of the
KEXIM Act nor Article 23(1) of the KEXIM Oper ating Manual even refer to the terms on which
KEXIM shall offer APRGs, let alone require below-market guarantees. The EC has not identified any
other provisions regulating the terms of APRGs. 74 Accordingly, we reject the EC's claim that the
APRG programme "as such" constitutes a subsidy. For this reason, there is no need for us to examine
the EC's claim that the APRG programme is de jure export contingent, nor Korea's reliance on item (j)
of the Illustrative List.
3. PSL programme
7.122 PSLs are loans made to Korean companies in connection with export contracts for the
purpose of assisting Korean exporters to finance production.
(a) Arguments of the Parties
7.123 The EC asserts that the KEXIM PSL programme " as such" provides for the grant of subsidies
that are contingent on export, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement . The EC
submits that the PSL programme provides for financial contributions covered by the SCM Agreement
because (i) KEXIM is a public body, and (ii) PSLs cons titute a “direct transfer of funds” pursuant to
Article 1.1(a)(1)(i) of the SCM Agreement . The EC submits that the PSL programme confers a

71 See KEXIM Operating Manual, Responses to Annex V Questions, Attachment 1.1(9) (Exhibit EC-
58).
72 See para. 7.50 supra.
73 We note that the EC has argued that KEXIM faile d to apply any credit risk spread before 12 March
1998. Since credit risk provisions were introduced after that date, the absence of any obligation to impose credit
risk spreads in the pre-12 March 1998 APRG programme is not relevant to our analysis of the EC's claims
against the (current version of the) APRG programme "as such".
74 Although the EC has adduced evidence regarding KEXIM's practice of providing APRG guarantees
(see paras 146-148 of the EC's first written submission), such evidence of practice is not relevant to our analysis
of the EC's claim against the APRG programme "as such". Although the Panel was initially unclear whether the
EC adduced this evidence of practi ce under the APRG programme in s upport of its clai m against that
programme "as such", the EC confirmed in response to Question 8 from the Panel that, in its view, the practices
"are ... separate violations in their own right". Furthermore, in reply to Question 138 from the Panel, the EC
stated that "the individual export subsidy transactions are ... separate, even if linked, violations".

benefit because PSLs are provided at preferential inte rest rates that place the Korean exporters in a
more advantageous position than if they were to obtain such financ ing on market terms. The EC
submits that KEXIM's website describes the PSL pr ogramme as designed “to encourage the export of
capital goods such as . . . ships . . . involving larg er credits and longer repayment terms than what
suppliers or commercial banks would provide .”
75 According to the EC, this shows that the very
purpose of KEXIM’s pre-shipment loans is to provi de financing to shipbuilders on better terms than
they could receive in the market. Th e EC submits that the PSL programme is de jure export
contingent because KEXIM PSLs are provided for the specific purpose of guaranteeing the down
payments for Korean goods intended for export.
7.124 Korea submits that the EC has failed to id entify what precisely constitutes the so-called
"KEXIM pre-shipment loan program". Korea ther efore considers that the measure at issue is
un-defined and cannot "as such" be the subject of a detailed factual or legal analysis. Korea further
asserts that the EC fails to give any support othe r than by way of general statements -- without
evidentiary support or, in some cases, outright in accurately -- as regards the benchmark on the basis
of which it claims that the pre-shipment loan progra m confers a benefit. For Korea, the EC fails to
make a prima facie case that the PSL program "as such" cons titutes a subsidy. According to Korea,
as the interest rates for the pre- shipment loans under the KEXIM program are determined taking into
account base rates reflecting market rates, the cr edit rating of the manufacturer of the capital goods
covered by the pre-shipment loan and the collateral provided by the pre-shipment loan beneficiary, the
pre-shipment loan program "as such" does not co nfer a benefit. Regarding the abovementioned
extract from the KEXIM website, Korea considers that providing a longer term than is generally
available does not mean that the rates are belo w market, since it depends on how those rates are
adjusted to reflect the different terms. According to Korea, the size of a credit may or may not require
different rates; it depends on factors extraneous to size alone. In the alternative, Korea submits that
the PSL programme benefits from a safe haven pursu ant to the first paragraph of item (k) of the
Illustrative List.
(b) Evaluation by the Panel
7.125 We recall that the EC replied to Question 138 from the Panel regarding the identification of
the PSL programme, as set forth at para. 7.117 above. We also note that the EC stated that the PSL
programme was introduced immediately after the establishment of KE XIM, and has been
administered since that time pursuant to Article 18 of the KEXIM Act. 76 The EC further argued that
KEXIM is authorised to provide “Pre-delivery Ex port Loans, which are extended until the delivery
date of the export goods and/or services concer ned” pursuant to Article 11(4) of the KEXIM
Operating Manual.77 In light of these considerations, we fi nd that the EC has done enough to identify
a PSL programme "as such". We consider that the legal basis for that programme is set forth in
Article 18 of the KEXIM Act and Article 11(4) of the KEXIM Operating Manual. We shall conduct
our analysis on the basis of those provisions.
7.126 Regarding the existence of a "finan cial contribution" covered by the SCM Agreement , we
have already found that KEXIM is a "public body " in the meaning of Article 1.1(a)(1) of the
SCM Agreement. We further accept the EC's argume nt that the PSL programme, pursuant to
Article 11 of the KEXIM Operating Manual, provid es for a "direct transfer of funds" within the
meaning of Article 1.1(a)(1)(i) of the SCM Agreement. We therefore find that the PSL programme
constitutes a "financial contribution" covered by SCM Article 1.1(a)(1).

75 See Description of Services and Pr oducts, “Project Related Guarantees”
<http://www.koreaexim.go.kr/web/eng/products/M03/s3_02.html> (Exhibit EC-26).
76 See Responses to Annex V Questions (Non-Confidential Version), Answer 1.2(26), at 14-15 (Exhibit
EC-39).
77 See KEXIM Operating Manual, Exhibit EC-58.

7.127 As to whether the PSL programme confers a "ben efit" and therefore constitutes a subsidy, the
issue before us is whether or not the PSL progra mme mandates the conferral of a benefit by requiring
the provision of PSLs on terms more favourable than Korean shipyards could obtain on the market.
We do not consider that the EC has established a prima facie case to this effect. 78 Neither Article 18
of the KEXIM Act nor Article 11(4) of the KEXI M Operating Manual even refer to the terms on
which KEXIM shall offer PSLs, let alone require belo w-market loans. The EC has not identified any
other provision regulating the terms of PSLs.79
7.128 Regarding the KEXIM website material, we note that it was submitted by the EC in support
of an argument regarding the "purpose" 80 of the PSL programme. We recall, however, that the
question we must answer is whether or not the PSL programme requires KEXIM to provide
prohibited export subsidies. The intent behind the PSL programme is not relevant to this issue. In
this respect, we agree with the fo llowing statement by the panel in Brazil – Aircraft (Article 21.5 –
Canada II ):
In our view, a conclusion that PROEX III could be applied in a manner which confers
a benefit, or even that it was intended to be and most likely would be applied in such a
manner, would not be a sufficient basis to conclude that PROEX III as such is
mandatory legislation susceptible of inconsistency with Article 3.1(a) of the
SCM Agreement.
81
7.129 In light of the above, we reject the EC's clai m that the PSL programme constitutes a subsidy.
For this reason, there is no need for us to examine the EC's claim that the PSL programme "as such" is
de jure export contingent, nor Korea's reliance on the first paragraph of item (k) of the Illustrative
List.
4. Individual APRG transactions
7.130 The EC has identified a number of KEXIM AP RGs which it claims are prohibited export
subsidies. The EC argues that these APRGs we re provided on terms more favourable than the
recipients could have obtained on the market. This argument is based on a comparison of the terms of
the KEXIM APRGs with those of APRGs provided by certain other domestic banks and foreign
banks.
7.131 Korea denies that the APRGs identified by the EC constitute prohibited export subsidies. In
the alternative, Korea asserts th at KEXIM APRGs benefit from a safe haven provided for through an
a contrario reading of item (j) of the Illustrative List. The EC submits that an item (j) defence is not
available to Korea.

78 We note that the EC has argued in respect of both the APRG and PSL programmes that KEXIM
failed to apply any credit risk spread before 12 March 1998. Since credit risk provisions were introduced after
that date, the absence of any obligation to impose credit risk spreads in the pre-12 March 1998 programmes is
not relevant to our analysis of the EC's claims against the APRG and PSL programmes "as such".
79 Although the EC has adduced evidence regarding KEXIM's practice of providing PSLs (see para 161
of the EC's first written submission), such evidence of prac tice is not relevant to our analysis of the EC's claim
against the PSL programme "as such". Although the Panel was initially unclear whether the EC adduced
evidence of practice under the PSL programme in support of its claim against that programme "as such", the EC
confirmed in response to Question 8 from the Panel that, in its view, the practices "are ... separate violations in
their own right". Furthermore, in reply to Question 138 from the Panel, the EC stated that "the individual export
subsidy transactions are ... separate, even if linked, violations".
80 See EC First Written Submission, para. 159.
81 Brazil – Aircraft, Second Recourse by Canada to Article 21.5 of the DSU , para. 5.43 (emphasis in
original).

7.132 The arguments of the parties raise a number of horizontal issues, mostly concerned with the
market benchmarks proposed by the EC. We shall consider these horizontal issues before turning to
the parties' transaction-specific arguments. In th e event that we find any of the relevant APRG
transactions inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement , we shall consider the
availability of a defence under item (j) of the Illustrative List.
(a) Horizontal issues
7.133 The parties have made arguments regarding th e following horizontal issues: designation by
the ship purchaser of a specific foreign APRG provi der, use of foreign benchmarks, country risk
spreads, use of domestic benchmarks, credit risk spread, past subsidies, and adverse inferences.
(i) Buyer's designation of foreign APRG-provider
7.134 Korea asserts that certain ship yards are not always able to choose which financial institution
would provide the APRG for its customers, since ce rtain buyers require Korean shipyards to procure
APRGs from designated foreign banks. Korea submitte d evidence of a number of such designations.
The EC has not responded to Korea's argument.
7.135 In our view, the fact that a buyer designates the source from which a shipyard is to procure an
APRG establishes a prima facie case that such APRG should not be treated as a market benchmark.
In such cases, the designation of the APRG-provider by the buyer means that th ere is a risk that the
APRG is not negotiated at arm’s length, since the ship yard is a captive buyer. The rate paid by the
shipyard might therefore be higher than it would if the shipyard were able to shop around and
compare offers from alternative suppliers.
7.136 Korea has submitted evidence pertaining to one transaction (Exhibit Korea-59) demonstrating
that the buyer, [BCI: Omitted from public version] designated [BCI: Omitted from public
version] as the provider of two APRGs proposed by th e EC as market benchmarks against which to
assess the terms of KEXIM APRGs provided in respect of Daedong. For the reasons set forth in the
preceding paragraph, and given the absence of any re buttal by the EC, we reject the use of these two
APRGs, dated 7 July 1999, as market benchmarks. That being said, we note that this nevertheless
leaves one [BCI: Omitted from public version] APRG (provided on the same terms, and about
which Korea has not adduced any evidence of buyer designation) for use as a market benchmark.
7.137 Korea also submitted further evidence in E xhibits KOREA-58 and KOREA-83, concerning
foreign APRG providers. This evidence is less pr obative, however. Exhibit KOREA-58 relates to an
APRG transaction that is not proposed as a market benchmark by the EC. The evidence contained in
Exhibit Korea-83 relates to APRGs provided to shipyards that fall outside the scope of these
prohibited export subsidy claims. The evidence in these Exhibits is therefore of no direct relevance to
our findings.
(ii) Foreign market benchmark
7.138 Early in the proceedings, the Panel was under the impression that Korea was arguing that, as a
matter of law, APRGs provided by foreign banks could not form part of the "market" against which to
compare APRGs provided by KEXIM. During th e second substantive meeting, however, Korea
stated that:
"the Panel may wish to do as the EC requ ests and make a ruling that foreign lenders
can be part of the market, but such a ruling would be completely beside the issue of
choosing an appropriate benchmark. The EC cites the Appellate Body report in

US -- Lumber CVD Final as support for its position, but that only serves as an
illustration of the “straw man” argument the EC is using."82
7.139 In light of this statement, we do not consid er that Korea disputes that foreign market
benchmarks could be used as a matter of law. 83 Rather, we understand Korea to argue that, as a
matter of fact, the foreign market benchmarks relied on by the EC are not representative of APRG
activities in the Korean market si nce the foreign APRG providers only participated in the APRG
business on an exceptional basis, and were less familiar with that business.84
7.140 In response, the EC submits that there is no reas on to believe that foreign institutions are less
capable of evaluating the creditworthiness of a shipya rd or its technical capability to carry out the
construction project until delivery. In response to Question 10 from the EC, Korea stated that its
argument "is based on discussions with the shipyard s and KEXIM. Korea has asked the shipyards
and KEXIM for any further documentation and it will be submitted when provided to the Government
of Korea".
7.141 We do not consider that a vague reference to shipyard and KEXIM perceptions is sufficient to
reject the foreign market benchmarks proposed by the EC. We also note that, despite Korea's
response to Question 10 from the EC, no documenta tion supporting the alleged perception of the
shipyards and KEXIM was submitted in the subseque nt stages of the Panel proceedings. In the
absence of more substantial arguments by Korea regarding alleged shortcom ings in foreign banks'
evaluation of the creditworthiness of shipyards, we are not persuaded by Korea's argument that
foreign benchmarks are not appropriate as a result of their lack of familiarity with the APRG business.
In our view, provided the terms of an APRG are nego tiated at arm's length for fair market value, the
fact that the provider engages in only a limited numb er of transactions should not be conclusive, and
should not preclude the use of such transactions as market benchmarks.
(iii) Country risk spreads
7.142 Korea has submitted evidence to the effect that at least one foreign bank proposed by the EC
as a market benchmark included a 0.6 per cent country risk spread in its APRG rates for Korean
shipyards. Korea submits that all other foreign ba nks would have done likewis e. Korea submits that
this means that foreign market APRG rates cannot be compared with KEXIM APRG rates without
adjusting for country risk.
7.143 The EC does not contest that a country risk spread would have been included by foreign
APRG providers. However, the EC submits that th e same spread should also have been included by
Korean banks, since the APRGs were provided in a foreign currency (i.e., US dollars). The EC
argues that the risk of providing an APRG to a Korean company in a foreign currency, as it is the case
for most of the APRGs, is the same regardless of where the bank is based. The EC notes in this
regard that the Comptroller's Handbook on Country Risk Management prepared by the US
Comptroller of the Currency provides that "[c]ountry risk is not necessarily limited to a bank's
exposures to foreign-domiciled counterparties".
85

82 Korea's second oral statement, para. 77.
83 We therefore consider that any potential argument by Korea that APRGs provided by foreign banks
could not form part of the "market" against which to compare KEXIM APRGs is a "straw man" that we need not
consider.
84 In light of para. 79 of Korea's second oral statement, Korea could also be understood to argue that all
foreign benchmarks are unreliable becau se foreign banks only provided APRG s when designated by the buyer.
However, since Korea argued these two issues separately in its earlier submission, we shall continue to treat
them separately in these findings. The buyer designation issue is addressed at paras 7.134- 7.137 supra.
85 Exhibit EC – 148, page 9.

7.144 The EC asserts that a Korean country premiu m has to be taken into account whenever a
currency exposure is generated, regardless of whet her a domestic or foreign bank issues the APRGs.
The EC asserts that KEXIM quoted below-market rates because it failed to take such currency
exposure into account. According to the EC, the coun try risk of Korea needs to be taken into account
in the price as an add-on to cover the transfer ri sk resulting from the company needing to find foreign
currency in the case where a government wants to keep the “strong” foreign currencies, and as an add-
on resulting from the bank’s needs to obtain refinancing in the foreign currency (in the case of default
by the shipyard).
7.145 Korea submits that Korean domestic banks, by definition, cannot face the risk of their own
country. Korea asserts that, for Korean banks, risk s from events in their own country are no longer
“country risk.” Korea asserts that the Comptroller's Handbook does not imply that country risk can
be applied to “every” domestic counterparty that is involved in “an export transaction”. Rather, the
handbook itself establishes that the country risk ma y be exceptionally applied to transactions with
domestic counter parties under very limited circ umstances, e.g., where the business of a domestic
borrower is heavily relying on the businesses associat ed with that particular foreign country with
respect to which the country risk is assessed. Kore a asserts that this explanation is understandable
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 directly affect the creditworthin ess of the borrower (or guarantor). According to
Korea, only in such specific circumstances would it ma ke sense to take into account the country risk
of such specific foreign country when assessing the creditworthiness of such borrower (or guarantor).
7.146 Korea submits that no Korean sh ipyards deal exclusively with a specific foreign country such
that the events in that foreign country would signi ficantly and directly affect the creditworthiness of
the Korean shipyards. Korea also asserts that among the buyers of Korean ships, the absolute
majority of buyers come from high income OECD countries, such as the EC, Norway, USA and
Japan. Korea submits that no foreign financial ins titution would apply country risk with respect to
counterparties from such countries as they do not bear any country risks.
7.147 Korea submits that, moreover, even if a Korean shipyard were exposed to the country risk of
a particular foreign country by retaining signifi cant “export receivables” from the buyers in that
foreign country, the country risk it bears is the count ry 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.
7.148 Korea also asserts that Korean country risk relates to Ko rea’s ability to honor its “external”
financial commitments. Korea therefore asserts that Korean domestic banks cannot face similar
“Korea risks” to those faced by foreign banks. Kor ea also submits that, in light of the definition of
country risk, country risk factors such as the risk of expropriation of assets and the risk of currency
manipulations must be understood to mean those that are of such nature that rather directly affect
external financial obligations of Korea. Korea ass erts that, by nature, these risks could not be the
same as those risks faced by Korean domestic banks.
7.149 Korea acknowledges that, during the period of th e financial crisis, the Korean banks were
facing credit risks that were generally increased throughout the country, but states that such risks were
different from the “country risk factors” as faced by foreign banks. Korea submits that such increased
risks during the crisis were taken into account by the Korean banks (as by foreign banks) as the
“general credit risk” of the Korean shipyards.

7.150 While Korea has provided evidence to the effect that foreign banks included country risk
spreads when providing APRGs to Korean shipyards, 86 we consider that the EC has established that
at least something equivalent to a country risk sp read would also have been included by domestic
APRG providers. A country risk spread is genera lly applied whenever a financial institution incurs
international exposure. This will occur when a currency exposure is incurred. A currency exposure is
incurred by both domestic and foreign providers of APRGs to Korean ship yards, because APRGs are
provided to Korean shipyards in a foreign currency, i.e., US dollars.
7.151 In addition, we note that an APRG guarantees th e repayment of pre-payments in the event of
default by the shipyard. The risk of default by the shipyard is related to the general economic
conditions in Korea, and would therefore form part of the country risk assessment. This risk applies
to both domestic and foreign banks.
7.152 For these reasons, we proceed on the basis that APRG rates offered by Korean banks also
reflect a country risk spread, or something equivalent thereto.
(iv) Domestic market benchmark
7.153 Korea also rejects the use of certain Korean domestic banks as a market benchmark. Korea
asserts that domestic rates should only be taken into account (in fixing an appropriate market
benchmark) if they represent a statistically representative number of transactions. Thus, rates charged
by domestic entities that only provided APRGs rare ly or exceptionally should not be taken into
account.
7.154 The EC asserts that such domestic banks onl y provided APRGs excep tionally because they
could not compete with the beneficial terms offered by KEXIM.
7.155 In our view, the exceptional nature of any mark et APRG (be it domestic or foreign) should
not preclude its use as an appropriate market benchm ark for the purpose of determining the existence
of "benefit". Provided it is negotiated on a commerc ial basis by a market operator, and is comparable
in terms of duration etc., any APRG should be admissible as a market benchmark. Korea has
submitted no evidence demonstrating that this w as not the case for the domestic APRGs relied upon
by the EC as market benchmarks.
(v) Credit risk spread
7.156 The EC claims that APRGs issued by KEXIM before 12 Ma rch 1998 conferred a benefit
because the terms did not include any credit risk spread.
7.157 In Attachment 6 to its first written submission, Korea states that "[u]ntil March 1998, KEXIM
did not take credit risks into account for its APRG transactions". There is therefore no disagreement
between the parties regarding the factual element of the EC's claim. Regarding the legal issue of
whether or not the absence of credit risk spreads confers a "benefit", we consider that market
operators of necessity would take account of credit ri sk, and that the failure by KEXIM to include a
credit risk spread would result in APRGs being offe red on terms that are more favourable than those
offered on the market. In this regard, we note that at page 62 of its first written submission, Korea
stated (in respect of PSLs, but the same principle w ould apply in respect of APRGs) that "Chapter 2
of the Interest Rate Guidelines provides detailed sta ndards for determining the interest rates including
the base rates and spreads requiring in particular to take a credit risk spread into account in the same
way as a private financial institution would ." (emphasis supplied, footnote omitted) This would
suggest that Korea accepts that failure to apply a credit risk spread is inconsistent with market
behaviour (i.e., the behaviour of a pr ivate financial institution). In li ght of the above, we find that the

86 See Exhibits KOREA - 86a and b.

following pre-12 March 1998 APRGs confer a "benefit" by virtue of KEXIM's failure to include a
spread for credit risk:
[BCI: Omitted from public version.]
(vi) Past subsidies
7.158 Korea submits that an alleged subsidy may only be challenged if it is conferring a benefit at
the time that the dispute settlement proceeding is initi ated. According to Korea, Article 1.1(a)(1) and
(2), Article 3 and Article 4 do not apply to subsidies that were granted in the past, and that are not
currently being maintained.
7.159 The EC submits that there is no rule in the WTO that a violation is forgiven once it is in the
past. According to the EC, Korea confuses the is sue of whether a subsidy has been granted with
countervailing duty principles, which only allow current benefit to be offset.
7.160 Despite Korea's abovementioned argument, Ko rea stated in response to Question 108 from
the Panel that it was "not making a general argume nt that the EC cannot challenge alleged past
subsidies as a matter of principle". In light of Kor ea's reply, we see no need to rule on whether or not
the EC is entitled to challenge "past" subsidies.
87
(vii) Adverse inferences
7.161 The EC requests adverse inferences on the b asis of Korea's alleged failure to provide
information regarding APRGs issued by independent entities after 28 May 2001. The EC requests the
Panel to find in accordance with paragraph 7 of Annex V of the SCM Agreement that these banks
either stopped issuing APRGs because they determin ed that they could not compete with KEXIM’s
low premia, or that they continued issuing APRGs at comparatively higher premia than KEXIM.
7.162 We note that the EC has requested an adverse inference on the basis of paragraph 7 of Annex
V of the SCM Agreement. Korea argues that adverse inferences cannot be drawn on the basis of that
provision in the context of claims brought under Part II of the SCM Agreement. We do not consider it
necessary to resolve this legal i ssue, since in any event it is well established that WTO dispute
settlement panels retain a residual authority 88 to draw adverse inferences outside of the circumstances
set forth in Annex V. Thus, even if that provisi on does not apply in respect of Part II claims, our
residual authority to draw adverse inferences remains.
7.163 As a factual matter, however, we consider that the EC has failed to establish that an adverse
inference would be warranted. The EC request is based on Korea's alleged failure to provide
information regarding APRGs issued by pr ivate banks to Daewoo-SME/Daewoo-HI after
28 May 2001, to Samho-HI/Halla-HI after 1 December 2000, and to STX/Daedong after
14 September 1999. The EC asks the Panel to infer (because of Korea's failure to provide the relevant
information) that such APRGs were issued at rat es higher than those charged by KEXIM. However,
the EC has failed to provide any evidence that such APRGs were act ually provided to the shipyards
concerned after the dates specified by the EC, whereas Korea submits that it has provided all
information regarding APRGs in its responses to the Annex V questions. In the absence of any

87 We note that Korea raised concerns regarding the pr obative value of "past" s ubsidies. To the extent
this issue is relevant in respect of the EC's Part III claims, it is addressed in section VII.D infra.
88 See Appellate Body Report, Canada –Aircraft, para. 198.

evidence regarding the existence of the alleged APRGs, there is no basis for us to draw any inference
regarding the terms on which such alleged APRGs were issued. 89
(b) Transaction-specific issues
(i) Daewoo
7.164 The EC has proposed a number of market benchmarks to argue that certain APRGs90 provided
by KEXIM to DHI or DSME were below market rates. In particular, the EC has compared certain
APRGs provided by KEXIM in 1998, 2000 and 2001 with a number of APRGs provided by [BCI:
Omitted from public version] during that period.
7.165 Korea rejects the market benchmarks proposed by the EC, and submits that the rates of
KEXIM's APRGs should be compared with APRGs provided to those companies by KDB. Korea
rejects the use of the EC's [BCI: Omitted from public version] benchmarks APRGs because, in
Korea's view, those APRGs did not involve collateral of the same value as that provided in respect of
the relevant KEXIM APRGs, i.e., Yangdo Dambo.91
7.166 In response, the EC submits (on the basis of information provided by Korea in its reply to
Question 14 from the EC) that the APRGs issued by [BCI: Omitted from public version] were
guaranteed by cash deposits, which the EC claims is a stronger form of collateral than Yangdo
Dambo.
7.167 Information provided by Korea conf irms the EC argument that the [BCI: Omitted from
public version] APRGs were collateralized by cash deposits. 92 The EC has provided a convincing
explanation in support of its argument that cash deposits are a stronger form of collateral than Yangdo
Dambo. The EC asserts that Yangdo Dambo "present s [] a wide spread depending on the financial
situation of the shipyard, the quality of the shipyard work, its on-time delivery record, the evolution of
the construction of the vessel, the sales price versus production cost of the ship, the technological
requirements of the buyer and the ease with which these will be met".93 The EC also states that "[i]t is
not unusual for instance that the final price paid by the purchaser of the ship be dependent upon a
certain number of technical characteristics of the ship such as its speed for inst ance. In such a case,
the final value of the ship will only be known at th e end of the production process. The value of such
a collateral is therefore highly depende nt upon the quality of the shipyard." 94 The value of Yangdo
Dambo is therefore dependent on a number of variables, whereas the value of a cash deposit is self-
evident. Korea has failed to rebut the EC's argume nts. Instead, Korea asserts that the cash deposits
provided in respect of the [BCI: Omitted from public version] APRGs covered only a small portion
of the guarantee, compared with the 100 per cen t coverage of the Yangdo Dambo provided in respect
of the KEXIM APRGs. In order for this argument to prevail, Korea would need to demonstrate that

89 We note that the EC also acknowledged the possibility that subsequent APRGs did not exist, but
nevertheless asked the Panel to infer that the APRGs ceased because market providers were not able to compete
with the terms offered by KEXIM. If the APRGs did no t exist, however, there is no basis for any adverse
inference. In particular, there is no basis for us to find that Korea failed to provide information concerning
APRGs that did not exist.
90 See Figure 11 of the EC's first written submission.
91 Korea describes Yangdo Dambo as "a security interest (including on the hull and the materials used
by the shipyards) created by way of tr ansfer of the title /ownership of a prop erty to the credito r. Such transfer
takes place based on an agreement providing that the creditor can either cover his claims through the sale or the
assumption of the definitive ownership to the property upon the default of the debtor or return of the title /
ownership to the property to the debtor when the latter fully settles the claim of the creditor" (see para. 215 of
Korea's first written submission).
92 See, for example, Korea's reply to Question 14 from the EC.
93 See Exhibit EC – 118, page 16.
94 See Exhibit EC – 118, page 4.

the collateral value of the Yangdo Dambo exceeds that of the cash deposits. We consider that Korea
has failed to do so, since Korea has made no attempt to do so.
95 We consider such a demonstration to
be particularly necessary since Korea has not challe nged the EC's assertion that "cash deposits [] are
one of the strongest forms of collateral compared to Yangdo Dambo".96
7.168 We do not consider that the EC could have done more to prove its argument that the [BCI:
Omitted from public version] collateral matched that of the KEXIM Yangdo Dambo. The EC was
dependent on Korea for information regarding the value of the [BCI: Omitted from public version]
cash deposits. The EC was also dependent on Kor ea for information regarding the value of the
Yangdo Dambo required by KEXIM. However, in its reply to Question 67 from the Panel
(concerning one of the [BCI: Omitted from public version] transactions), Korea indicated that it
could not provide worksheets or other documentati on regarding KEXIM's consid eration of collateral.
Korea was only able to provide very basic information regarding the Yangdo Dambo at issue. 97
Given the number of variables that determine th e collateral value of Yangdo Dambo, this limited
information is not sufficient to conclude that the value of the Yangdo Dambo exceeds that of the
relevant cash deposits.
7.169 Furthermore, even though Korea seeks to re ly on the limited value of the cash deposits
provided in respect of the [BCI: Omitted from public version] APRGs, Korea has failed to
establish the precise scope of those cash deposits. Thus, at note 155 to its first written submission,
Korea reported the collateral for the [BCI: Omitted from public version] APRGs as "a pledge
against bank deposits amount[ing] to 20 to 30% of the advance payments". Then, in reply to Question
14 from the EC, Korea stated that the cash deposits for the four [BCI: Omitted from public version]
APRGs amounted to 10, 12, 20 and 20 per cent respectively, whereas the cash deposit for the [BCI:
Omitted from public version] APRG was 30 per cent. As the party seeking to rely on the allegedly
limited coverage of the relevant cash deposits, Kor ea should at least have stated clearly what that
allegedly limited coverage was. Furthermore, Ko rea has failed to provide any evidence in support of
its reporting of the coverage of the [BCI: Omitted from public version] cash deposits. Such
evidentiary support is particularly necessary in this case, given the differences in Korea's reporting of
the cash deposits at issue.
7.170 In light of the above, there is no basis for us to accept Korea's argument that the [BCI:
Omitted from public version] market benchmarks proposed by the EC should be rejected because
the relevant collaterals were not comparable. In the absence of additional argumentation by Korea,
we consider that the 1998, 2000 and 2001 KEXIM AP RGs identified at Figure 11 of the EC's first
written submission should be compared with those be nchmarks in order to determine whether or not
they were provided on terms more favourable than those available on the market. Since the KEXIM
premia rates were less than the market benchmarks proposed by the EC, we find that the 1998, 2000
and 2001 KEXIM APRGs identified at Figure 11 of the EC's first written submission conferred a
benefit and therefore constitute subsidies.

95 At para. 81 of its second oral statement, Korea st ated that "[t]he strength of a type of collateral is
relevant, but is not particularly useful as a basis for comp arison if it only covers a sm all portion of the credit".
We do not consider that this statement rebuts the EC's claim, since at a certain poi nt the value of a smaller
portion of credit coverage by a stronge r form of collateral will equal, or ex ceed, the value of a larger portion of
credit coverage by a weaker form of collateral.
97 In Exhibit KOREA-57, "Security interests" are reported as:
"[on-Credit: 100%]
- Yangdo Dambo as for shipbuilding materials & ships being built
- Yangdo Dambo as for sh ip price payment claim
- Procuring insurance against loss as to ships be ing built on behalf of KEXIM as beneficiary."
This was the only information submitted by Korea regarding the value of the collateral at issue.

7.171 The EC has also proposed APRGs offered by [BCI: Omitted from public version] and
[BCI: Omitted from public version] as market benchmarks against which to compare KEXIM
APRGs provided to Daewoo in 1997. It is not necessary for us to review the EC's argument, since we
have already found that KEXIM's pre-March 1998 APRGs constituted subsidies because the terms did
not include any credit risk spread.98
7.172 We recall that Korea proposed the use of ce rtain APRGs provided by KDB to Daewoo as
market benchmarks. Korea's proposal was based on its argument that KDB is not a public body. We
disagree with this argument, however. In our view, KDB is a public body because it is subject to
government control. Government control derives from the fact that it is 100 per cent owned by the
GOK.
99 Further evidence of government control is found in the fact that GOK "appoints the
Governor, Vice Governor, Directors and Audito rs of the KDB…, approves its annual operation
plan…, and has an oversight role with respect to its operations….". 100 Since the KDB is a public
body, there is a risk that its APRG rates are based on public policy, rather than commercial,
principles.
101 The KDB APRG rates therefore do not constitute an appropriate market benchmark.
(ii) Samho/Halla
7.173 The EC has proposed a number of market benchm arks to argue that certain APRGs provided
by KEXIM to Samho / Halla in 2000 were below mark et rates. The releva nt KEXIM APRGs are set
forth at Figure 12 of the EC's first written submission. Korea asserts that the KEXIM APRGs are not
comparable with the EC's proposed market benchm arks, since the latter were not collateralized
whereas the former were provided on the basis of Yangdo Dambo. Korea submits that the KEXIM
APRGs should instead be compared with a number of APRGs provided by KDB.
102 Korea also
asserts that the KEXIM APRGs identified by the EC were not provided to Samho / Halla.
7.174 Regarding Korea's reliance on KDB APRGs, we recall our finding that KDB is a public body.
KDB rates therefore cannot be used as a market benchmark.
7.175 Regarding Korea's argument on collateralization, the EC refers to its translation of a
document submitted by Korea in the Annex V pro cedure, and asserts that the KEXIM APRGs were
issued "on credit", and therefore without collateral. 103 In its first written submission, however, Korea
stated that KEXIM APRGs were always provided agai nst "real property (land, buildings, factories as
a whole), personal property, securities (i.e., 'Yangdo Da mbo' [...] on significant items such as the hull
of a vessel) and guarantees." 104 In response to Question 67 from the Panel, Korea has demonstrated
that KEXIM APRG transactions reported by Kor ea as being "on credit" actually involved the

98 For the sake of completeness, however, we note that Korea's reply to Question 14 indicated that no
collateral had been required in respect of the [BCI: Omitted from public version] and [BCI: Omitted from
public version] APRGs relied on by the EC. Korea asserts that those APRGs therefore cannot be properly
compared with KEXIM APRGs, which were collateralized. In the absence of any ar gument by the EC that the
[BCI: Omitted from public version] and [BCI: Omitted from public version ] APRGs were collateralized,
or that the KEXIM APRGs were not, there is no basis for us to find that the [BCI: Omitted from public
version] and [BCI: Omitted from public version] APRGs may be properly co mpared with the relevant
KEXIM APRGs.
99 See Attachment 3 to the EC's replies to the Panel's questions after the first substantive meeting.
100 See Responses to Annex V Questions (Non-Confidential Version), Answer 2.4(29), at 45 (citing
Articles 12, 21, and 47 of Korea Development Act) (citations omitted) (Exhibit EC-50).
101 Otherwise, the rates of one public body could be used to show that the rates of another public body
do not confer a "benefit", even though there is a risk that the rates of both entities are below market. This, of
course, is the reason that Article 1 of the SCM Agreement brings financial contributions by public bodies into
the scope of the disciplines of the SCM Agreement.
102 See Korea's reply to Question 71 from the Panel.
103 See para. 100 of the EC's second written submission, note 117.
104 See Korea's first written submission, para. 188. See also para. 215 of that submission.

provision of collateral such as Yangdo Dambo.
105 There is therefore no basis to doubt that the
KEXIM APRGs provided to Samho / Halla and reported as being "on credit" were actually
collateralized. Since the EC has failed to demonstrat e that its proposed market benchmarks were also
collateralized, we are unable to accept the use of those proposed market benchmarks for comparing
with collateralized KEXIM APRGs. We therefore reject the EC's claim against the KEXIM APRGs
identified in Figure 12 of its first written submission.
7.176 In response to a Korean argument that some of the KEXIM APRGs included in Figure 12 of
the EC's first written submission did not relate to Samho, the EC performed an additional benefit
analysis in respect of other KEXIM APRGs provided to Samho / Halla. 106 However, the EC's
modified analysis is based on the same proposed market benchmarks, which (as described above) we
are unable to compare with collateralized KEXIM APRGs. Since the EC has given us no reason to
doubt Korea's assertion that all KEXIM APRGs were collateralized, we reject the EC's modified
analysis in respect of the additional 107 KEXIM APRGs identified by the EC. We therefore reject the
EC's claim against those additional KEXIM APRGs provided to Samho / Halla.
(iii) STX/Daedong
7.177 The EC submits that two KEXIM APRGs issu ed to STX/Daedong in 1999 (see Figure 13 of
the EC's first written submission) constitute prohibited export subsidies. The EC claims that the terms
of the KEXIM APRGs were more favourable than those of three APRGs provided to STX / Daedong
by [BCI: Omitted from public version] in 1999. Korea opposes any comparison with APRGs
provided by [BCI: Omitted from public version] . Korea asserts that those APRGs were not
collateralized, whereas KEXIM's APRGs were. Korea submits that the KEXIM APRGs should
instead be compared with APRGs provided by th e Korea Exchange Bank ("KEB") in 2001 and KDB
in 2002.
7.178 We recall that we have already rejected the use of two of the three [BCI: Omitted from
public version] APRGs. 108 We shall therefore examine the EC 's claim in light of the terms and
conditions of the one remaining [BCI: Omitted from public version] APRG. Regarding
comparability on the basis of collateralization, we recall Korea's argument that all KEXIM APRGs
were collateralized. KEXIM APRGs should theref ore be compared with collateralized market
benchmarks. In this regard, we note that the remaining [BCI: Omitted from public version] APRG
was collateralized "with cash deposits amounting to 5% of the advance payment amount and an
export guarantee insurance".109 Since Korea has failed to argue th at such collateral is not comparable
with any collateral required in respect of the relevant KEXIM APRGs, we consider that it is
appropriate to compare the two 1999 KEXIM APRGs with the single [BCI: Omitted from public
version] APRG provided to STX / Daedong in 1999. On the basis of such comparison, we find that
the KEXIM APRGs were below market, and therefore conferred a benefit.
7.179 We recall that Korea has argued that the terms of the KEXIM APRGs should be compared
with the terms of certain APRGs provided by KDB and KEB. In this regard, we recall our finding
that KDB is a public body. Accordingly, KDB AP RGs do not constitute a reliable market benchmark
with which to asses the existence of benefit. As for KEB, we note that Korea has sought to rely on
APRG rates offered by KEB in 2001, whereas th e KEXIM APRGs at issue date from 1999. Given
the absence of any temporal correlation between the KEXIM APRGs challenged by the EC and the
KEB APRGs identified by Korea, and our preference for rates charged by entities without government

105 See Exhibit KOREA – 57, under the heading "II. Items relating to the resolution", where various
security interests are reported in respect of a transaction described as being "On-Credit: 100%".
106 See para. 36 of the EC's second oral statement.
107 As set forth at para. 36 of the EC's second oral statement.
108 See para. 7.136 supra.
109 See Korea's reply to Question 14 from the EC.

ownership, we do not consider it appropriate to use KEB APRGs as a market benchmark for
determining whether or not the KEXIM APRGs confe rred a benefit. We also note the EC argument
that KEB is not a reliable market benchmark as a result of government entrustment or direction 110 and
government ownership. 111 We are not persuaded by the EC 's argument concerning government
entrustment or direction, since the only evidence provi ded by the EC of the government's alleged role
is in relation to KEB's participation in the Daewoo workout, and has nothing to do with KEB's
provision of APRGs to Samho / Halla. Regarding government ownership, the EC asserts that GOK
has a minority shareholding in KEB. In choosing an appropriate market benchmark, we consider it
preferable to choose when possible entities without any government ownership. The absence of
government ownership generally removes the possibilit y that rates have been fixed on the basis of
public policy, rather than commercial principles.
7.180 In light of the above, we uphold the EC's cl aim against the KEXIM APRGs identified in
Figure 13 of the EC's first written submission.
(iv) Hanjin
7.181 The EC claims that two APRGs provided by KE XIM to Hanjin in 2002 constitute subsidies
because they were provided on terms more favour able than those of two APRGs provided by [BCI:
Omitted from public version] to Hanjin in the same year. The relevant APRGs are set forth at
Figure 14 of the EC's first written submission.
7.182 Korea opposes the comparison proposed by the EC because of differences in collateralization.
Korea submits that the relevant KEXIM APRGs s hould instead be compared with certain APRGs
provided by [BCI: Omitted from public version] , KEB, KDB and [BCI: Omitted from public
version] in 1997.112
7.183 In its reply to Question 71, Korea submits that no security was deposited for the [BCI:
Omitted from public version] APRGs, whereas Yangdo Dambo was provided for the relevant
KEXIM APRGs. Korea submits that such differe nces in collateralization preclude any comparison
between the [BCI: Omitted from public version] and KEXIM APRGs at issue. The EC submits
that Korea's argument that the two APRGs issued by [BCI: Omitted from public version] were not
collateralized is inconsistent with Ko rea's statement in the Annex V process 113 that "[a]ll APRGs"
reported by Korea, including therefore those from [BCI: Omitted from public version] , "were
issued with the collaterals of Yangdo Dambo".
7.184 Despite Korea's contradictory statement in the Annex V process, Korea provided
documentary evidence114 during these proceedings demonstrating that the two [BCI: Omitted from
public version] APRGs at issue were not collateralized. The EC has not disputed that the KEXIM
APRGs at issue were, by contrast, collateralized. Given these differences in collateralization, and the
fact that the EC has not provided us with any basi s for making adjustments to reflect such differences,
we are unable to determine benefit on the basis of a comparison of the [BCI: Omitted from public
version] APRGs with the KEXIM APRGs. We are th erefore unable to accept the use of the [BCI:
Omitted from public version] APRGs as a market benchmark, and reject the EC's claim against the
Hanjin APRGs accordingly.

110 See EC reply to Question 171 from the Panel.
111 See para. 103 of the EC's second written submission.
112 See para. 223 of Korea's first written submissi on, which refers to other domestic, non-KEXIM
APRGs set forth in Exhibit Korea – 16.
113 See Annex V information submitted as Exhibit EC-24.
114 See Exhibit Korea – 88, which clearly states that no securities were provided in respect of APRG
projects N-120 and N-121.

7.185 In light of the above finding, it is not strictly necessary for us to consider the [BCI: Omitted
from public version] , KEB, KDB and [BCI: Omitted from public version] benchmarks proposed
by Korea. We shall do so, however, for the sake of completeness. We have already indicated that
KDB APRGs would not constitute an appropriate market benchmark, since KDB is a "public body".
Although the EC does not argue that [BCI: Omitted from public version] , KEB and [BCI:
Omitted from public version] are public bodies, it asserts that they are entrusted or directed by the
government.
115 We must reject this argument, since th e EC has not provided any evidence that these
entities were entrusted or directed to provide APRGs to Hanjin. The only evidence of alleged
government entrustment or direction of these entities relates to their participation in some of the
restructurings at issue in these proceedings. Ne vertheless, we note that the alternative APRGs
proposed by Korea as market benchmarks all re late to 1997, whereas the KEXIM APRGs challenged
by the EC relate to 2002. Given the lack of temporal correlation be tween these APRGs, the [BCI:
Omitted from public version] , KDB, KEB and [BCI: Omitted from public version] APRGs do
not constitute appropriate market benchmarks for the purpose of assessing the KEXIM APRGs at
issue.
(v) Samsung
7.186 In respect of Samsung, the EC challenges four KEXIM APRGs, all of which were issued in
1997. The EC claims that these APRGs conferred a benefit because they were issued on terms more
favourable than 1997 APRGs provided by [BCI: Omitted from public version] and [BCI: Omitted
from public version] . The relevant APRGs are set forth at Figure 15 of the EC's first written
submission.
7.187 We recall that we have already found th at KEXIM's pre-March 1998 APRGs to Samsung
constitute subsidies because their terms did not include any credit risk spread. For this reason, there is
no need for us to consider additional arguments by the parties regarding the comparability of these
APRGs with the market benchmark APRGs proposed by the EC.
7.188 For the sake of completeness, we note Korea's argument regarding the use of KDB APRGs as
a market benchmark. We recall that KDB is a public body. 116 As a public body, KDB does not
constitute a market benchmark for the purpose of assessing whether or no the relevant KEXIM
APRGs conferred a benefit.
(c) Export contingency
(i) Arguments of the Parties
7.189 The EC submits that APRGs are provided for the specific purpose of guaranteeing the down
payments for Korean goods intended for export. Th e EC asserts that any transaction financed through
KEXIM's APRG programme must, by definition, be an export transaction, and that APRGs provided
pursuant to the programme are expressly contingent on export within the meaning of Article 3.1(a) of
the SCM Agreement.
7.190 When asked by the Panel (Question 48) whethe r Korea contests the EC's claim that PSLs and
APRGs under the KEXIM legal regime are contingent on export performance, Korea responded that it
"has not taken any position as to whether [PSLs a nd APRGs] are contingent on export performance".
In response to an oral question from the Panel at th e second substantive meeting, Korea stated that it
was not contesting the EC's claim of export contingency.

115 See EC reply to Question 171 from the Panel.
116 See para. 7.172 supra.

(ii) Evaluation by the Panel
7.191 We find that the EC has established a prima facie case that KEXIM APRGs are contingent on
export performance. In light of Korea's decision no to contest the EC's arguments regarding this
matter, we find that KEXIM APRGs are "contingent ... upon export pe rformance" within the meaning
of Article 3.1(a) of the SCM Agreement.
(d) Specificity
7.192 Pursuant to Article 1.2, the disciplines of the SCM Agreement only apply to subsidies that are
"specific" within the meaning of Article 2 thereof. Article 2.3 of the SCM Agreement provides that
"[a]ny subsidy falling under the provisions of Article 3 shall be deemed to be specific". Since export
contingent subsidies fall under the provisions of Ar ticle 3 (paragraph 1(a)), they are "specific".
Pursuant to Article 2.3, therefore, we conclude that those APRGs that we have found to be export
subsidies are "specific".
(e) Item (j) defence
7.193 In light of our findings that certain APRGs cons titute subsidies, and that such subsidies are
contingent on export performance, we will be required to find that such APRGs are inconsistent with
Articles 3.1(a) and 3.2 of the SCM Agreement unless we uphold Korea's claim that they benefit from a
safe haven pursuant to item (j) of the Illustrative List.
7.194 Korea submits that item (j) should be inte rpreted such that export credit guarantee
programmes, or guarantee programmes against incr eases in the cost of exported products, that are
provided at premium rates that cover the long- term operating costs and losses of the programmes
should be found not to constitute export subsidies. In other words, Korea relies on an a contrario
interpretation of item (j). Korea's reliance on ite m (j) raises a number of issues. First, is an a
contrario interpretation of item (j) permissible? Second, if so, what are the relevant conditions to be
fulfilled? Third, have those conditions been fulfilled in this case?
(i) Is an a contrario interpretation permissible?
7.195 We note that the panel in Brazil – Aircraft – Article 21.5 was required to consider whether or
not one of the items of the Illustrative List could be interpreted in an a contrario manner. In doing so,
that panel observed that footnote 5 117 to the SCM Agreement provides an explicit textual basis for
determining whether and under what conditions the Illustrative List may be used to demonstrate that a
measure is not a prohibited export subsidy. 118 The panel noted that footnote 5 provides that
"[m]easures referred to in Annex I as not constituti ng export subsidies shall not be prohibited under
this or any other provision of this Agreement." The panel observed that, in its ordinary meaning,
footnote 5 relates to situations where a measure is referred to as not constituting an export subsidy.
The panel therefore considered whether or not the Illustrative List provision at issue contained any
affirmative statement that a measure is not an export subsidy, or that a measure not satisfying the

117 The SCM Agreement also includes a provision governing the relationship between certain elements
of the Illustrative List and Article 1 of the Agreement. Footnote 1 to the Agreement provides that, "[i]n
accordance with the provisions of Artic le XVI of GATT 1994 (Note to Article XVI) and the provisions of
Annexes I through III of this Agreement, the exemption of an exported product from duties or taxes borne by
the like product when destined for domestic consumption, or the remission of such duties and taxes in amounts
not in excess of those which have accrued, shall not be deemed to be a subsidy." Footnote 1 therefore indicates
when certain measures will not constitute a subsidy, whereas footnote 5 addresses situations where certain
measures will not constitute prohibited export subsidies. Footnote 1 is not applicable to the situation at hand, as
Korea has not alleged that APRGs (or PSLs) are related to the exemption of an exported product from duties or
taxes.
118 See Panel Report, Brazil – Aircraft – Article 21.5, paras. 6.33-6.34.

conditions of that provision is not prohibited, and thus falls within the scope of footnote 5.
119 Finally,
the panel noted that a broad reading of footnot e 5 could place developing country Members at a
permanent, structural disadvantage in the field of e xport credit terms, a result that it considered to be
inconsistent with one of the objects and purposes of the WTO Agreement.120
7.196 We find the reasoning 121 expressed by the Brazil – Aircraft-Article 21.5 panel to be
convincing, and consider it appropria te for us to be guided by it in these proceedings. We are of
course aware that the Brazil – Aircraft-Article 21.5 panel was considering whether or not the first
paragraph of item (k) of the Illustrative List could be interpreted a contrario. However, the panel's
reasoning was based in the first instance on an interpretation of footnote 5 of the SCM Agreement, and
was not confined to the text of item (k) in isola tion. Furthermore, the panel's concerns regarding
structural discrimination against developing country Members were based explicitly on considerations
regarding item (j). Accordingly, there is no r eason why the panel's reasoning should not also be
applied in respect of the remaining provisions of the Illustrative List, including item (j).
7.197 Korea argues that we should not follow the reasoning of the Brazil – Aircraft – Article 21. 5
panel because it was invalidated by the Appellate Bo dy. In particular, Korea relies on the statement
by the Appellate Body in those proceedings that "[i]f Brazil had demonstrated that the payments made
under the revised PROEX were not 'used to secure a ma terial advantage in the field of export credit
terms', and that such payments were 'payments' by Brazil of 'all or part of the costs incurred by
exporters or financial institutions in obtaining credits', then we would have been prepared to find that
the payments made under the revised PROEX are justified under item (k) of the Illustrative List."122
However, we do not accept that this amounts to a reve rsal of the panel's findings, nor a legal finding
by the Appellate Body that an a contrario interpretation of the first paragraph of item (k) is
permissible. This is because th e Appellate Body explicitly stated that "[i]n making this observation,
we wish to emphasize that we are not interpreting footnote 5 of the SCM Agreement, and we do not
opine on the scope of footnote 5, or on the meaning of any other items in the Illustrative List." In
light of this clarification by the Appellate Bo dy, we consider that there is nothing in the
Appellate Body statement that would cause us not to be guided by the abovementioned reasoning of
the Brazil – Aircraft – Article 21.5 panel.
7.198 Thus, in order to determine whether or not item (j) of the Illustrative List may be interpreted
a contrario, we shall consider whether or not item (j) falls within the scope of footnote 5 of the
SCM Agreement. That is to say, we shall consider whether item (j) contains any affirmative statement
that a measure is not an export subsidy, or that a measur e not satisfying the conditions of that
paragraph is not prohibited. Item (j) contains no such affirmative statement. Item (j) merely
describes certain circumstances in which particular programmes shall constitute export subsidies.
Since item (j) therefore falls outside the scope of footnote 5, item (j) does not provide a basis on
which to find that measures do not constitute prohibited export subsidies.
7.199 Although the EC rejects the application of item (j ) on the basis of the facts of this case, the
EC submits that in law item (j) could be read to incl ude a proviso, and thereby "refer" to export credit
guarantees as not constituting export subsidies to th e extent that the premium rates cover the long-
term operating costs and losses of the programmes. As indicated above, however, we consider that
item (j) does not refer to measures as not constituting export subsidies. The terms of item (j) merely
refer to export credit guarantees etc. at premium rates which are inadequate to cover long-term
operating costs and losses. It contains no explicit re ference to export credit guarantees etc. that are

119 See ibid., paras. 6.36-6.37.
120 See ibid., paras. 6.46-6.66.
121 We therefore incorporate the reasoning set forth in paragraphs 6.33 – 6.41 of that panel's report into
our findings.
122 See Appellate Body Report, Brazil – Aircraft – Article 21.5, para. 80.

adequate to cover long-term operating costs and los ses. There is therefore no basis for claiming that
item (j) somehow incorporates a proviso that brings it within the scope of footnote 5.
7.200 Korea objects to the Brazil – Aircraft – Article 21.5 panel's interpretation and application of
footnote 5, which we apply here. Korea considers th at such an application is overly narrow. Korea
argues that the negotiating history of footnote 5 shows that the drafters intended to expand, rather than
restrict, the scope of footnote 5. In this regard , Korea makes the same argument as was advanced by
the United States in Brazil – Aircraft – Article 21.5 . The Brazil – Aircraft – Article 21.5 panel
described and rejected this argument in the following terms:
The United States advances arguments based on the negotiating history of footnote 5
in support of its broad interpretation of that footnote to apply to the first paragraph of
item (k). In this respect, it points ou t that in a Chairman's text of the SCM Agreement
known as Cartland III, footnote 5 provided as follows:
"Measures expressly referred to as not constituting export subsidies shall not be
prohibited under this or any other provision of this Agreement." (emphasis added).
As the United States correctly observes, a new Chairman's text (known as "Cartland
IV") was released just a few days later. In that new text, the word "expressly" was
dropped from the footnote, which took its present form. In the view of the
United States, this change demonstrates that the drafters "intended to expand, rather
than restrict" the scope of footnote 5, and that "they did not intend the sort of narrow
construction of footnote 5 advanced by Canada and the EC."
We agree with the United States that the de letion of the term "expressly" appears to
have broadened the scope of footnote 5 in Cartland IV beyond its scope in
Cartland III. We do not agree, however, that it served to broaden footnote 5 to the
extent suggested by the United States. As we discussed above, the Illustrative List
contains – and already contained at the time of Cartland III and IV – a number of
provisions that include affirmative statemen ts that arguably represent authorizations
to use certain measures. The language of Cartland III ("expressly referred to") could
have precluded asserting that footnote 5 applied to any of these provisions, and it may
be that the purpose of the modification was to rectify this situation. If on the other
hand the intention of the drafters in cha nging footnote 5 had been to extend the scope
of that footnote to cover situations where the Illustrative List merely referred to things
that were export subsidies, they might have been expected to modify the structure of
the second part of the footnote, and not merely delete the word "expressly". At the
very least, we conclude that the implicati ons of the negotiating history referred to by
the United States are inconclusive and cannot lead us to disregard the ordinary
meaning of the footnote.
Of course, it could be argued that, based on an a contrario argument, the Illustrative
List permits admitted export subsidies even where those subsidies do not fall within
the scope of footnote 5 . As we have already indicate d, however, the drafters have
provided us with a specific textual pr ovision that addresses the issue when the
Illustrative List can be used to demonstrate that a measure is not a prohibited export
subsidy. The fact that this footnote was adjusted on at least one occasion suggests
that the drafters gave this issue consid eration and provided the answer to this
question. If we were to conclude that the Illustrative List by implication gave rise to

"permitted" measures beyond those allowed by footnote, we would be calling into
serious question the raison d'être of footnote 5.
123
7.201 We find the panel's reasoning to be convincing. Fo r this reason, and in light of the fact that
Korea has not attempted to rebut it, we see no reason not to be guided by that reasoning in the present
case. Although Korea notes that the Appellate Body has not opined on the Brazil – Aircraft –
Article 21.5 panel's reasoning,
124 this fact does not make the panel's reasoning any less convincing to
us. On the basis of that reasoning, we reject Korea's argument concerning the negotiating history of
footnote 5.
7.202 Korea also argues that the only purpose of item (j ) is to indicate when export subsidies do not

exist.125 Korea submits that failure to permit an a contrario reading of item (j) and the first paragraph
of item (k) would render those provisions meaningless, since a complaining party would never rely on
them to demonstrate the existence of an export subsid y. According to Korea, this is because reliance
on these provisions would require a complaining party to demonstrate more facts than the basic legal
provision in Article 3. In particular, Korea argues that since one could establish a violation of
Article 3.1(a) simply by showing export continge ncy, a complainant would never have recourse to
item (j) to demonstrate export subsidization, becau se that would require the complainant to also
demonstrate that premium rates are inadequate to cover the long-term operating costs of the relevant
programme (i.e., that the conditions of item (j) are met).
7.203 We cannot accept Korea's argument that the only purpose of item (j) is to indicate when
export subsidies do not exist. To accept this ar gument would require reading item (j) in a sense
exactly opposite that of its plain language: on its f ace, item (j) defines certain circumstances in which
export credit guarantee programmes are
 export subsidies. Item (j) simply does not address export
guarantee programmes that do cover their long-term operating costs and losses. Indeed, what is the
point of footnotes 1 and 5 being included in the SCM Agreement to clarify the relationship between
Articles 1 and 3 of the SCM Agreement on the one hand, and the Illustrative List on the other, if
footnotes 1 and 5 can ultimately be ignored and the Illustrative List read in a sense exactly the
opposite of its plain language?
7.204 As for Korea's argument that item (j) would neve r be used by a complaining party to establish
the existence of a prohibited export subsidy, we disagr ee. As item (j) provides, if a complaining party
establishes that another Member's export guarantee programme fails overall to cover its long-term
operating costs and losses, that is sufficient for a finding that the programme as a whole constitutes a
prohibited export subsidy. Given the per se nature of the items set forth in the Illustrative List, no
further separate analysis of the programme under Articles 1 and 3 would be necessary. 126
Furthermore, in arguing that all a party would need to do to pursue a claim under Article 3.1(a) is
establish export contingency, Korea overlooks the need under Article 3.1(a) to demonstrate the
existence of subsidization. Thus, a complainant ca nnot establish a violation of Article 3.1(a) simply
by showing export contingency; the complainant must also demonstrate subsidization, and therefore
benefit, on the basis of Article 1.1 of the SCM Agreement.
7.205 Furthermore, we recall that the Brazil – Aircraft –Article 21.5 panel's reasoning was based
explicitly on the structural disadvantages for deve loping country Members that would result from an
a contrario interpretation of item (j). The panel found:

123 Panel Report, Brazil – Aircraft – Article 21.5, paras 6.39 – 6.41 (footnotes omitted).
124 Korea's first written submission, para. 253.
126 This perhaps reflects the historical context of the Illustrative List , in the sense that it was first
drafted before the definition of "subsidy" set forth in the SCM Agreement was introduced.

6.59 The same situation exists in respect of item (j) of the Illustrative List. Brazil
argues that its interpretation of the first paragraph of item (k) is necessary to allow it
to meet export credit terms provided by developed country Me mbers through export
credit guarantees. If footnote 5 is interp reted broadly to encompass the first
paragraph of item (k), however, it presumabl y would also apply to item (j) and thus
"permit" export credit guarantees at prem ium rates adequate to cover long-term
operating costs and losses, even wher e the guarantees constituted a subsidy
contingent upon export performance within the meaning of Article 3.1(a). As Canada
points out, however, in the case of a government guarantee, a lending bank
establishes financing terms in light of the risk of the guarantor government, not the
borrower. Developed countries generally present a lower risk of default than
developing countries, and a developing c ountry may often be perceived as posing a
higher risk than even the borrower to whom a guarantee might be extended. As a
result, while developing countries in theo ry could utilise any "safe harbour" under
item (j) to provide loan guarantees at th e same premium rates as developed countries,
the effect of guarantees by developing count ry Members on the interest rate of the
guaranteed export credits would be minimal or non-existent in most cases. In other
words, a broad reading of footnote 5 would, in respect of item (j), allow developed
countries to support export credits at interest rates that would be consistently lower
than those of export credits supported by developing countries.
6.60 If, on the other hand, we interpret footnote 5 in accordance with its ordinary
meaning, and conclude that it does not appl y to items such as the first paragraph of
item (k) and item (j), then all WTO Members are faced with a common set of rules in
respect of export credit practices. First, they can ensure that those practices do not
confer a benefit within the meaning of Article 1 and are therefore not subsidies.
Because the existence of benefit is determined based on the existence of a benefit to a
recipient, and without regard to whether there is a cost to the government, all
Members compete on a level playing field in respect of this assessment, i.e., a
measure which constitutes an export subsidy when provided by Brazil ipso facto will
also constitute a subsidy when provided by Canada, and vice versa.
127
7.206 We share that panel's concerns regarding the structural disadvantages that would result for
developing country Members from an a contrario interpretation of item (j). As noted by that panel,
an interpretation leading to such structural disa dvantages "would be at odds with one of the objects
and purposes of the WTO Agreement generally and the SCM Agreement specifically".128
7.207 In light of the above, we find that an a contrario interpretation of item (j) is not permissible.
Strictly speaking, therefore, it is not necessary fo r us to continue with our analysis of the two
remaining issues outlined above. For the sake of completeness, however, we shall do so.

127 See Panel Report, Brazil – Aircraft – Article 21.5, paras 6.59 – 6.60 (footnotes omitted).
128 Ibid, para. 6.47. That panel noted that the preamble to the WTO Agreement recognises "that there is
need for positive efforts designed to ensure that developi ng countries, and especially the least-developed among
them, secure a share in the growth in international trade commensurate with th e needs of their economic
development." That panel also noted that "[t]his overarching concern of the WTO Agreement finds ample
reflection in the SCM Agreement. Article 27 of that Agreement recognizes that 'subsidies may play an important
role in economic development programmes of developing country Members' and provides substantial special
and differential treatment for developing countries, including in respect of export subsidies" (ibid, note 49).

(ii) If an a contrario interpretation of item (j) were permissible, what conditions would need to be
fulfilled?
7.208 Assuming arguendo that item (j) could operate as an affirmative defence (with which, as
noted, we disagree), it would need to be demons trated that the APRG programme constitutes an
export credit guarantee or insurance programme, or an insurance or guarantee programme against
increases in the cost of exported products or of ex change risk, that operates at premium rates which
are adequate to cover the long-term operating costs and losses of that programme.
(iii) Are the relevant conditions for the application of item (j) as an affirmative defence fulfilled?
7.209 As the party seeking to rely on item (j) as an affirmative defence, the burden of proof is on
Korea to establish that the relevant conditions ha ve been fulfilled. Korea submits that KEXIM
APRGs are export credit guarantees or, at least, gua rantees against increases in the costs of exported
products. Korea further submits that the APRG pr ogramme covers its long-term operating costs, as
evidenced by the profitability of that programme from 1997 to 2002.
7.210 The EC contests Korea's assertion that APRGs are export credit guarantees, or guarantees
against increases in the cost of exported products. The EC asserts that export credit guarantees are
provided to banks or exporters in respect of credits they have provided to foreign customers, whereas
APRGs involve guarantees provided to the foreign cust omers in respect of payments they have made
to shipbuilders. The EC also asserts that APRGs guard against the overall expenses of the exporter or
credit risks taken by the purchaser, not against increas es in the cost of the exported product. The EC
argues that Korea’s broad interpretation would al low any subsidy to an exporter or to exported
products that is formulated as a “guarantee progra mme” to be covered by item (j) since any such
subsidy would tend to reduce the cost of manufact uring the exported goods for the exporter or of
buying the exported goods for the purchaser.
7.211 The EC further asserts that, in making APRGs and preshipment loans, KEXIM assumes a risk
that relates to the creditworthiness of the domestic exporters. The EC submits that the export credit
financing referred to in item (j) c oncerns foreign risk. According to the EC, the underlying rationale
of these provisions is that domestic banks typically do not have the means of assessing overseas risks
of a potential buyer of an export product (or of recovering money abroad).
7.212 The EC does not challenge Korea's assertion re garding the long-term profitability of the
APRG programme.
Do APRGs constitute export credit guarantees?

7.213 From a purely textual perspective, based entir ely on the plain meaning of the words, we
consider that an instrument may only be designate d as an "export credit guarantee" if it guarantees an
export credit. An instrument will guarantee an expor t credit if it covers default by a borrower in
respect of an export credit provided to that borrower.
7.214 Korea has not explicitly argued that APRGs guarantee export credits. Rather, Korea has
sought to establish a link between the APRGs and export credits by arguing that "APRGs are issued to
protect the shipowner against a contractual default by the shipbuilder. It is not disputed that Korean
exporters who export capital goods which qualify for loans under KEXIM policies on export loans are
also eligible for APRGs. There is, therefore, a close connection between the export loan / credit
financing and the APRGs even though th ere is no complete concurrence." 129 Thus, although Korea
does not argue that APRGs guarantee export credits (Korea asserts, instead, that APRGs guarantee
against contractual default by the shipbuilder), it argues that there is a sufficiently close connection

129 Korea's first written submission, para. 263.

between credits to exporters130 and APRGs for the latter to be treated as export credit guarantees. We
note, however, that there is no direct connection between APRGs and loans to exporters, since there
may well be cases in which APRGs are issued but no KEXIM loans (or, in theory at least, any loans at
all) are provided to the exporters.
7.215 In reply to Question 59 from the Panel, Korea st ated that "[t]he fact that APRGs may be
granted when export credits in the narrow sense ar e not does not prevent APRGs from being qualified
as export credit guarantees because it still is a guarantee accessory to an export transaction similar to a
loan guarantee which covers a default by the bor rower." If we understand Korea correctly, it is
seeking to demonstrate a closer link between APRG s and loans to exporters by treating advance
payments by the buyers as loans to exporters, a nd the APRGs as guarantees of those loans. We are
unable to accept this argument. First, we see no b asis for treating the advance payment as a loan to
the shipbuilder. Receiving and making pre-payment is not the same as accepting and offering a loan.
A loan is to be repaid, whereas a pre-payment is a payment for a good or service to be provided.
Indeed, the fact that Korea merely argues that the APRG is "similar to" a loan guarantee suggests that
Korea itself is not of the view that the advance payment constitutes a loan. 131 Second, even if the
advance payment were treated as a loan, the mere fact that a guarantee is issued in respect of a loan in
the context of (or "accessory to") an export tran saction does not necessarily make that guarantee an
export credit guarantee. An instrument will only cons titute an export credit guarantee if it guarantees
an "export credit". Korea has neither argued nor de monstrated that advance payments guaranteed by
APRGs constitute "export credits".132
7.216 Korea submits that other Members' export credit agencies also pr ovide APRGs. We
understand Korea to argue that, because APRGs are offered by other Members' export credit agencies,
they should be treated as export credit guarantees. Korea also asserts at note 34 to its replies to
questions from the Panel after the second meeting that "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 programs would be outside of the parameters of the OECD Arrangement and
not protected by any safe harbors." The conformity of the practices of other Members with Part II of
the SCM Agreement is not an issue in these proceedings. In resolving the present dispute, therefore,
we take no account of the practices of other Members, nor of the potential implications of our findings
for the practices of such Members.
7.217 For the above reasons, we find that KEXIM APRGs do not constitute export credit guarantees
within the meaning of item (j) of the Illustrative List.
Do APRGs constitute guarantees against increases in the cost of the exported product?

7.218 Regarding the issue of guarantee against in creases in cost, Korea asserts (response to
Question 60 from the Panel) that an APRG guarantee s against an increase in the cost associated with
the working capital necessary to pr oduce the ship, because the fact that the shipowner makes an
advance payment (guaranteed by the APRG) reduces the amount of money that the shipyard needs to
borrow to finance the cost of producing the v essel (i.e., the pre-payment serves as interest-free
working capital).

130 For present purposes, we do not consider it necessary to determine whether or not a loan to an
exporter constitutes an export credit.
131 As noted below, Korea actually treats the advan ce payment covered by the APRG as interest-free
working capital for the shipyard, and therefore not as a loan.
132 Korea makes an argument at para. 262 of its firs t written submission that only applies "[i]f a credit
to the shipyard qualifies as an export credit". We do not treat this hypothetical a ssertion as an argument that
advance payments do constitute export credits. In any event, even if this could be interpreted as an argument by
Korea that advance payments constitute "export credits", we find below that loans to exporters do not constitute
export credits. Thus, even if advance payments could be treated as loans to exporters, they would not be "export
credits".

7.219 The EC submits that item (j) does not apply to guarantees against increases in exporters' costs
generally, but only to guarantees against increases in "the cost of exported products".
7.220 We note that item (j) applies to guarantee programmes against increases in the cost of
"exported products". The fact that a shipyard has access to interest-free working capital (in the
amount of the advance payments guaranteed by APRGs) has no bearing on whether or not the (total)
cost of the vessel
 will increase. It provides neither a guarant ee for the shipbuilder that the cost of
production of the vessel will not increase, nor a guarant ee to the buyer that the price of the vessel will
not increase.133 Irrespective of the pre-payment, the cost of the vessel could still increase. APRGs
provide no guarantee that other costs, and therefor e the (total) cost of the exported product, will not
increase. Accordingly, there is no basis for us to find that APRGs constitute "guarantee programmes
against increases in the cost of exported pr oducts" within the meaning of item (j) of the Illustrative
List.
7.221 Although the above findings indicate that item (j) could not operate as an affirmative defence
in the present case, for the sake of completeness we shall address the issue of the adequacy of APRG
premium rates. In this regard, we note that the EC has not disputed Korea's assertion that the APRG
premia are adequate to cover the long-term operating costs and losses of the programme. We
therefore consider that Korea has established prima facie that this condition is fulfilled.
7.222 In light of our findings that item (j) may not be interpreted a contrario, and that APRGs are
neither export credit guarantees nor guarantees against increases in the cost of exported products, we
find that Korea has failed to demonstrate that item (j ) is applicable as an affirmative defence for those
individual APRGs found to be in violation of Article 3.1(a) of the SCM Agreement.134
(f) Conclusion
7.223 To conclude on the individual APRG transacti ons challenged by the EC, we find that the
following KEXIM APRGS constitute prohibited export subsidies contrary to Articles 3.1(a) and 3.2 of
the SCM Agreement:
[BCI: Omitted from public version.]
5. Individual PSL transactions
7.224 The EC claims that a number of individual KEXIM PSLs constitute prohibited export
subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement. The EC's claim is based on a
comparison of the terms of individual PSLs with a market benchmark constr ucted primarily on the
basis of an index of corporate bond prices.
7.225 Korea has made a number of arguments concer ning the EC's proposed market benchmark.
Korea has also proposed alternative market benchmarks of its own. In particular, Korea submits that
the terms of KEXIM PSLs should be compared with th e terms of other financing instruments used by
the relevant shipyards, including corporate bonds issued by those shipyards. In the alternative, Korea
submits that the individual PSL transactions be nefit from a safe haven provided for in the first
paragraph of item (k) of the Illustrative List. We shall examine the parties' arguments regarding the
alternative market benchmarks proposed by Kor ea before addressing issues concerning the market
benchmark proposed by the EC. Only then will we examine the individual transactions identified by

133 The parties have made a number of arguments as to whether "the cost of the exported products"
refers to cost of production or price. We do not consider it necessary to resolve this issue in order to decide
whether APRGs constitute guarantees against increases in the cost of exported products.
134 In light of this finding, it is not necessary for us to consider the EC's argument that any safe haven
under item (j) of the Illustrative List could only operate as a defence for the APRG programme per se, but not
the individual APRG transactions under that programme (see EC reply to Question 169 from the Panel).

the EC in its claim. In the event that we uphold any of the EC's claims against individual transactions,
we shall then consider Korea's reliance on the first paragraph of item (k) of the Illustrative List.
(a) Alternative benchmarks proposed by Korea
(i) Corporate bonds issued by shipyards
7.226 Korea notes that the EC has proposed a market benchmark constructed on the basis of an
index of corporate bond rates. Korea submits that, if a market benchmark is to be based on corporate
bonds, it should at least be based on corporate bonds issued by the individual shipyards at issue.
Accordingly, Korea has submitted data concerning corporate bonds issued by DHI/DSME, Samho,
STX/Daedong, Hyundai Mipo and HHI.
7.227 The EC asserts that the bonds actually issued by the shipyard s are not appropriate market
benchmarks. The EC submits that many of the bonds issued were guaranteed, and that Korea failed to
submit details regarding the terms of the guarantees. The EC also complains that Korea often failed
to report the identity of the guarantor.135
7.228 In determining whether or not it is appropria te to use the corporate bond data submitted by
Korea as a market benchmark, we shall examine the evidence provided by Korea for each shipyard
separately.
DHI/DSME
7.229 In response to Question 17 from the EC, Korea provided a table containing information in
respect of six corporate bonds issued by DHI/DSME in 1997 and 1998. 136 The table reports "N/A" in
the "collateral / guarantee" column. It is unclear whether Korea intended to report "not applicable" or
"not available". The EC argues that at least three of those bonds were guaranteed. 137 Although Korea
has not disputed this, it has not provided informa tion regarding the terms on which such guarantees
were offered. Without this information, we ar e unable to use the bond data provided by Korea as a
market benchmark. In particular, there is no mean s for us to ensure that the Korean corporate bond
data and the PSL rates are directly comparable. No r is there any means for us to make adjustments
for any differences in guarantee / collateralization that may exist. In addition, information submitted
by the EC also indicates that the guarantor for at least one of those bonds was KDB, which we have
already found to be a public body. 138 This confirms our decision not to establish a market benchmark
on the basis of this data, since there is a risk th at corporate bonds guaranteed by public bodies are not
a reliable indicator of market rates.
7.230 Korea also submitted corporate bond data for 1999 and 2000. 139 The data comprise quarterly
balances, with average interest rates. The par ties disagree as to whether or not such information
constitutes a proper basis for a market benchmark. 140 We consider that we do not need to address this

135 The EC also argued that Korea failed to provide information regarding yield rates in respect of
bonds issued below par value. However, some such information was ultimately provided by Korea (see, for
example, Exhibit KOREA – 68). The EC also argued that, because the data submitted by Korea reflects a
quarterly summary of outstanding borrowings, they do not reflect interest rates at any given date, and may
reflect bonds issued months or years before the quarter in which they were reported. In view of our decision to
reject the data for other reasons, we do not consider it necessary to address this argument.
136 See Exhibit KOREA-68.
137 See Exhibit EC-129.
138 See para. 7.172 supra.
139 See Exhibit KOREA – 18.
140 The EC also claims that such bonds were affected by the restru cturing, and also for that reason
should not be used as a market benchmark (para. 132, EC second written submission). Korea has not disputed
this argument.

issue, however, as Korea has in any event failed to report details of any collateral or guarantees
provided in respect of these bonds, even though Exhibit EC – 129 demonstrates that many
DHI/DSME bonds were issued against guarantees. Ag ain, the absence of such information precludes
us from using such data as a market benchmark.
7.231 In light of the above, we are unable to use the data submitted by Korea in respect of corporate
bonds issued by DHI/DSME as a reliable market benchmark.
Samho

7.232 Korea provided information regarding corporate bonds issued by Samho at para. 233 of its
first written submission, and in response to question 17 from the EC.
7.233 The EC claims that the bonds cannot be used as a reliable market benchmark because they
were guaranteed by [BCI: Omitted from public version] , thus reflecting the credit rating of [BCI:
Omitted from public version] rather than Samho.
7.234 Korea has not rebutted the EC's argument regarding the [BCI: Omitted from public
version] guarantee, nor has it provided any information regarding the terms of that guarantee. We are
therefore unable to determine what the rate for th e bonds would have been without the guarantee.
Furthermore, Korea has reported two-year bond da ta, which cannot be readily compared with six-
month PSL rates. In these circumstances, we are unable to use the Samho corporate bond data
submitted by Korea as a basis for establishing a ma rket benchmark against which to judge the
KEXIM PSLs.
STX/Daedong

7.235 Korea provided information regarding corporate bonds issued by STX/Daedong at para. 236
of its first written submission, and in response to question 17 from the EC. Korea asserts that the
STX/Daedong bonds constitute particularly appropriate market benchmarks, since they were
collateralized, and could therefore be readily compared with the collateralized PSLs.
7.236 The EC notes that, according to the information provided by Korea, the STX/Daedong bonds
were issued in Japanese yen. The EC submits th at it is improper to compare the corporate bond
interest rates quoted in Japanese yen with the PSL ra tes quoted in Korean won, as interest rates may
differ greatly based on the underlying currency. The EC also asserts that the collateral backing the
STX/Daedong bonds was the factory as a whole, wh ereas the factory was not used as collateral for
PSLs.
7.237 We note that Korea has not rebutted the EC's arguments against the use of the STX/Daedong
bond data as a market benchmark. We agree with th e EC that yen rates for corporate bonds cannot be
compared directly with won rates for PSLs. Furthe rmore, in the absence of additional information
from Korea regarding the value of the collateral underlying the STX/Daedong bonds (i.e., factory) and
PSLs (i.e., Yangdo Dambo) respectively, we are una ble to ensure that any comparison of the
corporate bond and PSL rates is not affected by differen ces in the value of the relevant collateral. In
addition, we note that Korea has reported three- year bond data, which cannot be readily compared
with six-month PSL rates. For these reasons, we are unable to use the STX/Daedong corporate bond
data submitted by Korea as a basis for establishing a market benchmark against which to judge the
STX/Daedong PSLs.
Hyundai / Mipo
7.238 Korea provided information regarding corporate bonds issued by Hyundai Mipo at para. 238
of its first written submission.

7.239 The EC submits that Korea's data should no t be used as a market benchmark because Korea
failed to provide any supporting evidence in the form of exhibits, or otherwise. The EC also argues
that, even if the Panel considers Korea’s propo sed benchmark as relevant , the corporate bond rates
proposed by Korea are generally higher than the ra tes of the KEXIM pre-shipment loans to Hyundai-
MIPO.
7.240 First, we note that Korea failed to provide any detailed information regarding the Mipo bond
rates. For example, it failed to provide any of the more detailed information (concerning quarterly
average rates) that it had provided for other shipyard s in the form of Exhibits KOREA 18 – 21. In
addition, we note that Korea failed to inform the Panel whether any of the Mipo bonds were
guaranteed or collateralized. For these reasons, we do not consider it appropriate to establish a market
benchmark on the basis of the corporate bond information submitted by Korea.
HHI
7.241 Korea provided information regarding corporate bon ds issued by HHI at para. 240 of its first
written submission.
7.242 The EC asserts that the HHI PSL rates are lower than the HHI corporate bond rates submitted
by Korea.
7.243 We note that Korea has reported three-year bon d data, which it would be inappropriate to
compare with six-month PSL rates (without further adjustment). For this reason, we are unable to
establish a market benchmark on the basis of the HHI corporate bond data submitted by Korea.
Conclusion

7.244 For the above reasons, we are unable to establish a market benchmark on the basis of the data
submitted by Korea regarding corporate bonds issued by the shipyards at issue.
(ii) Other benchmarks proposed by Korea
7.245 Korea submits that individual PSL transactions can be reviewed in light of usance letters of
credit, overdraft loans, corporate bonds, commercial papers, facility loans a nd short-term borrowings
taken / issued by the individual shipyards at issue.
7.246 The EC asserts that the other sources of financ ing mentioned by Korea should not be used as
a market benchmark, as the EC is unaware of the conditions and collateral with which such financing
was provided.
7.247 In our view, Korea has failed to provide enough information for us to use the abovementioned
alternative instruments as a reliable market benchmar k. With the exception of facility loans, the only
information submitted by Korea regarding collateral requirements is that it "depend[s] on the financial
strength of the borrower".141 For facility loans, Korea reports a n eed for collateral in the form of "real
properties, factory as a whole", 142 but provides no indication of the impact of such collateral on the
facility loan spreads. Thus, there is not enough info rmation for us to be sure that facility loans and
KEXIM PSLs are comparable on the basis of collatera lization (nor is there sufficient information for
us to make any adjustments that might be required) . The information provided in respect of the terms
/ maturity of these various instruments is similarly insufficient. The only concrete term information
relates to usance letters of credit. 143 For the other instruments, Korea merely reports what terms

141 See para. 226 of Korea's first written submission.
142 See Korea's First Written Submission, para. 226.
143 Ibid.

"normally" or approximately ("about") are applicable.
144 There is therefore no means for us to ensure
that these other instruments and KEXIM PSLs are direc tly comparable in terms of maturity (nor is
there sufficient information for us to make any ad justments that may be required). In addition,
because Korea has not report ed the identity of the providers of the abovementioned instruments, we
are unable to establish whether or not they repr esent market (as opposed to public body) rates.
Furthermore, we note that Korea has reported data in respect of usance letters of credit issued in
US dollars for Hanjin. 145 We do not consider it appropriate to compare the terms of instruments
issued in different currencies.
(iii) Conclusion
7.248 For the above reasons, we are unable to estab lish a market benchmark on the basis of the
abovementioned alternative instruments.
(b) The EC's proposed market benchmark
7.249 The EC's claim is based on a comparison of the terms of individual PSLs with a market
benchmark constructed primar ily on the basis of an index of corporate bond prices. 146 For shipyards
with a credit rating agency rating of BBB or highe r (i.e., investment grade), the EC generally
compares the actual KEXIM PSL rates with a market benchmark constructed on the basis of the
Korea Stock Dealers Association ("KSDA") general index of six-month corporate bond prices, with
certain adjustments for differences in maturity and collateral. For each investment grade shipyard, the
EC identifies a credit rating agency rating, and applies KSDA index prices for corporate bonds with
the same rating. For non-investment grade shipyard s, having agency ratings lower than BBB, the EC
compares the actual PSL rates with rates constructed on the basis of KEXIM's own Interest Rate
Guidelines (generally using the KE XIM spreads for the relevant KEXIM rating), again with certain
adjustments for differences in maturity and collateral.
7.250 Korea objects to the market benchmark proposed by the EC. Korea's objections concern
alleged differences in the rating practices of KEXI M / private banks and corporate bond credit rating
agencies, the use of indexed bond pricing, the ch oice of maturity of the KSDA index data, risk
management under the PSL disbursement process, a nd the admissibility of certain EC arguments /
data.
(i) Alleged differences in rating practices
7.251 Korea submits that the EC's methodology for i nvestment grade transactions is flawed, as the
credit rating assigned by KEXIM to a particular shi pbuilder cannot be systematically matched to the
credit ratings assigned to the same shipbuilder by co rporate bond rating agencies. Korea asserts that
corporate bond ratings and KEXIM's credit ratings ar e based on different leve ls of underlying credit
risk.
147 In particular, Korea argues that the basic credit rating for an unsecured bond is the same as the
credit rating for the issuing company, whereas th e credit rating by KEXIM is based on a "facility
rating", which includes not only the credit risk of the borrowing company, but also risk-reducing
factors reflecting the structure of the facility concer ned, including collateral. As a result of facility
rating, Korea argues that the default rate for a bank credit rating (such as KEXIM's PSLs) is lower
than that for the corresponding corporate bond rating. According to Korea, for the same corporate
entity, the corporate bond rating must be higher than the bank credit rating in order to have equivalent
risk. Korea submits that banks analyse three elem ents when assigning credit ratings: the probability
of default, loss given (i.e., in the event of) default, and expected loss. Korea states, on the basis of a

144 Ibid.
145 See Exhibit KOREA-21.
146 The latest version of the EC's analysis is set forth in Attachment EC-10.
147 See Exhibit KOREA – 91.

KEXIM document,148 that loss given default "is the critical element that distinguishes corporate bonds
from bank loans, since corporate bond rating in Ko rea, which is generally targeting for unsecured
senior bonds with long-term maturity, does not take in to account [loss given default]". Korea asserts
that there is therefore a significant difference in expected loss between bank loan rating and corporate
bond rating, with the result that yields on corporate bonds should be higher than those of bank loans
for the same entity.
7.252 Korea also argues that there is a fundamental difference between the rating practices of banks
and those of credit rating agencies. Korea submits that banks generally employ a "point in time"
approach, under which the time period for validity of a risk assessment is generally one year from the
date of assessment. Korea states that private ba nks therefore analyse the risk in the "current
situation". Korea asserts that credit rating agen cies, on the other hand, rate corporate bonds on a
"through the cycle" approach, covering the whole period of maturity, and taking into account the
projected condition of the bond issuer in the project ed worse part of the economic or industry cycle
within that period. Korea therefore submits that th e rating by credit ratings would be worse than that
of banks.
7.253 The EC submits that the cr edit ratings by corporate bond credit rating agencies are
comparable to credit ratings by KEXIM. With rega rd to DSME, the EC notes that most of the DSME
bonds issued between 1997 and 1999 were guaranteed / collateralized. The EC argues that the rating
of the bonds reflected the guarantee, just as KEXIM's ratings reflected the collateral for the PSL.
7.254 The EC also asserts that credit exposure from investment grade and BB rated private
placement loans are comparable to credit exposure from public debt with the same rating. The EC
argues that, in case of discrepancy, the more pessimistic rating is usually the one with the most
predictive power. The EC argues that there shoul d at least be correlation between corporate bond
ratings and KEXIM ratings for ratings better than or equal to BB. The EC asserts that a credit rating
assesses exposure risk in terms of the repayment capacity of the obligor, taking into account all
possible collateral. The EC therefore submits that a private loan (such as a PSL) and a bond having
the same ratings will present the same obligor repayment capacity a nd the same credit exposure risk,
and should therefore be remunerated with the same interest rate.
7.255 Regarding rating practices, the EC asserts that Standard & Poor's definition of a rating does
not refer to worst-case scenario projections. Instea d, it refers to the creditworthiness of the obligor
and guarantees. In addition, the EC states that KE XIM's rating must analyse more than the "current
situation", otherwise it would not have continued issuing PSLs for DSME when it was bankrupt.
7.256 Regarding the relevance of guarantees in determ ining credit risk exposure, Korea states that
most of the bonds issued in Korea are non-collateralized, and that the KSDA bond rates quoted by the
EC are also non-collateralized. Korea also notes th at the EC stated that the DSME corporate bonds
were collateralized, just like the KEXIM PSLs, and queries why the DSME corporate bonds could not
have been used as a benchmark.
7.257 With regard to the EC's argument that th e credit exposure from investment grade and
BB-rated private loans and public debt is comparab le, Korea notes that the source relied on by the EC
actually refers to the "worse incidence or defau lt rates" for public placements, and "better loss
severities on private placements". Korea also not es that the source further provides that private
placement "offer superior experience with respect to all of incidence, severity and economic loss"
than publicly issued bonds. Korea asserts that the EC's source therefore confirms Korea's position
regarding the lower risk exposure of private placements vis-à-vis public placements with the same
credit rating.

148 Incompatibility of Bank Rating Systems and Agency Rating systems, KEXIM, July 2004, page 3
Exhibit KOREA-143.

7.258 In reviewing Korea's argument, we are struck by KEXIM's statement that loss given default
"is the critical element that distinguishes cor porate bonds from bank loans, since corporate bond
rating in Korea, which is generally targeting for unsecured senior bonds with long-term maturity ,
does not take into account [loss given default]".
149 KEXIM states that loss given default depends in
part on the conditions of the facility and protection measures, including " collateral, collateral margin
requirements, ... and other support measures including guarantees and insurances".150
7.259 We also note Korea's reliance on a Moody's document which states:
Moody's typically rates bank loans anywhere from on a par with a given borrower's
senior implied rating to three refined categories above senior implied. The rating
differential between a firm's bank loans and other debt obligations is not a reflection
of a greater or lesser probability of default. Rather it is a consideration of higher
expected recovery values for bank loans over the same borrower's bonds as a result
of loan structure and security."
151
7.260 To the extent that there are discrepancies be tween the rating practices of private banks and
credit rating agencies, the above extracts from th e KEXIM and Moody's documentation submitted by
Korea indicates that such discrepan cies are largely caused by differences in collateral / guarantee (in
the sense that bank loans such as KEXIM PSLs ar e normally guaranteed / collateralized, whereas
corporate bonds are not) and maturity (in the sense that corporate bonds generally have a longer
maturity than private bank loans such as KEXIM PSLs).
152153 We shall therefore examine to what
extent differences in collateralization and matu rity are addressed in the EC's proposed market
benchmark.
7.261 Although the KSDA bond index is based on unsecured bonds, whereas KEXIM PSLs are
collateralized, the EC's proposed market benchmark includes the same adjust ment for collateral /
guarantees as made by KEXIM in respect of PSLs (i.e., [BCI: Omitted from public version] per
cent reduction in credit risk spread). 154 For the most part, therefore, we consider that any rating

149 Incompatibility of Bank Rating Systems and Agency Rating systems, KEXIM, July 2004, page 3,
Exhibit KOREA-143, emphasis supplied.
150 Ibid, page 3, emphasis supplied
151 A Sense of Security, Moody's Investors Servi ce, October 1997, Exhibit KOREA– 143, emphasis
supplied.
152 Our understanding that Korea's con cern essentially relates to issues of collateral and maturity is
confirmed by para. 236 of Korea's first written submissi on, where Korea stated that corporate bonds and PSLs
are not directly comparable "due to, particularly, the difference in collater als and maturity". Although this
statement was made early in the Panel proceedings, it was never retracted by Korea, and should therefore inform
Korea's subsequent arguments.
153 The fact that the EC's proposed market benchmark may require adjustments for differences in
collateral and maturity does not render that benchmark ipso facto unusable. Indeed, even the alternative
benchmarks proposed by Korea would have required similar adjustments. As stated at para. 230 of Korea's first
written submission, DSME "has used various types of fi nancing and due to the difference in terms, direct
comparison between the pre-shipment loan interest rate and the interest rates of other financing facilities is
difficult." Of course, the fact that a comparison is difficult does not mean that it should not be made.
154 During the Panel proceedings, Korea contested the manner in which the EC had adjusted the KSDA
interest rate data to reflect the value of Yangdo Dambo provided as collateral for KEXIM PSLs (see Exhibit
KOREA – 90, paras 6-9). The EC claimed to address Korea's concern in the recalculations set forth in
Attachment EC 10 (see paras 40 and 41 of the EC's rep lies to the Panel's questions after the second substantive
meeting.) Since there was no further reference to the EC's treatment of this adjustment in Korea's comments on
Attachment EC- 10 (see page 20 of Korea's 9 July 2004 replies to the Panel's supplemental questions), we
consider that there is no longer any dispute between the parties concerning this issue. Korea also complained
that the EC failed to take account of th e collateral value of joint and several personal liability guarantees. Since
Korea stated in Exhibit KOREA – 90 that [BCI: Omitted from public version], we see no reason why the EC

discrepancy caused by differences in collateraliz ation between corporate bonds and KEXIM PSLs is
appropriately addressed.
7.262 Regarding maturity, we note that the EC has incorporated six-month bond pricing data into its
proposed benchmark. Since Korea claims that "the maturity of PSLs in general is not less than
6 months",155 the alleged discrepancies in rating practices caused by differences in maturity should not
arise when comparing the terms of those KEXIM PSLs with the KSDA bond index rates.
7.263 In any event, we note Moody's statement that bank loans may sometimes be rated on a par
with other debt obligations. 156 This would suggest that, in certain cases, credit ratings for bank loans
and other debt obligations can be compared direc tly, without any need for collateral or maturity
adjustments. Given that adjustments may not be necessary in all cases, and given the approach to
collateralization and maturity taken in the EC's pr oposed market benchmark, we consider that any
discrepancies in the rating practices of credit rating agencies and private banks are adequately
addressed in the EC's proposed market benchmark.
7.264 Korea has also argued that there is a fundame ntal difference between the rating practices of
banks and those of credit rating agencies. Korea submits that banks generally employ a "point in
time" approach, whereas credit rating agencies us e a "through the cycle" / worst case scenario
approach. Korea has submitted an extract from th e abovementioned Moody's article, which compares
point-in-time to through-the-cycle gradings. Although Korea relies on this article to argue that there
is a fundamental difference between the rating practices of banks and credit rating agencies, we note
that the article also states that "[a]gencies and banks both consider similar risk factors".
157 In addition,
we note that the Standard & Poor's rating defin ition submitted by the EC contains no reference to
either "through the cycle" or worst case scenario rating methodologies. Instead, that definition states
that a rating "is a current opinion of the creditworthiness of an obligor". 158 We consider this to be
consistent with KEXIM's point-in-time approach, which (according to Korea) "mainly focus[es] on
the 'current condition' of the borrower". 159 On the basis of the evidence before us, therefore, we are
not persuaded by Korea's argument that ther e are fundamental differences between the rating
practices of banks and those of credit rating agencies.
7.265 Furthermore, we note that KEXIM introduced its credit rating system in April 2001. 160
Between March 1998 and April 2001, KEXIM applied the ratings of credit rating agencies. This
causes us to make two observations. First, many of the individual PSLs challenged by the EC were
provided under KEXIM's pre-April 2001 corporate bond rating regime. Thus, the abovementioned
issues raised by Korea do not apply in respect of those transactions. Second, the fact that KEXIM
itself was using agency ratings up until April 2001 s uggests to us that the rating practices of rating
agencies and private banks are not incompatible (especially when adjustments are made for any
differences in collateralization and maturity).

should not do likewise in constructing its market benchm ark. In any event, since Korea has failed to quantify
the alleged value of such collateral, there is no basis for us to make any adjustment.
155 See Korea's reply to Question 12 from the EC. The table included in pa ra. 226 of Korea's first
written submission states that the tem of PSLs is "about 6 months (average)".
156 See para. 7.259 supra.
157 A Sense of Security, Moody's Investors Service, October 1997, Exhibit KOREA– 143, page 911.
158 Ibid, page 13, emphasis supplied.
159 Incompatibility of Bank Rating Systems and Agency Rating systems, KEXIM, July 2004, Exhibit
KOREA-143, page 5, emphasis supplied.
160 See Attachment 6 to Korea's first written submissi on. Although this attachment refers to credit
ratings in respect of APRGs, Korea argues that the same applies to PSLs (see para. 196 of Korea's first written
submission).

7.266 For the above reasons, we do not accept Kore a's arguments that alleged fundamental
differences between the rating practices of banks an d those of credit rating agencies preclude the use
of the market benchmark proposed by the EC.
(ii) The use of indexed bond pricing
7.267 In its response to Question 73 from the Panel, Korea submits that the KSDA corporate bond
data submitted by the EC does not constitute an appropriate market benchmark because it is a
hypothetical index of bond prices. According to Korea, the corporate bond rates offered by the EC
are the rates which the KSDA announces for the purposes of general indices. Korea asserts that, in
order for KSDA to post corporate bond yield rates daily, the securities dealers of 10 securities houses
designated by KSDA provide KSDA with the daily yield rates that are not based on the statistics of
actual yield rates, but based on their own projections taking into account the market situations on that
date. Korea asserts that KSDA simply averages thos e projected rates and posts it, so that the KSDA
rates must also be projected / hypothetical ones. Korea also submits that the KSDA rates are general
indices that do not reflect differences between industr y sectors, nor the different financial strengths of
individual issuers (e.g., whether the company is an affiliate of a Chaebol) of the actual corporate
bonds being traded in the market. Korea asserts th at, when looking at the individual companies even
having the same credit ratings, the companies may be perceived and treated differently in the market
considering various factors. According to Korea, therefore, the actual yield rates of the corporate
bonds of the issuers with the same credit rating may be substantially different. Korea submits that
there must therefore be differences or gaps between the KSDA rates and the actual corporate bond
rates of individual companies. According to Ko rea, therefore, the KSDA Bond Matrix is only an
index which indicates the market situations on a specific date. Korea submits that it does not reflect
specific situations of the industry sector, the issuer s, and the preferences in the market, and can in no
event be a “price” at which a specific bond can be purchased.
7.268 The EC submits that the KSDA Bond Matrix is not a hypothetical or projected rated, but a
reliable market benchmark to assess interest rates for loans. The EC asser ts that, 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-balan ced weekly. All such changes are updated weekly in the Index
Constituents so you can see the new underlying secur ities for each sector. Credit rating changes are
updated monthly by the KSDA. […] The KSDA Bond Matrix is the accepted mark-to-market price
for the domestic market”.
161 The EC submits that, in short, the KSDA bond matrix is the accepted
mark to market price, i.e. that it reflects th e 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.
7.269 We are required to establish a market benchmark in order to resolve the claims before us. We
recall that Korea has failed to provide sufficient info rmation to allow us to use any of the alternative
market benchmarks that it has proposed. In these circumstances, and given the absence of any
acceptable benchmark based on shipyard-specific data, we are prepared to use the KSDA index data,
provided it does not give rise to manifestly inaccurate results. In this regard, we note that the KSDA
index is based on input from a number of market operators, and is updated on a daily basis. We
further note that Korea itself has acknowledged that the KSDA index "may be a preliminary indicator
that an investor may use as a first refere nce before studying the market further". 162 As such, we do
not consider that the use of the KSDA index woul d give rise to manifestly inaccurate results.
Furthermore, since appropriate adjustments are made for factors such as collateralization, we consider
that the KSDA index necessarily constitutes more than merely a "preliminary indicator", and becomes
a reliable indicator of the terms on which the market would have offered PSLs to the shipyards.

161 See Exhibit EC – 118, page 9.
162 Korea's 9 July 2004 comment on Exhibit EC-148 regarding KSDA Bond Matrix, see Annex G-5.

(iii) The choice of maturity of the KSDA index data
7.270 Initially, the EC constructed its market benchm ark on the basis of three-year KSDA corporate
bond data. In response to arguments by Korea that PSLs had a maturity of six months, the EC then
used one-year KSDA index data, adjusted to six-month levels. In response to additional comments by
Korea, the EC constructed its proposed market benc hmark primarily on the basis of six-month KSDA
index data.163 In Attachment EC – 10, however, the EC stated that it had continued to use one-year
KSDA index data in cases "when the base rate applied by Kexim is superior to 6 months" 164 i.e., in
cases where KEXIM had used one year, or one year six months, prime rates.
7.271 In its comments on Attachment EC – 10, Korea complained that:
the EC now abruptly starts to allege that a benchmark with a 1-year duration should
be used in certain cases. In support, 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 alle ged by the EC itself, a proper benchmark
must be a facility conferred with simila r terms and conditions. The term must be
assessed based on its duration, not the name of base rates.165
7.272 In the absence of any explanation by Korea why KEXIM chose to use one-year (or longer)
base rates for certain PSLs, but six-month base rates for others, we consider it appropriate to construct
a market benchmark using six-month KSDA data wh en reviewing PSLs issued on the basis of six-
month base rates, and using one-y ear KSDA data when reviewing PSLs issued on the basis of one-
year (or more) base rates. In this way, the data underlying the market benchmark is aligned with the
data underlying the KEXIM PSLs. Furthermore, we not e that, even though the EC adopted the same
approach in respect of its earlier proposed market benchmark based on one-year KSDA data, 166 Korea
did not object to this approach at th at earlier stage of the Panel proceedings. 167 Korea's objection
therefore lacks conviction. For all these reasons, we consider that the EC was entitled to use one-year
KSDA index data in cases where the KEXIM base rate exceeded six months.
(iv) Risk management under the PSL disbursement process
7.273 Korea submits that KEXIM enjoys greater scope for risk management than corporate bond-
holders. In particular, Korea asserts that, because PSLs are disbursed in instalments corresponding to
the progress of the shipbuilding work, KEXIM is ab le to continuously monitor and review the
development of any management and financial conditions of shipyards. Korea asserts that KEXIM is
also able to immediately stop disbursing additional instalments, and take actions to promptly recover
outstanding loans by disposing of collaterals or otherwise.
7.274 The EC concedes that Korea's risk management ar gument is to a certain extent valid but only
if Kexim effectively adjusts the credit spread fo llowing the downgrading of a shipyard's financial
situation. The EC submits that this is not the case, as evidenced by KEXIM' s failure to adjust its
credit risk spreads despite changes in certain shipyard credit ratings. The EC further asserts that even
if KEXIM were really monitoring and managing this situation, the impact on the credit spread at
issuance of the credit would be very limited.

163 Korea made a number of arguments concerning the EC's earlier reliance on data pertaining to
corporate bonds with a maturity in excess of six months. Since the EC ultimately used a benchmark constructed
primarily on six-month data, we do not consider it necessary to review all of these arguments in our findings.
164 Attachment EC – 10, page 1.
165 Korea's 9 July comment on Attachment EC-10, see Annex G-5.
166 See Exhibit EC – 125, column (8), "AD duration".
167 In particular, there is no reference to this issue in Exhibits KOREA 90 – 102.

7.275 Regarding the possible cessation of disbursements, the EC asserts that Korea has presented no
evidence that KEXIM ever stopped disbursing add itional instalments when the credit situations
degraded. The EC also submits that because KE XIM's credit spreads already took into account the
existence of collaterals by adjus ting downward the (no collateral) credit spread, there is no reason
why the above disbursement mechanism for PSLs should further mitigate KEXIM’s risk. The EC
also asserts that Korea's argument is flawed sin ce, in the case of Yangdo Dambo, the collateral is
supposed to increase in value as the total amount di sbursed increases. However, the EC states that
stopping disbursements will not increase the value of wh at will be recovered. The EC argues that the
opposite will occur, as the ship will not be finished and will be more difficult to sell.
7.276 We consider that the EC has effectively rebu tted Korea's argument that KEXIM has a greater
capacity for risk management under the PSL disburse ment process. Furthermore, we note Korea's
failure to quantify the impact of KEXIM's allege dly greater capacity for risk management. We
consider this to be especially important given the EC's assertion that any impact on the credit spread
upon issuance of the credit would be very limited.
168 In the absence of any quantification by Korea,
there is no basis for us to reject the EC's assertion that the impact would be very limited. For these
reasons, we do not consider this to be an appropr iate basis for rejecting the EC's proposed market
benchmark.
(v) Admissibility of certain EC arguments and data
7.277 At para. 88 of its second oral statement, Kor ea claims that paragraphs 113-121 of the EC's
second written submission should be disregarded and di smissed by the Panel. Korea argues that this
part of the EC's submission is material purporting to support a prima facie case, rather than rebuttal
evidence.
7.278 We assume that Korea's comment is based on paragraph 12 of the Panel's Working
Procedures, whereby:
Parties shall submit all factual evidence to the Panel no later than during the first
substantive meeting, except with respect to evidence necessary for purposes of
rebuttals, answers to questions or commen ts made for purposes of rebutting answers
provided by others. Exceptions to this pr ocedure will be granted upon a showing of
good cause. In such cases, the other party shall be accorded a period of time for
comment, as appropriate.
7.279 In paragraphs 113 to 121 of its second written submission, the EC is responding to arguments
made by Korea (in its first written submission and during the Panel's first substantive meeting with the
parties) concerning the market benchmark proposed in the EC's first written submission. As such, we
consider that the factual information contained in those paragraphs constitutes "evidence necessary for
purposes of rebuttals" within the meaning of para graph 12 of our Working Procedures. For this
reason, we decline Korea's request to dismiss or disregard this evidence.
(vi) Conclusion
7.280 In light of the above, we reject Korea's objec tions to the market benchmark proposed by the
EC. We therefore consider it appropriate to apply that benchmark in order to determine whether the
individual PSL transactions at issue confer a "benefit" and therefore constitute subsidies.

168 See para. 7.274 supra.

(c) The application of the EC's market benchmark to individual KEXIM PSL transactions
7.281 The EC has compared a number of KEXIM PSLs with its market benchmark. The PSLs were
provided by KEXIM to DSME, Samho/Halla, STX /Daedong, Hyundai/MIPO, HHI. The EC claims
that the majority of these PSLs conferred a benef it on the relevant shipyard. Korea has raised a
number of issues regarding the shipbuilder-specifi c comparison undertaken by the EC. We examine
these issues below.169
(i) DSME
7.282 On the basis of Attachment EC-10, the EC submits that a number of KEXIM PSLs to DSME
conferred a benefit and therefore c onstitute subsidies. In applying its market benchmark, however,
the EC did not use KEXIM's credit rating for DSME [BCI: Omitted from public version] when
determining the KEXIM credit risk spread for certain PSLs provided in 2000 and 2001. 170 It used a
KEXIM SM rating instead. The EC noted that credit rating agencies had rated DSME "C" during this
period. The EC asserts that a credit rating agency's C rating equates to a KEXIM rating of SM
(instead of the [BCI: Omitted from public version] used by KEXIM). The EC argues that credit
rating agency ratings constitute a more appropriate benchmark than KEXIM's ratings. According to
the EC, any discrepancy in credit ratings shows an unexplained difference between the credit rating of
KEXIM and the private credit agencies.
7.283 Korea submits that the EC should have app lied the KEXIM credit risk spread for KEXIM
[BCI: Omitted from public version] ratings. In addition to arguing that credit rating agency ratings
cannot be compared directly with KEXIM ratings, Korea denies that a credit rating agency "C" is
equivalent to a KEXIM "SM" rating.
7.284 We note that, according to Exhibit KOREA – 92, KEXIM rated DHI/DSME [BCI: Omitted
from public version] as of April 2001 (when KEXIM introduced its own credit rating system). In
Exhibit KOREA – 99, Korea proposes to apply this [BCI: Omitted from public version] rating in
respect of all PSLs issued as of June 1999. Acco rding to Exhibit KOREA - 92, however, credit rating
agencies rated DHI/DSME BB+ in May 1999, but reduced their rating to C in August 1999.
171 This
would reflect the fact that DHI/D SME's financial condition deteriorated during the course of 1999.
By contrast, Korea purports to apply the same KE XIM credit rating as of June 1999, through August
1999, and into 2000. Given DHI's deteriorating fi nancial position, we are unable to accept that a
market-based approach to credit rating would ha ve applied the same credit rating to DHI/DSME
throughout this period. 172 For this reason, we have serious doubts as to the reliability (in terms of
market consistency) of KEXIM's [BCI: Omitted from public version] rating of DHI/DSME during
this period. In these circumstances, we consider that the starting point fo r the credit risk spread
adjustment in the EC's market benchmark should be the C rating applied by the credit rating agencies.
7.285 In terms of establishing the KEXIM equivalent of a credit rating agency C rating, we note that
Table 1 of Exhibit EC – 148 173 indicates that a KEXIM [BCI: Omitted from public version] credit
risk spread equates to a BBB or BB cr edit risk agency credit spread. It does not equate to a C spread.

169 At this point, our findings are confined to the parties' arguments regarding the existence of benefit.
They do not include issues regarding the amount of alleged benefit (such as, for example, Korea's argument
regarding the actual duration of certain PSLs (see inter alia para. 283 of Korea's second written submission)).
170 We note that the EC used actual KEXIM credit risk spreads when a shipyard's rating was below
investment grade, as KSDA index data was not available for such ratings (see para. 7.249 supra).
171 This is confirmed by para. 338 of Korea's first written submission, which states that "starting in
1999, the international credit rating of Daewoo group companies including DHI began to weaken".
172 In response to Question 114 from the Panel, Korea notes that KEXIM improved DHI/DSME's rating
after the workout. While this is true, it does not mean that KEXIM's P5 rating during the workout was accurate,
or reflected market principles.
173 See page 7.

Although Korea submits that Table 1 of Exhibit EC – 148 only refers to the chronology of the
changes implemented by KEXIM in its credit rating system,
174 we nevertheless consider that it
indicates that KEXIM itself considered that a [BCI: Omitted from public version] rating was
broadly equivalent to a credit rating agency BBB or BB rating, as opposed to a C rating. This is
confirmed by KEXIM's own definition of a [BCI: Omitted from public version] rating, which
applies where [BCI: Omitted from public version] .
175 By contrast, a C-rated obligor has "no
capacity for redemption", 176 i.e., no capacity to redeem its financ ial obligations. There is therefore a
fundamental difference between a KEXIM [BCI: Omitted from public version] rating and a credit
rating agency C rating (in terms of capacity to red eem obligations). In our view, a comparison of the
relevant definitions indicates that an agency C ra ting is more appropriately compared with a KEXIM
SM rating, since an SM obligor is similarly "vulnerable to non payment".177
7.286 In light of the above considerations, we find that KEXIM's [BCI: Omitted from public
version] credit risk spread should not be used in the market benchmark in respect of DHI/DSME
PSLs issued during the period that credit rating ag encies applied a C rating for DHI/DSME. Instead,
we consider it appropriate to apply KEXIM's SM credit risk spread to these transactions.
7.287 For these reasons, we uphold the comparison unde rtaken by the EC in Attachment EC-10
concerning KEXIM PSLs to DSME. Since that co mparison demonstrates that these PSLs are made
on terms more favourable than those available to DSME on the market, we find that those KEXIM
PSLs confer a benefit, and therefore constitute subsidies.
(ii) Samho/Halla
7.288 On the basis of the comparison set forth in A ttachment EC-10, the EC submits that a number
of KEXIM PSLs to Samho/Halla conferred a benef it and therefore constitute subsidies. Korea
submits that the EC failed to adjust its analysis of those PSLs to reflect the fact that they were [BCI:
Omitted from public version].
7.289 The EC submits that Korea never provided s ubstantiated evidence of the existence and
monitoring of collaterals and replied to the Panel 178 that it is not “Kexim’s policy to keep and
maintain any worksheet or similar documents” 179 necessary for the consideration of collaterals.
According to the EC, there is, therefor e, no justified reason to consider [BCI: Omitted from public
version]. The EC asserts that, on the basis of best information available, the EC applied the same rule
as for the Yangdo Dambo adjustment, i.e. a [BCI: Omitted from public version] per cent of the
credit risk spread.
7.290 In addressing this issue, we consider that the onus should be on Korea, as the party seeking to
establish a fact, to prove that KEXIM applied a lowe r credit risk spread in respect of transactions
reported as being [BCI: Omitted from public version] than for transactions reported as being [BCI:
Omitted from public version]. We do not consider that Korea has discharged this burden.
7.291 First, Korea has failed to cite to any provi sion of the KEXIM Interest Rate Guidelines
concerning this matter. Second, there is nothing on the face of any other document submitted by
Korea to indicate that an additional adjustment of the credit risk spread is made in respect of
transactions reported as being [BCI: Omitted from public version] compared to transactions
reported as being [BCI: Omitted from public version].

174 See Korea's 9 July 2004 comment on the EC's reply to Supplemental Question 136 from the Panel.
175 Responses to Annex V Questions, Answer 1.1(24)-2, Exhibit EC – 131.
176 Moody's affiliate, Korea Investor Services, Bond ratings definitions, Exhibit EC – 9.
177 Responses to Annex V Questions, Answer 1.1(24)-2, Exhibit EC – 131.
178 See Reply by Korea to Panel Question 72 following the first substantive meeting.
179 See Korea's reply to Question 67 from the Panel.

7.292 Korea asserts that "Exhibit Korea – 60 clearly show[s] that as to [BCI: Omitted from public
version]. However, while it may be correct that [BCI: Omitted from public version] , Exhibit
KOREA – 60 does not indicate how, if at all, 180 KEXIM reflected the value of [BCI: Omitted from
public version] in its interest rate calculation. Ind eed, Korea's reply to Question 72 from the Panel 181
– in the context of which Exhibit KOREA – 60 was provided – stated that "it is not KEXIM’s policy
to keep and maintain worksheets and other similar documents." Even if an additional adjustment
were necessary, therefore, there is no basis for the Panel to determine what exactly that adjustment
should be.
7.293 For the above reasons, we consider that the EC was entitled to make the same credit risk
spread adjustment for transactions reported as being [BCI: Omitted from public version] as for
transactions reported as being [BCI: Omitted from public version].
7.294 We therefore uphold that part of the analysis set forth in Attachment EC-10 concerning
KEXIM PSLs to Samho / Halla. Since that comparison demonstrates that these PSLs are made on
terms more favourable than those available to Sa mho / Halla on the market, we find that those
KEXIM PSLs conferred a benefit and therefore constitute subsidies.
(iii) STX/Daedong
7.295 On the basis of the comparison set forth in A ttachment EC-10, the EC submits that a number
of KEXIM PSLs to STX/Daedong conferred a benefit and therefore constitute subsidies.
7.296 Korea criticises the EC for having applied KS DA index data from BBB- rated companies.
Korea notes that KEXIM rated STX [BCI: Omitted from public version] during the relevant
period, and argues that a KEXIM P3 rating equates to an agency A- rating. Korea therefore asserts
that the EC should have included KSDA index data from A- rated companies in its benchmark.
7.297 The EC submits that the BBB- rating it used for its analysis regarding STX/Daedong is the
rating provided by private credit rating companies. The EC asserts that such ratings are more accurate
than KEXIM’s internal rating.
7.298 Consistent with its methodology for investment gr ade shipyards, the EC based its analysis of
STX/Daedong PSLs on rating agency ratings and relevant KSDA index prices. Given our rejection of
Korea's arguments against the use of rating agen cy ratings, and in the absence of any further
arguments from Korea concerning the agency ratin gs of STX/Daedong in particular, we see no reason
why those ratings should not be relied on by the EC.
182

180 We note in this regard that KEXIM does not make an additional adjustment of the credit risk spread
in respect of transactions reported as being [BCI: Omitted from public version] (Korea stated in Exhibit
KOREA – 90 that [BCI: Omitted from public version]). There is no evidence to suggest that KEXIM applies
a different approach in respect of [BCI: Omitted from public version].
181 Requesting, inter alia , "worksheets and other documentation showing calculations of the interest
rate and other terms, including consideration of collate ral" related to KEXIM's review / authorization of a
particular Samho PSL.
182 While we note (in relation to para. 235 of Korea's first written submission, which refers to the EC's
treatment of Samho PSLs) that an A- agency rating was applied by the EC in respect of Samho, when that yard
was rated [BCI: Omitted from public version] by KEXIM, this does not necessarily mean that the EC equates
a KEXIM P3 rating with an agency A- rating. It simply means that Sa mho was rated A- by agencies and [BCI:
Omitted from public version] by KEXIM at that time. Under the EC methodology, it would have applied a
BBB+ rating if that is how the agencies had rated Samho at that time, even if the KEXIM [BCI: Omitted from
public version] rating remained unchanged. There is, theref ore, no methodological connection between the
agency rating and the KEXIM rating in that particular case.

7.299 We therefore uphold that part of the analysis set forth in Attachment EC-10 concerning
KEXIM PSLs to STX/Daedong. Since that comparison demonstrates that these PSLs are made on
terms more favourable than those available to STX/Daedong on the market, we find that those
KEXIM PSLs conferred a benefit and therefore constitute subsidies.
(iv) Hyundai/MIPO
7.300 Korea has not raised any transaction-specific objections regarding the EC's analysis of
KEXIM PSLs to Hyundai / Mipo. We therefor e uphold the EC's analysis of these PSLs in
Attachment EC-10, and find that these PSLs - other than projects 000056P and 000116P
183 - are made
on terms more favourable than those available to MIPO on the market. Those PSLs (other than
projects 000056P and 000116P) therefore conferred a benefit, and constitute subsidies.
(v) Hanjin
7.301 Korea has not raised any transaction-specific objections regarding the EC's analysis of
KEXIM PSLs to Hanjin. We therefore uphold the EC's analysis of these PSLs in Attachment EC-10,
and find that projects 000108P, 000109P, 000130P, 000131P, 000132P, 010005P and 010073P
conferred a benefit and therefore constitute subsidies.
(vi) Hyundai Heavy Industries
7.302 During the Panel proceedings, Korea complained that the EC had failed to apply the correct
credit risk spreads in respect of certain KEXIM PS Ls for HHI. Korea asserted that the credit risk
spreads presented in the EC's first written submi ssion for HHI were temporary non-collateral rates
that were subsequently reduced upon the provision of collateral by Hyundai.
7.303 Since the EC confirmed in response to Question 137 that it had applied the reduced credit risk
spread for the relevant HHI PSLs, we do not consider it necessary to address this issue further.
7.304 In the absence of any additional transaction-speci fic objections by Korea, we uphold the EC's
analysis of KEXIM PSLs to HHI set forth in Atta chment EC-10. We therefore find that projects
010019P, 010020P, 010021P, 010022P, 010023P, 010080P, 010081P, 010082P, 010083P, 010084P,
010154P, 010152P, 010153P, 010155P, 010157P, 010156P, 024838P, 024840P, 024842P, 024849P
and 024852P conferred a benefit and therefore constitute subsidies.
(d) Export contingency
(i) Arguments of the parties
7.305 The EC submits that PSLs are provided for the specific purpose of assisting Korean
companies with production of goo ds intended for export. The EC asserts that KEXIM PSLs are
therefore contingent on export within the meaning of Article 3.1(a) of the SCM Agreement.
7.306 When asked by the Panel (Question 48) whethe r Korea contests the EC's claim that PSLs and
APRGs under the KEXIM legal regime are contingent on export performance, Korea responded that it
"has not taken any position as to whether [PSLs a nd APRGs] are contingent on export performance".
In response to an oral question from the Panel at th e second substantive meeting, Korea stated that it
was not contesting the EC's claim of export contingency.

183 The EC calculated negative benefit margins in respect of these transactions.

(ii) Evaluation by the Panel
7.307 We find that the EC has established a prima facie case that KEXIM PSLs are contingent on
export performance. In light of Korea's decision not to contest the EC's arguments regarding this
matter, we find that KEXIM PSLs are "contingent ... upon export performance" within the meaning of
Article 3.1(a) of the SCM Agreement.
(e) Specificity
7.308 Pursuant to Article 1.2, the disciplines of the SCM Agreement only apply to subsidies that are
"specific" within the meaning of Article 2 thereof. Article 2.3 of the SCM Agreement provides that
"[a]ny subsidy falling under the provisions of Article 3 shall be deemed to be specific". Since export
contingent subsidies fall under the provisions of Ar ticle 3 (paragraph 1(a)), they are "specific".
Pursuant to Article 2.3, therefore, we conclude that those PSLs that we have found to be export
subsidies are "specific".
(f) Defence under the first paragraph of item (k) of the Illustrative List
7.309 In light of our findings that certain PSLs cons titute subsidies, and that such subsidies are
contingent on export performance, we will be require d to find that such PSLs are inconsistent with
Articles 3.1(a) and 3.2 of the SCM Agreement unless we uphold Korea's claim that they benefit from a
safe haven provided for in the first paragraph of item (k) of the Illustrative List . As with Korea's
earlier reliance on item (j) of the Illustrative List as a defence in respect of certain individual APRG
transactions, Korea's defence raises the issue of whether or not the first paragraph of item (k) may be
interpreted a contrario and, if so, whether or not the relevant conditions are fulfilled in the present
case.
(i) Is an a contrario interpretation of the first paragraph of item (k) permissible?
7.310 We have already determined that an a contrario interpretation of item (j) is not permissible.
We see no reason why we should not reach the same c onclusion in respect of the first paragraph of
item (k). Since the first paragraph of item (k) does not contain any affirmative statement that a
measure is not an export subsidy, nor that a measure not satisfying the conditions of that paragraph is
not prohibited, we consider that it does not fall within the scope of footnote 5 of the SCM Agreement.
We note that this finding is consistent with the report of the Brazil – Aircraft – Article 21.5 panel,
with which we agree. In light of the above, we find that the first paragraph of item (k) may not be
interpreted a contrario.
7.311 For the most part, Korea makes the same arguments concerning the a contrario interpretation
of item (k), first para., as for item (j).
184 There is therefore no need for us to repeat our analysis of
those arguments at this juncture. Korea also argued that a failure to permit an a contrario reading of
the first paragraph of item (k) would render the "material advantage" clause ineffective. This
argument was made by Brazil and the United States in the Brazil – Aircraft – Article 21.5 case. The
Brazil – Aircraft – Article 21.5 panel described and rejected that argument in the following terms:
Brazil, and the United States as third party, contend that a finding that the first
paragraph of item (k) cannot be used a contrario to permit export credits and
payments that are not used to secure a material advantage would render the "material
advantage" clause ineffective. We do not agree. In our view, the primary role of the
Illustrative List is not to provide guidance as to when measures are not prohibited
export subsidies – although footnote 5 allows it to be used for this purpose in certain

184 The EC submits that the first paragraph of item (k) – unlike item (j) (see para. 7.199 supra) - may
not be interpreted a contrario.

cases – but rather to provide clarity that certain measures are prohibited export
subsidies. Thus, it would be possible to demonstrate that a measure falls within the
scope of an item of the Illustrative List and was thus prohibited without being
required to demonstrate that Article 3, and thus Article 1, was satisfied. To borrow a
concept from the field of competition law, the Illustrative List could be seen as
analogous to a list of per se violations. Seen in this light, the material advantage
clause is not "ineffective", in the sense that it is reduced to redundancy or inutility, by
a finding that the first paragraph of item (k) cannot be used a contrario to establish
that a measure is permitted. To the cont rary, the material advantage nevertheless
continues to serve an important role by narrowing the range of measures that would
otherwise be subject to the " per se" violation set forth in the first paragraph of item
(k), as discussed below.
Let us consider the first situation envisione d by the first paragraph of item (k), the
grant by governments of export credits at rates below their cost of funds. It may
generally be assumed that in such circum stances there will be a benefit to the
recipient and thus a subsidy. This is however not always the case. Whenever a
government's cost of funds is higher than th at of the borrower, a loan at below the
government's cost of funds may nevertheless fail to confer a benefit on the recipient.
For example, Brazil argues in this dispute th at its cost of funds is in excess of
13 per cent. By contrast, it is likely th at many purchasers of Brazilian exports could
obtain private export credit financing, not benefiting from government intervention of
any kind, at an interest rate significant ly lower than 13 per cent. Thus, direct
financing by Brazil in these circumstances could well entail a co st to the government
but provide no advantage, material or othe rwise, to the recipient. Under these
circumstances, and in the absence of the ma terial advantage clause, Brazil would be
prohibited from providing export credits at an interest rate lower than 13 per cent,
even if the export credits provided no advantag e whatsoever. The role of the material
advantage clause in this situati on is to narrow the scope of the per se prohibition in
such cases.
A similar situation could arise in cases of payments under the first paragraph of item
(k). Without the material advantage cl ause, a complainant could demonstrate the
existence of a prohibited subsidy merely by demonstrating the existence of a payment
within the meaning of item (k). However, a financial institution in a developing
country may have a higher cost of funds than financial institu tions in developed
countries, and thus be unab le to provide export credits on terms competitive with
those of foreign financial institutions. A payment by Brazil that allowed a Brazilian
financial institution to provide export credits to an overseas customer on precisely the
same terms as that customer could have obtained in international financial markets
could, absent the material advantage clau se, constitute a prohibited export subsidy,
even though the borrower – and hence the e xporter – was no better off than it would
have been but for the payment. The mate rial advantage clause narrows the scope of
the "per se" violation in the first paragraph of item (k) and precludes this result.
In light of the foregoing, we consider that the "material advantage" clause would not
be rendered "ineffective" by a finding that the first paragraph of item (k) cannot serve
as a basis to establish that a measure is "permitted".
185
7.312 We find this reasoning to be convincing. We al so note that Korea has not attempted to rebut
it. In these circumstances, we shall be guided by this reasoning and on that basis reject Korea's

185 Panel Report, Brazil – Aircraft – Article 21.5, paras 6.42 – 6.45 (footnotes omitted).

argument that a failure to permit an a contrario interpretation of the first paragraph of item (k) would
render the material advantage clause of that provision meaningless.
7.313 Having found that an a contrario interpretation of the first paragraph of item (k) is not
permissible, there is strictly speaking no need for us to consider the additional issues identified above.
For the sake of completeness, however, we shall do so.
(ii) If an a contrario interpretation of the first paragraph of item (k) were permissible, what
conditions would need to be fulfilled?
7.314 Assuming arguendo that the first paragraph of item (k) could operate as an affirmative
defence in the present case (with which, as discussed , we disagree), it would need to be demonstrated
that PSLs constitute "export credits", and are provide d at rates above those which the government in
question actually has to pay for the funds or, if the rates are below cost, at rates that nevertheless do
not secure a material advantage in the field of export credit terms.
(iii) Are the relevant conditions fulfilled?
7.315 As the party seeking to rely on the first paragra ph of item (k) as an affirmative defence, the
burden of proof is on Korea to establish that the relevant conditions have been fulfilled. Korea
submits that the PSLs constitute expor t credits, and that PSLs "are made at rates far higher than those
the government has to pay for the funds so employed". 186 Korea also submits that the PSLs do not
confer a material advantage.
7.316 The EC submits that PSLs are not export credits, since they are not exte nded to the foreign
buyer. The EC bases its argument on the following definition set forth in the Organization for
Economic Cooperation and Development ("OECD") Handbook on Export Credits:
Broadly defined, an export credit is an in surance, guarantee or financing arrangement
which enables a foreign buyer of export ed goods and/or services to defer payment
over a period of time. … Export credits may take the form of “supplier credits”
extended by the exporter or of “buyer cr edits” where the exporter’s bank or other
financial institution lends to the buyer (or his bank).
7.317 Given the EC's argument that PSLs are not export credits in the meaning of the first paragraph
of item (k), the EC does not address Korea's assertions that PSLs "are made at rates far higher than
those the government has to pay for the funds so employed", 187 and that the PSLs do not confer a
material advantage.
7.318 Korea asserts that the EC's definition of "expor t credit" is overly narrow. Korea relies on a
broad interpretation of the concept of "export credit" . Korea submits that a basis for such a broad
interpretation is provided by the following OECD website definition:
Broadly defined, an export credit arises whenever a foreign buyer of exported goods
or services is allowed to defer payment. Export credits are generally classified as
short-term (repayment terms of usually under two years), medium term (usually two
to five years) and long-term (over five y ears). Export credits may take the form of
"supplier credits" or "buyer credits". "Supplie r credits" are extended by an exporter
directly to an overseas buyer. "Buyer cred its" are extended by an exporter's bank or
other financial institution as loans to the buyer (or his bank). OECD Member
countries may give official support to both types of transactions through their export

186 Korea's First Written Submission, para. 277.
187 Ibid, para. 277.

credit agencies, provided that such support is in accordance with the Arrangement on
Guidelines for Officially Supported Export Credits.
188
7.319 Korea also relies on Section 3 of the OECD Sector Understanding on Export Credits for
Ships, whereby:
The minimum interest rate will also appl y to the credit granted with support by
governments participating in the Understandi ng, in the shipbuilder's country to the
shipbuilder or to any other party, to enable credit to be given to the shipowner or to
any other party in the shipowner's country, whether this official support is given for
the whole amount of the credit or only part of it.
7.320 Korea asserts that the EC's a pproach gives primacy to the OECD over the WTO.
189 The EC
considers that the definition of “export credits” given by the OECD reflects the generally accepted
meaning of term in the relevant circles, that the term “export credit” used in the second paragraph of
item (k) has the meaning given to it in the OECD Arrangement on Guidelines for Officially Supported
Export Credits ("OECD Arrangement") and that in view of the close parallels between the first and
second paragraph it must be assumed, in the absence of any indication to the contrary, that the term
has the same meaning in both the first and second paragraphs.
7.321 We do not consider that the re ference to "export credits" in th e first paragraph of item (k)
should necessarily be defined in the same way as th e reference to "official export credits" in the
second paragraph thereof. However, we note that both parties have referred to OECD sources in
supporting their respective definitions of the term "export credit". Accordingly, we will have regard
to OECD sources for the purpose of assessing the meaning of the term "export credit" in the first
paragraph of item (k).
7.322 The basic issue raised by the parties' argumen ts is whether a loan will only constitute an
"export credit" if it is conferred on the foreign buyer, or whether the term "export credit" also includes
loans provided to exporters. The EC submits that loans to exporters are not "export credits". Korea
relies on Section 3 of the Sector Understanding to ar gue that loans to shipbuilders may also be treated
as "export credits". Failing that, Korea asserts that PSLs are "export credits" because they are
"intricately linked" to supplier credits extended by the shipyard to its customer. The relevant
"supplier credit" is the amount of money that the sh ipbuilder allows the foreign buyer to "defer" until
the end of the contract. Korea establishes a link between the PSL and the "deferred" payment by
arguing that the larger the payment at the end of th e contract, the more credit the shipyard needs in
terms of pre-shipment loans.
7.323 In addressing this issue, we not e that both parties have relied on OECD definitions that
indicate that the OECD only treats loans to foreign buyers (and not to exporters) as "export credits".
Even the OECD website definition relied on by Korea states that "[e]xport credits may take the form
of "supplier credits" or "buyer credits". "Supplie r credits" are extended by an exporter directly to an
overseas buyer. "Buyer credits" are extended by an exporte r's bank or other financial institution as
loans to the buyer (or his bank)" (emphasis supplied). Although Korea relies on Section 3 of the
Sector Understanding, we first note that Section 2 thereof also indicates that "export credits" are loans
to the foreign buyer. Thus, Section 2 refers to credits "granted with official support by the shipbuilder
to the buyer (in a supplier-credit transaction) or by a bank or any other party in the shipbuilder's
country to the buyer or any other party in the buyer's country" (emphasis supplied). The OECD
materials submitted by both parties therefore indicat e that the term "export credits" relates to credits
provided to foreign buyers.

188 Ibid, para. 272.
189 Korea's reply to Question 168 from the Panel.

7.324 Although Section 3 of the Sector Understanding indicates that the OECD Arrangement 's
minimum interest rate shall also apply to official credits granted "to the shipbuilder", this is only to
the extent that such credit to the shipbuilder "enable[s] credit to be given to the shipowner or to any
other party in the shipowner's country". Thus, a stand-alone credit to the shipbuilder would not be
treated as an "export credit" even under Section 3 of the Sector Understanding. Section 3 therefore
supports the view that credits to shipyards in and of themselves do not constitute "export credits".
7.325 Korea submits that, even if loans to expor ters do not constitute "export credits", PSLs
constitute "export credits" because they are "intricat ely linked" to supplier credits extended to the
foreign buyer in the form of tail-heavy contracts. In this regard, we understand Korea to argue that
the amount of money payable at the end of the contract is effectively an export credit from the
shipyard/supplier to the foreign buyer. We fu rther understand Korea to argue that PSLs are also
therefore export credits because they are "intricately linked" to that export credit because the greater
the amount of the PSL, the greater the amount of payment that can be delayed until the end of the
contract, and therefore the greater the amount of the "export credit".
190
7.326 We do not find Korea's argument convincing. First, we do not consider that a shipyard's
agreement that certain money should only be paid upon termination of the contract should be treated
as a loan, or credit, to the buyer, since nothing is lent or credited to the foreign buyer in the period
leading up to termination of the contract. Second, there is no direct connection between the PSL and
the payment terms, particularly as different parties are involved in each respective transaction. Third,
even if the "delay" of payment until completion of the contract did operate as a loan, it does not
provide for the deferral of payment. As noted above, the OECD definitions of export credits relied on
by the parties refer to an arrangement that enables the foreign buyer to "defer payment" over time. In
our view, this reference to deferral means post-sh ipment deferral of payment, whereas any delay in
payment resulting from the availability of a PSL does not extend beyond termination of the contract.
7.327 According to Korea, the largest OECD member, the United States, has suggested interpreting
the definitions in a more economically coherent manner to include guarantees to both the seller and
the buyer. In this regard, Korea argues that th e United States has proposed that the export credit
disciplines envisaged by Article 10.2 of the Agreement on Agriculture should apply to "any other
form of involvement, direct or indirect, by providers of official support".
191 We do not share Korea's
interpretation of the US position. First, the United States refers to the involvement of "providers of
official support". In response to a question from th e Panel, the United States noted that the definition
of "official support" in the OECD Arrangement is limited to support provided "for export", and would
therefore "preclude pre-export financing to the exporter, such as the PSL program". 192 Second, the
United States has explicitly argued before the Pane l that APRGs are not export credit guarantees.
Accordingly, we reject Korea's argument regardin g the US proposal concerning Article 10.2 of the
Agreement on Agriculture.
7.328 In light of the above, and having regard in pa rticular to the fact that PSLs are credits to
shipbuilders, rather than foreign buyers, we find th at PSLs are not "export credits" in the sense of the
first paragraph of item (k) of the Illustrative List. Thus, even though the EC has not contested Korea's

190 As with APRGs, Korea also argues that a number of export credit agencies offer instruments similar
to PSLs (see Korea's reply to Question 168 from the Panel). We remain of the view that our findings should be
based on our interpretation of the relevant provisions of the SCM Agreement , and not the practices of other
Members (se para. 7.216 supra).
191 Korea refers to the "US Position on Disciplines for Export Credits", allegedly submitted in early
February 2003 to the WTO in relation to Article 10.2 of the WTO Agreement on Agriculture (see Korea's First
Written Submission, para. 275).
192 US response to question from the Panel following the second substantive meeting, para. 5, emphasis
in original.

assertion that PSLs cover costs and do not confer a material advantage, PSLs would not fulfil the
conditions for any a contrario application of the first paragraph of item (k).
7.329 For these reasons, we find that the abovemen tioned PSLs do not benefit from any safe haven
provided for in the first paragraph of item (k) of the Illustrative List. First, we find that an a contrario
reading of this provision is not permissible. Sec ond, we find that, even if such a reading were
permissible, some of the relevant conditions woul d not have been fulfilled by the PSLs at issue.
Accordingly, we find that the abovementioned PSLs constitute prohibited export subsidies, in
violation of Articles 3.1(a) and 3.2 of the SCM Agreement.
(g) Conclusion
7.330 To conclude on the individual PSL transactions challenged by the EC, we find that the
DSME, Samho/Halla, STX/Daedong and Hyundai/MI PO (except projects 000056P and 000116P)
PSLs identified in Attachment EC-10, as well as PSLs 000108P, 000109P, 000130P, 000131P,
000132P, 010005P and 010073P provided to Hanjin, and PSLs 010019P, 010020P, 010021P,
010022P, 010023P, 010080P, 010081P, 010082P, 010083P, 010084P, 010154P, 010152P, 010153P,
010155P, 010157P, 010156P, 024838P, 024840P, 024842P, 024849P and 024852P provided to HHI,
constitute prohibited export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement.
6. Conclusion
7.331 For the above reasons, we reject the EC's claim that the KLR, the APRG programme, and the
PSL programme, "as such" violates Articles 3.1(a) and 3.2 of the SCM Agreement. We uphold the
EC's claim that the individual KEXIM APRGs identified at para. 7.223 supra constitute prohibited
export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement. We further find that the
KEXIM PSLs identified at para. 7.330 supra constitu te prohibited export subsidies, contrary to
Articles 3.1(a) and 3.2 of the SCM Agreement.
C.
ALLEGED ACTIONABLE SUBSIDIES
7.332 The EC has challenged a number of alleged actionable subsidies under Article 5 of the
SCM Agreement. In order for a complaint under Article 5 to prevail, it must be demonstrated that the
measure is a subsidy, that it is specific, and that it causes adverse effects to the interests of another
Member.
7.333 For the most part, these claims of the EC are concerned with the restructurings of Daewoo,
Halla and Daedong. These claims also include an alleged tax concession to DSME and DHIM, and
the individual APRG and PSL transactions addressed above.
7.334 In respect of the EC's Article 5 claims concerning these transactions, we recall that Korea has
argued that it is "legally and factually impossible" for a given measure to be at the same time both a
prohibited and an actionable subsi dy. We do not accept Korea's legal argument, since nothing in the
SCM Agreement precludes claims being brought under both Parts II and III in respect of the same
measures. Thus, to the extent that a complaining Me mber is able to demonstrate that a measure is a
prohibited export subsidy that causes adverse effect s to the interests of other Member, we see no
reason why simultaneous findings could not be made under both Articles 3 and 5 of the
SCM Agreement in respect of that measure. In respect of the present dispute, we take up in section
VII.D, infra, the factual analysis of whether the indivi dual APRG and PSL transactions that we have
found to be prohibited export subsidies cause serious prejudice to the interests of the EC.
7.335 We shall first provide a factual review of th e three debt restructurings at issue in these
proceedings. We shall then address the parties' arguments on whether or not these restructurings
constitute "financial contributions" "by a government or public body" that confer a "benefit" in the

mean ing of Article 1.1 of the SCM Agreement . We shall next consider the parties' arguments
regarding the alleged tax concession to DSME and DHIM. In the event that we find that any of these
measures are subsidies, we shall consider whether or not they are "specific". If any of these measures
are specific subsidies, we shall then consider whet her they have caused adverse effects to the interests
of the EC. We shall perform the same analys is in respect of the APRG and PSL transactions
identified at para. 7.331 supra, which we have already found to be specific subsidies.
1. Debt restructurings
(a) Factual Review
(i) Daewoo workout
7.336 Daewoo Heavy Industry, or DHI, was restructured in 1999 under the workout procedure set
forth in the Corporate Restructuring Agreement ("CRA"), after a failed attempt at a voluntary workout
in 1998. As discussed in more detail infra, the CRA, which was signed by more than 200 private
banks, established certain terms and procedures pertai ning to corporate restructuring. The parties
have differing views as to whether the CRA compelled banks to participate in such restructurings.
Daewoo's creditors adopted a workout plan after Anjin, an accounting firm, reported that the going
concern value of Daewoo exceeded its liquidation value. The workout plan comprised three elements:
the spin-off from DHI of two new companies, DS ME (shipbuilding) and DHIM (machinery); debt-
for-equity swaps; and debt rescheduling.
7.337 DSME and DHIM were spun off from DHI on 23 October 2000. Each of the new companies
received a portion of DHI’s assets and capital stock, whereas much of the company's debt was left
behind in DHI. The assets, liabilities, and cap ital stock of the new operating companies were
determined based on their debt payment capability.
7.338 On 14 December 2000, a major portion of the de bt still held by DSME was swapped by the
creditors for equity in the newly established company. The terms of the debt-for-equity swaps varied
according to the division of the company and the type of debt at issue (i.e., secured or non-secured).
7.339 Daewoo-SME’s debt obligations were also rescheduled. The debt rescheduling took
three forms: extension of principal repayment due da te; reduction of interest rates; and conversion of
short-term loans into medium- and long-term loans.
(ii) Halla reorganization
7.340 The SHI/Halla corporate reorganization plan was crafted by creditors under the Corporate
Reorganization Act, after a court confirmed the repo rt by Rothschild, a consulting firm retained by
Halla, that the going concern value of Halla exceeded its liquidation value. The reorganization plan
(based on a proposal from Rothschild) comprised four el ements: (i) debt forgiveness; (ii) a debt-for-
equity swap; (iii) interest forgiveness; (iv) a conversion of short-term debt.
7.341 Under the reorganization plan, the assets of Halla were transferred to a new company, RHHI.
Halla’s debts were partly paid off using the proceeds from this sale, and Halla’s remaining debts were
assumed by RHHI. All of RHHI’s shares were held by a single individual, although these shares were
subsequently cancelled.
193

193 Korea asserts that, under Article 221(4) of the Corporate Reorganizati on Act, at least two-thirds of
the shares held by the shareholder who influenced the directors in the mismanagem ent of a bankrupt company
shall be written off. In the event, the court-appointed receiver proposed that all of the individual's shares should
be written off (see Korea's reply to Question 38 from the EC after the first substantive meeting).

7.342 RHHI then issued 20,000,000 new shares to its creditors under a debt-for-equity swap of
KRW 100 billion. At the same time, RHHI changed its name to Samho Heavy Industries (“Samho”).
Samho received interest relief on its remaining debt (accrued interest was written off).
7.343 Samho then entered into a trusteeship agreem ent with Hyundai-HI, under which Hyundai-HI
was entrusted with the management of Samho. When Hyundai-HI entered into the trusteeship
agreement, it also executed a call option agreemen t with the shareholders of Samho, whereby
Hyundai-HI received an option to purchase the shares of Samho at a specified price within the next
five years. The call-price was the par value of the subject shares ( i.e., [BCI: Omitted from public
version]). However, if the net asset value per share of Samho, as of the date of exercise of the call
option, exceeded the par value of the subject shares, then [BCI: Omitted from public version] per
cent of the difference would be added to the purch ase price. Pursuant to the agreement, Hyundai-HI
exercised its call option on 30 April 2002. Because the net asset value per share on that date was
[BCI: Omitted from public version] , Hyundai exercised its call option at the price of [BCI:
Omitted from public version] , as per the terms of the agreement. Hyundai then held [BCI:
Omitted from public version] per cent of the shares in Samho, which changed its name to Hyundai
Samho Heavy Industries, or Samho-HI. Samho then increased its capital by [BCI: Omitted from
public version], reducing Hyundai’s shareholding to [BCI: Omitted from public version] per cent.
(iii) Daedong
7.344 Daedong was reorganized under the Corporate Reor ganization Act, after the court established
that the going concern value of Daedong exceeded its liquidation value. The reorganization plan
comprised three elements: (i) debt restructuring / exemption from interest; (ii) a capital infusion; and
(iii) the issuance of corporate bonds.
7.345 In August 2000, in accordance with the corporate reorganization plan, all shares owned by the
then controlling shareholder were extinguished
194 and shares held by the remaining shareholders were
consolidated at the rate of [BCI: Omitted from public version] . Daedong then began searching for
an outside investor with the help of KPMG Financ ial Services Inc. ("KPMG"), its financial advisor.
KMPG received final offers from five investors. KPMG determined that the offer from STX was
most beneficial for Daedong and recommended that STX be granted the right of first negotiation on
22 August 2001. Accordingly, on 27 August 2001, th e Seoul District Court selected STX Co. as the
first negotiation party based on KPMG’s recommendation.
7.346 STX submitted a preliminary proposal on 22 August 2001, with the key terms that (i) it would
subscribe for and acquire common shares (new shares) corresponding to approximately [BCI:
Omitted from public version] , (ii) subscribe for and acquire bonds with warrants corresponding to
KRW 20 billion and immediately exercise these warra nts to acquire new shares, and (iii) purchase
additional bonds with warrants after amending the reorganization plan.
7.347 On 24 September 2001, STX submitted a definiti ve proposal on almost identical terms to
those in the first proposal. Daedong accepted STX’s proposal. On 28 September 2001, Daedong and
STX executed a subscription agreem ent for the acquisition of new shares and bonds with warrants.
On 24 October 2001, STX paid [BCI: Omitted from public version] and immediately thereafter
exercised its warrants, resulting in a shareholding of [BCI: Omitted from public version] per cent
in Daedong.
7.348 After it had acquired the Daedong shares as d escribed above, STX acqui red additional bonds
issued by Daedong in the amount of [BCI: Omitted from public version] . This means that STX
injected a total of [BCI: Omitted from public version] into Daedong’s capital. With such funds,
Daedong made an early repayment of [BCI: Omitted from public version] per cent of its liabilities

194 Ibid.

(i.e., [BCI: Omitted from public version] ), leaving only [BCI: Omitted from public version]
outstanding (consisting of [BCI: Omitted from public version] for secured loans and [BCI:
Omitted from public version] for unsecured loans). On 1 Ja nuary 2002, Dae dong changed its
corporate name to STX Shipbuilding Co., Ltd.(the “STX Shipbuilding”), its current corporate name.
7.349 STX made partial sell-off of its shares in STX Shipbuilding on two occasions (one for public
offering and the other for private placement), leaving it with [BCI: Omitted from public version]
per cent of the shares in STX Shipbuilding. Furthe r, STX Shipbuilding listed its shares at the Korea
Stock Exchange in September 2003.
(b) Financial Contribution Issues
7.350 The EC submits that the restructurings constitu te "financial contributions" by public body
creditors and private body creditors entrusted or directed by GOK. Korea denies that any of the
creditors participating in the restructurings are public bodies. 195 Korea also denies that (private body)
creditors were entrusted or directed by GOK to part icipate in the workout. In addition, Korea submits
that the restructurings did not provide for any transf er of pecuniary value, and that in any event the
creditors could not properly be found to have made "financial contributions" to companies in which
they acquire ownership rights. Korea also submits that any "financial contributions" were not made
"by" public bodies, in the sense that decisions were made pursuant to the authority of the creditors'
council or courts under the relevant legislative provisions.
(i) Public Bodies
7.351 The EC claims that the following creditors par ticipating in the relevant restructurings and
workout are "public bodies" in the sense of Article 1.1(a)(1) of the SCM Agreement: Korea Asset
Management Corporation ("KAMCO"), Korea Depos itory Insurance Company ("KDIC"), Bank of
Korea ("BOK"), KDB, Industrial Bank of Korea ("IBK"), and KEXIM.
7.352 We recall 196 that we consider that an entity is a "public body" if it is controlled by the
government.
KAMCO
7.353 We find that KAMCO is a public body. Firs t, KAMCO is 100 per cent government-owned, a
situation that is highly relevant to and often dete rminative of government control. We find further
evidence of government control of KAMCO in the fact that government-appointed officials on the
Management Committee are responsible inter alia for formulating KAMCO's operational policy and
service plan, and assuming non-performing assets (Article 14 of the KAMCO Act).
7.354 Although we therefore find that KAMCO is a " public body", we note Korea's argument that
KAMCO only became a Daewoo creditor (by virtue of its acquisition of the NPLs of other creditors)
toward the middle of the workout process, after the workout plan had already been adopted by prior
creditor financial institutions. We understand Korea to argue that KAMCO therefore did not actually
participate in the workout. In its reply to Questi on 25 in the Annex V process, however, Korea stated
that creditors "agreed to allow the holders of the 19 July Loan (including KAMCO which purchased

195 Korea also repeats its argument (made above in the context of the KEXIM legal regime) that a
transfer of funds by a public body or private body en trusted or directed by a government will only constitute a
"financial contribution" if it involves a "government practice" or a function that would “normally be vested in
the government” and “the practice, in no real sense, differs from practices normally followed by governments”.
Since we have already rejected th at argument (see paras 7.28 - 7.31 supra, there is no need for us to consider it
further at this juncture.
196 See para. 7.50 supra. Since we have already reviewed the par ties' arguments on this issue, there is
no need for us to revisit these arguments at this juncture.

loans from other creditor financial institutions) to partic ipate in the debt for equity swap". In light of
Korea's statement that KAMCO participated in the debt-for-equity swap provided for under the
Daewoo workout, we see no basis for finding that KAMCO did not participate in that workout.
KDB

7.355 We have already found, at para. 7.172 supra, that the KDB is a public body.
IBK
7.356 We find that the IBK is a "public body". Here, we give particular weight to the fact that the
IBK is almost fully (95 per cent) government owned, 197 a highly relevant and arguably determinative
fact for the question of government control of the IBK. In addition, we note that, pursuant to
Article 35 of the IBK Act, both the IBK Business Pl an and Operations Manual must be approved by a
GOK minister, and the Operations Manual itself mu st contain detailed pr ovisions regarding the
operations of the IBK, including "the lending method , interest rates, loan terms, means of collection
of loan principal and interest, and the maximu m loan amount and payment guarantees to any one
person".
198
BOK and KDIC
7.357 Korea submits that BOK and KDIC did not participate in any of the three restructurings at
issue in these proceedings. The EC has not responde d to this argument. With regard to the Daewoo
workout, we note that Attachment 3 to Annex 1 of th e EC's replies to Panel questions after the first
substantive meeting includes a list of DHI's cred itors. This would appear to confirm Korea's
argument that BOK and KDIC did not participate in the Daewoo workout. Bearing this in mind, and
in the absence of any rebuttal of Korea's argument that BOK and KDIC did not participate in the two
remaining restructurings, we find that BOK and KDIC did not participate in any of the restructurings
at issue in these proceedings. For this reason, it is not necessary for us to determine whether BOK
and KDIC constitute "public bodies".
(ii) Entrustment or Direction of Private Bodies?
Arguments of the parties
7.358 The EC submits that a number of private fina ncial institutions involved as creditors in the
restructuring of shipbuilders were subject to such a high degree of government influence that they
were "entrust[ed] or direct[ed]" by the Korean G overnment in the sense of Article 1.1(a)(1)(iv). The
EC asserts that their participation in the restructuring process should therefore be treated as a financial
contribution by the Korean Government.
7.359 The EC argues that the Korean Government and its public bodies took advantage of their
multiple roles as decision-maker/strategist, legislat or, executive, regulator, shareholder/owner, capital
injector, guarantor, and lender to ensure that comm ercial financial institutions acted to support the
Korean shipbuilding industry pursuant to the entrustm ent and direction of the Government of Korea.
The EC submits that, at the time that the commercia l financial institutions were called upon to make
restructuring decisions, they were themselves financia lly weak (as a result, in part, of their exposure
to the shipbuilding industry) and in the process of being restructured, essentially dependent on the
Government of Korea and its agencies and associ ated public bodies for their future liquidity.

197 As of 2003, 51 per cent of IBK was owned by the GOK, 15.2 per cent by KEXIM, 15.6 by KIS
(itself owned 12.08 per cent by the GOK and 86.61 per cent by KDIC), and 12.53 per cent by KDB (See
Responses to Annex V Questions (BCI), Answer 2.1(1), at 23, Exhibit EC-39).
198 Exhibit EC – 52.

According to the EC, the injection by the Korean Government and the six public bodies acting
pursuant to the Government’s policies of substantial sums into the private financial institutions (at a
time that these institutions were themselves facing c onsiderable financial difficulties) persuaded these
institutions to participate in the corporate restructuring programmes of the shipbuilding industry.
7.360 Korea submits that the EC has failed to provide prima facie evidence of the existence of any
direction or entrustment, since it has not even id entified which commercial financial institutions are
concerned. Korea asserts that the demonstration of direction or entrustment is a determination that
must be made for each private body separately. Korea also asserts that the EC must prove
government entrustment and direction in respect of each of the three restructuring procedures
challenged by the EC, rather than making allegations regarding the general structure of the financial
market.
7.361 Korea also submits that there cannot be dir ection or entrustment by the GOK for private
banks to extend a financial contribution without an explicit and affirmative mandate to do so. Korea
notes in this regard that the panel in US - Export Restraints concluded that "the ordinary meanings of
the words 'entrusts' an d 'directs' require an explicit and affirmative action of delegation or
command."
199 Although the EC asserts that there is no b asis for requiring "an explicit and affirmative
action of delegation or command", Korea argues that such a requirement is needed to preserve the
balance of rights and obligations arising under the SCM Agreement. According to Korea, allowing
challenges to be made based on vague circumstantia l evidence that does not amount to an explicit and
affirmative action would likely impair the interests of the Member which is alleged to have provided
subsidies.
7.362 Korea submits that the GOK simply intervened in the market, in consultation with the IMF, in
order to stabilize the overall financial market. Korea relies on the following findings of the
abovementioned panel to argue that there is a difference between government intervention and
government entrustment or direction:
Government entrustment or direction is t hus very different from the situation in
which the government intervenes in the mark et in some way, which may or may not
have a particular result simply based on the given factual circumstances and the
exercise of free choice by the actors in that market.
200
7.363 Korea notes that a part of its agreement w ith the IMF was that it would abstain from
government direction. 201 Korea submits that private financ ial institutions participated in the
restructuring process in their own commercial inte rest, especially as they would only receive capital
injections from the government on the condition that they meet certain financial soundness targets.
7.364 According to the EC, there is no basis in the SCM Agreement for the US – Export Restraints
panel having required that the “ element of an explicit and affirmativ e action, be it delegation or
command”202 must be a formal action by the government. The EC asserts that if the panel were to
interpret these terms as requiring a showing that a government made a formal or official command to
the private entity, this would create a loophole b ecause governments can use less formal—but no less
effective—forms of influence to grant their subsidi es. According to the EC, the analysis whether a

199 Panel Report, US - Export Restraints, para. 8.44.
200 Panel Report, US - Export Restraints, para 8.31.
201 In this regard, Korea notes that Letters of Intent ("LOIs") signed with the IMF required that specific
workout procedures as applied to particular corporations should be carried out on a “voluntary (i.e., not
government directed)” basis as well as on a “market or iented” basis. Attachment to the LOI of May 2, 1998,
Attachment "Corporate Governance and Restructuring" section), Exhibit Korea - 23. The Panel notes that the
LOI submitted as Exhibit EC – 102 also stated that Korea would "ensure that corporate debt restructuring takes
place in a market-based manner, through voluntary workouts between corporations and their creditors".
202 Panel Report, US - Export Restraints, para 8.29 (emphasis supplied).

financial contribution granted by a private body can be imputed to the government has to be made on
a case by case basis, taking account of all the rele vant elements influencing the decision-making of
the private body that point towards government involvement.
Evaluation by the Panel

7.365 The parties disagree as to the circumstances unde r which an investigating authority could
properly determine that a government has entrusted or directed a private body in the sense of
Article 1.1(a)(1)(iv). Korea submits that an aut hority must demonstrate an explicit and affirmative
government action addressed to a particular party to perform a particular task or duty. The EC
considers that there is no need to have express pr oof of private body-by-private body, transaction-by-
transaction, entrustment or direction, arguing that entrustment or direction can be established on the
basis of broader evidence.
7.366 We recall that Article 3.2 of the DSU recognizes that interpretative issues arising in WTO
dispute settlement are to be resolved through the a pplication of customary rules of interpretation of
public international law. It is well settled that the principles codified in Articles 31 and 32 of
the Vienna Convention on the Law of Treaties (the "Vienna Convention") are such customary rules.203
Thus, the task of interpreting Article 1.1(a)(1)(iv) a treaty provision must begin with its specific
terms. Article 1.1(a)(1)(iv) provides that a financ ial contribution by a private body is covered by the
SCM Agreement when:
a government makes payments to a funding mechanism, or entrusts or directs a
private body to carry out one or more of the type of functions illustrated in (i) to (iii)
above which would normally be vested in th e government and the practice, in no real
sense, differs from practices normally followed by governments.
7.367 We note that the text of Article 1.1(a)(1)(iv) was interpreted by the US – Export Restraints
panel. That panel found:
8.28 The dictionary meaning of the word "entrust" is, inter alia, to "give (a person,
etc.) the responsibility for a task . . . Commit the . . . execution of (a task) to a person .
. . ". The word "direct" is defined, inter alia, as to "[g]ive authoritative instructions
to; order (a person) to do . . . order the performance of". In this regard, we consider
significant the fact that, for "direct" when fo llowed by "to" plus an infinitive (i. e., a
verb), the dictionary gives as a meaning to "give a formal order or command to", as
this is precisely the construction used in s ubparagraph (iv) (". . . entrusts or directs a
private body to carry out . . .").
8.29 It follows from the ordinary meanings of the two words "entrust" and "direct"
that the action of the government must contain a notion of delegation (in the case of
entrustment) or command (in the case of direction). To our minds, both the act of
entrusting and that of directing therefore necessarily carry with them the following
three elements: (i) an explicit and affirm ative action, be it delegation or command;
(ii) addressed to a particular party; and (iii) the object of which action is a particular
task or duty. In other words, the ordinary meanings of the verbs "entrust" and
"direct" comprise these elements – something is necessarily delegated, and it is
necessarily delegated to someone ; and, by the same token, someone is necessarily
commanded, and he is necessarily commanded to do something. We therefore do not

203 Article 31(1) of the Vienna Convention provides in relevant part that: "A treaty shall be interpreted
in good faith in accordance with the ordinary meaning to be given to the terms of the treat y in their context and
in the light of its object and purpose."

believe that either entrustment or direction could be said to have occurred until all of
these three elements are present.
8.30 Having said that, it is clearly the first element – an explicit and affirmative
action of delegation or command – that is determinative. The second and third
elements – addressed to a particular party and of a particular task – are aspects of the
first. Any assessment of whether delegation or command has occurred would
necessarily be in reference to that whic h has been delegated or commanded and in
reference to the one to whom it has been de legated or commanded. As aspects of and
flowing from the first element of the definition, the second and third elements provide
further support for our view that the action must be an explicit and affirmative act of
delegation or command. We note, in this regard, that the "entrusts or directs"
language in subparagraph (iv) is followed by the language "a private body to carry
out . . . ", which is similar to that which we have used to describe the second and third
elements of the definition of entrustment or direction. Thus, the subsequent language
in subparagraph (iv) confirms our view of the requirement of an explicit and
affirmative action.
204
7.368 As noted by the panel in US – Export Restraints, the dictionary meaning of the word "entrust"
is, inter alia, to "give (a person, etc.) the responsibility for a task . . . Commit the . . . execution of (a
task) to a person . . . ". 205 The word "direct" is defined, inter alia , as to "[g]ive authoritative
instructions to; order (a person) to do . . . order the performance of". 206 We agree with the US –
Export Restraints panel that "[i]t follows from the ordinary meanings of the two words 'entrust' and
'direct' that the action of the government must contain a notion of delegation (in the case of
entrustment) or command (in the case of direction)".
7.369 The US – Export Restraints panel also found that "both the act of entrusting and that of
directing therefore necessarily carry with them the following three elements: (i) an explicit and
affirmative action, be it delegation or command; (ii) addressed to a particular party; and (iii) the object
of which action is a particular task or duty". 207 The parties disagree on this aspect of the panel's
findings. Korea relies on this finding to argue that there can be no finding of entrustment or direction
in the absence of an explicit act whereby a particular task or duty is delegated to a specific person, or
whereby a specific person is commanded to perform a par ticular task or duty. The EC denies that the
act of delegation or command need be explicit, or addressed to a specific person.
7.370 Regarding the first element identified by the US – Export Restraints panel, we agree that the
delegation or command inferred by the terms "entrust ment" and "direction" must take the form of an
affirmative act. The object of a Member's responsib ility should be its acts, as such, rather than the
reactions to or consequences of those acts, as a lleged reactions and consequences may simply be the
result of happenstance or chance.208 That being said, we see nothing in the text of Article 1.1(a)(1)(iv)
that would require the act of delegation or command to be "explicit". Although the particular facts of
the US – Export Restraints case may have caused that panel to employ the term "explicit", no such
qualification is included in the terms of Article 1. 1(a)(1)(iv). In our view, the affirmative act of
delegation or command could be explicit or implicit, formal or informal. 209

204 Panel Report, US – Export Restraints, paras 8.28 – 8.30 (footnotes omitted).
205 The New Shorter Oxford English Dictionary, Volume 1, 1993, Clarendon Press, Oxford.
206 Id.
207 Panel Report, US – Export Restraints, para. 8.29.
208 Like the US – Export Restraints panel, "we do not see how the reaction of private entities to a given
governmental measure can be the basis on which the Memb er's compliance with its treaty obligations under the
WTO is established" (see US – Export Restraints, para. 8.34).
209 Indeed, the utility of Article 1.1(a)(1)(iv) would be undermined if an "explicit and affirmative action
of delegation or command" were required. That provision operates as a catch-all, so that indirect government

7.371 As to the issue of whether or not the act of delegation or command must be addressed to a
specific individual, we agree with the US – Export Restraints panel that, of the three elements it
identified in the extract cited above, the first elem ent, i.e. the affirmative action of delegation or
command, is determinative. As the panel noted , the second and third elements – addressed to a
particular party and of a particular task – are asp ects of the first, in the sense that the assessment of
whether delegation or command has taken place woul d of necessity involve an examination of both
who allegedly has been entrusted or directed to act, and what the action or task in question is.
7.372 Since the second and third elements identified by the US – Export Restraints panel are aspects
of the first element, we consider that the manne r, or degree of detail, in which the addressee and
object of the act of delegation or command is sp ecified will depend on the form that the act of
delegation or command may take. Thus, while a great er degree of specificity may be expected in
respect of explicit or formal acts of delegation or command,
210 this will not necessarily be the case in
respect of implicit or informal acts. In our view, the fact that the addressee and object of the act of
delegation or command is described in less deta il does not preclude a finding of entrustment or
direction, as a matter of law. Rather, it raises evid entiary issues. While th e fact that an act of
delegation or command is specifically addressed to a particular private body may make it easier, in
terms of evidence, for a Member or investigating au thority to establish the existence of entrustment or
direction, the fact that an act of delegation or command is not specifically addressed to a particular
private body does not necessarily mean that a finding of entrustment or direction in respect of that
private body is precluded. It simply means that, as an evidentiary matter, it will be more difficult for
a Member or investigating authority to properly dem onstrate that such private party was entrusted or
directed. Similarly, the fact that an act of delegation or command does not specify in great detail what
must be done does not necessarily preclude a finding of entrustment or direction. It simply makes it
more difficult for a complainant or investigating au thority to properly demonstrate that a transaction
undertaken by a private body was the object of gove rnmental entrustment or direction. Thus,
although the plain meaning of entrustment and directi on requires that something must be delegated to
someone, or that someone must be commanded to do something, the plain meaning of those terms
does not require that such someone or something must necessarily be specified in great detail. That
being said, the evidence of entrustment or directio n must in all cases be probative and compelling.
Thus, whatever the nature or form of the affirm ative acts of delegation or command at issue, the
evidence must demonstrate that each entity allege dly providing, or participating in, a financial
contribution was entrusted or directed by the government to do so.211
7.373 For the most part, the EC does not rely on any explicit affirmative act of government
delegation or command in respect of the three restruct urings at issue in these proceedings. Instead, its
arguments are largely based on alleged implicit and informal acts of delegation or command. For this
reason, most of the evidence relied on by the EC is circumstantial in nature. There is no reason why a
case of government entrustment or direction shoul d not be premised on circumstantial evidence,
provided that such evidence is probative and compelli ng, in the sense that it demonstrates that each of
the private creditors participating in the restructurings was entrusted or directed to do so. Thus, the EC
purports to build its claim on the following factors:
• GOK compelled commercial financial institutions to participate in the restructuring process
by ruling that no public funds would be made available to banks which "are not certified by

action does not fall outside the scope of the SCM Agreement . We are not prepared to read into
Article 1.1(a)(1)(iv) terms that would allow such indirect government action to circumvent the WTO's subsidy
disciplines.

210 Of course, explicit and formal acts of delegation or command could also be drafted in very general
terms, and addressed to a broadly defined group.
211 Whatever the nature or form of the affirmativ e acts of delegation or command, and whatever the
type of evidence relied upon, there must always be a dete rmination to the effect that each of the private entities
at issue was entrusted or directed by the government.

the FSC to be performing their role in the corporate restructuring process", 212 or "making
adequate progress on implementation of sound corporate debt restructuring";213
• GOK controlled the workout of DHI/DSME at the level of the CRA;
• the enactment of Prime Ministerial Decree No. 408;
• one of Daewoo's creditors, Kookmin Bank, acknowledged that its commercial policy had
been affected by government intervention;
• GOK guaranteed creditors against losses incurred in the restructurings at issue;
• the very fact that capital-deficient creditors rest ructured, rather than liquidated, the companies
at issue; and
• many of the domestic creditors were partially or wholly owned by GOK.
7.374 Although reliance on such circumstantial evidence may make it more difficult for the EC to
establish a prima facie case of entrustment or direction as a matter of fact, it does not exclude the EC's
claim as a matter of law. In reviewing the EC 's evidence, however, we would agree with the US –
Export Restraints panel that:
Government entrustment or direction is t hus very different from the situation in
which the government intervenes in the mark et in some way, which may or may not
have a particular result simply based on the given factual circumstances and the
exercise of free choice by the actors in that market.
214
7.375 Since the EC's Article 1.1(a)(1)(iv) claims ar e based on circumstantial evidence, we consider
that it is particularly important not to confuse the concepts of government entrustment or direction on
the one hand, and the government intervention in the ma rket on the other. With this in mind, we shall
now consider the circumstantial evidence relied on by the EC.
 - Access to public funds
7.376 The EC submits that GOK was able to entrust or direct Korean private banks to participate in
restructurings because they were financially weak and essentially dependent on government capital.
The EC claims that GOK was able to compel fi nancial institutions to participate in corporate
restructurings by imposing conditions on their access to public funds. In particular, the EC submits
that, in accordance with LOIs submitted to the IM F, no public funds would be made available to
banks which were "not certified by the FSC to be pe rforming their role in the corporate restructuring
process",
215 or "making adequate progress on impl ementation of sound corporate debt
restructuring".216 The EC also asserts that banks that received public funds were limited in the way
they could exercise their independence in participat ing in a restructuring. According to the EC,
Article 18 of the Special Act on the Management of Public Funds obliges banks to enter into written
agreements with the companies they wish to suppor t the details of which are set out in a Presidential
Decree. The EC further argues that banks are prohi bited from providing funds if the agreements are
not implemented or are not likely to be implemented.

212 Exhibit EC – 36.
213 Exhibit EC – 102.
214 Panel Report, US - Export Restraints, para 8.31.
215 Exhibit EC – 36.
216 Exhibit EC – 102.

7.377 The EC also submits that it would have been unthinkable for Daehan Investment Trust and
Seoul Guarantee Insurance Co. not to participate in the Daewoo restructuring having been informed
that they were eligible to receive substantial am ounts of public funds. In support, the EC relies on a
MOFE press release which, it claims, "announc[es] th at Daehan Investment Trust Co. would receive
KRW 1 trillion in public funds and that Seoul Guar antee Insurance Co. would receive public funds to
guarantee Daewoo bond".
217
7.378 According to Korea, the certification by th e FSC referred to in the LOI was never
implemented. Korea also submits that the EC's description of the Special Act on the Management of
Public Funds is misleading. In response to Questi on 118 from the Panel, Korea submits that
Article 18 does not apply in the context of the rest ructurings at issue in the present proceedings.
According to Korea, Article 18 applies to a public ly-funded bank’s individual lending activity. Thus,
the restriction applies only when a publicly-funded fi nancial institution decid es to extend a new loan
to an unsound company in an individual transac tion between that particular bank and the unsound
company as a borrower. According to Korea, therefor e, the “restructuring agreement” referred to in
Article 18 means an agreement between the lendi ng bank and borrowing company (normally called a
“Memorandum of Understanding”, or "MOU") wher eby the unsound borrower agrees to implement
self-initiated actions, such as disposing of unnecessar y assets or businesses or reducing labor costs, in
order to make itself more accountable for the new borrowing. Korea asserts that Article 18 does not
apply to the cases where the publicly-funded banks pa rticipate in a workout or court-receivership
proceeding as a member of the creditors’ council or other interested parties’ meeting.
7.379 First, we note that the EC has not disputed Korea's argument that the FSC certification
referred to in the LOI was never implemented. In addition, we note that the LOIs required that
specific workout procedures as applied to particul ar corporations should be carried out on a
“voluntary (i.e., not government directed)” basis as well as on a “market oriented” basis.218 For these
reasons, we are unable to accept the LOIs as eviden ce that GOK compelled banks to participate in
corporate restructurings.219
7.380 Second, we are not persuaded that the Special Act on the Management of Public Funds is
relevant to these proceedings. On the basis of the explanation provided by Korea, and in the absence
of rebuttal by the EC, we do not consider that the restructurings under review are "restructuring[s]"
referred to in Article 18 of the Special Act on the Management of Public Funds.220
7.381 Third, we note that the MOFE press release re lied on by the EC in respect of the Korea
Investment Trust Co. and Daehan Investment Trust Co. also contains a statement by the FSC
chairperson that "the fiscal injection to these two ITCs is not directly related to Daewoo papers, rather
it is an inevitable step needed to resolve financial problems aggravated over the years at these two
companies".221 Since the same document therefore both makes and refutes the EC's argument

217 MOFE Press Release, "Financial Market Stabilization Package Re lated to Daewoo Group Workout
Plan", 4 November 1999, Exhibit EC – 60.
218 Attachment to the LOI of May 2, 1998, Attachment "Corporate Governance and Restructuring"
section), Exhibit Korea - 23. The LOI submitted as Exhibi t EC – 102 also states that Korea would "ensure that
corporate debt restructuring takes place in a market -based manner, through vo luntary workouts between
corporations and their creditors".
219 We note that Korea has not sought to rely on its various agreements with the IMF as a general
defence in these proceedings (see para. 46 of Korea's first written submission).
220 Article 18(1) of the Special Act on the Manageme nt of Public Funds provides "[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 Presiden tial Decree, it shall enter into a written agreement with
such unsound company, which shall incl ude consents from the persons concerned with the restructuring of that
company and other matters as prescribed by the Presidential Decree".
221 MOFE Press Release, "Financial Market Stabilization Package Re lated to Daewoo Group Workout
Plan", 4 November 1999, Exhibit EC – 60.

regarding these companies' access to public funds, we are unable to draw any conclusions on the basis
of that document regarding the conditions on which those companies obtained access to public funds.
7.382 In light of the above, we are not persuaded by th e EC's argument that restrictions on creditors'
access to public funds provided GOK with sufficient leverage to entrust or direct creditors to
participate in the Daewoo workout.
 - Corporate Restructuring Agreement
7.383 The EC asserts that GOK controlled the Daewoo wo rkout at the level of the CRA. According
to the EC, the Government of Korea in mid-1998 fo rced all banks and financial institutions sign the
CRA, under which these institutions explicitly comm itted themselves to such things as corporate
restructuring (as opposed to liquidation) through debt-for-equity swaps and other measures, and
subjected themselves to penalties for breach of th e CRA. The EC asserts that banks essentially
waived their rights to act as fully independent entities when signing the CRA.
7.384 Korea submits that the CRA is merely a framewo rk agreement that did not in itself pose any
substantive controversial issues. According to Ko rea, the CRA was a voluntary agreement and, in no
event, mandated the banks to agree to a particular restructuring plan against market principles.
Rather, the CRA provided a structure for workout on ce the creditor financial institutions had decided
that workout of a given company was preferable to liquidation. Korea rejects the EC's argument that
the CRA was government-mandated because it was impl emented quickly. According to Korea, the
speed of action, particularly in a financial crisis where everything moves quickly, is proof of nothing
at all regarding independence.
7.385 The EC states that Korea’s contention that the CRA was negotiated and signed voluntarily is
doubtful. The EC asserts that the CRA was explaine d to only 28 financial institutions in June 1998,
and was signed by 210 financial ins titutions only 6 days later. According to the EC, it is hard to
believe that 210 institutions voluntar ily negotiated and agreed to such an important document in less
than one week without any governmental interferen ce. Korea disputes the EC contention that the
CRA was created over so short a period, stating that a task force had been at work on this question
since April 1998.
7.386 We understand that the EC's argument concerns the structure and basic provisions of the CRA
per se, rather than the application of the CRA in respect of the Daewoo workout in particular. The EC
relies on Articles 1, 2 and 20 of the CRA in support of its argument. Turning to Article 1, we note
that it states that the objective of the CRA is "to propel workout programs of companies ... and
improve financial integrity of creditor financial institutions th rough an effective and activated
propulsion of workout programs". We do not interp ret this provision as an obligation on signatories
to participate in restructurings. For example, in the event of a determinati on by creditors that the
liquidation value of a company exceeds its going-c oncern value, nothing in Article 1 of the CRA
requires those creditors to nevertheless restructur e (rather than liquidate) the company. The CRA
simply means that if restructuring is to take place, the provisions of the CRA shall apply. Article 2
merely contains definitions, and therefore impos es no substantive obligation on signatories to
participate in restructurings. Article 20 provi des for the imposition of penalties when financial
institutions breach restructuring arrangements that have been negotiated under the CRA. Article 20
does not impose penalties on creditors that oppose a restructuring. Nor are penalties imposed if
creditors collectively decide to liquidate rather th an restructure a company. Accordingly, we do not
consider that Articles 1, 2 and 20 of the CRA support a finding that the CRA per se obliges creditors

to participate in restructurings, or otherwise c onstitutes evidence of gove rnment entrustment or
direction in respect of the Daewoo workout.
222
7.387 Regarding the speed with which banks signed up to the CRA, we note 223 that work on the
CRA commenced in April 1998, and that the b asic concept and structure of the CRA as the
framework agreement for workout was explained to 28 banks and financial institutions. Furthermore,
a process of commenting and negotiations took pl ace among the financial institutions through their
trade associations between 19 June and 24 June 199 8. We also note that, although the CRA was to
take effect on 25 June 1998, it remained open for signature after th at date. In these circumstances,
and especially given the involvement of banks in the preparation of the CRA, we see nothing
untoward in a large number of banks being in a position to sign the CRA within one week after it took
effect.
7.388 In light of the above, we reject the EC's argument that the CRA constitutes evidence of
entrustment or direction.
 - Prime Ministerial Decree No. 408
7.389 The EC submits that GOK's control over privat e banks is demonstrated by Prime Ministerial
Decree No. 408. The EC asserts that, while Article 6 of this Decree seems to guarantee the
independence of banks in which the Government of Korea has a shareholding interest, Article 5
specifically requires these banks to co-operate w ith the Government of Korea “for the purpose of
stability of the financial market” and “to attain the goals of financial policies.” The EC states that it is
even specified that instructions can be given orally or by telephone.
7.390 Korea submits that it is a duty of the governme nt in any jurisdiction to adopt and implement
financial policies and to ensure stability of the financial market. Korea asserts that financial
institutions are typically subject to statutory ob ligations to comply with legitimate governmental
orders or requests to implement such financial policies to stabilize the financial market. Korea
submits that Article 5 of the Prime Minister’s Decree only provides for procedures that the
Government of Korea can follow to implement such legitimate governmental policies. Korea submits
that the Prime Minister’s Decree proves the opposite to what the EC purports to prove by referring to
it, since the Decree was intended to guarantee the independence of banks in which the Government of
Korea has a shareholding interest. Korea asserts that the Prime Minister’s Decree in fact implemented
the commitment of the Government of Korea to the IMF that:
In the interim [i.e., pending re-privati zation of government-owned commercial
banks], banks will be operated on a fully commercial basis and the government will
not be involved in the day-to-day management of the banks.
224
7.391 We understand the EC's argument in respect of Prime Ministerial Decree No. 408 to be that
the Decree gives the GOK "control" over private banks, i.e., that by virtue of the Decree, the GOK has
the power to entrust or direct the banks to engage in corporate restructuring. We do not see anything
in the Decree, however, to suggest that it has anythi ng to do with any such power of the government
to compel banks to participate in corporate restructuring. Rather, the Decree appears to be focused on
measures to ensure the stability of the financial market as such. 225 We note that Article 1 of Prime
Ministerial Decree No. 408 provides that its purpose is to "procure that the Government shall go

222 Our conclusion is further supported by Article 10 of the CRA, which provides that dissatisfied
creditors may resort to mediation.
223 See Korea's reply to Question 120 from the Panel. The EC did not comment on the new factual
information submitted by Korea in response to this question.
224 Annex to Korea's 13 November 1998 Letter of Intent to the IMF, Exhibit EC – 117.
225 We find it difficult to conceive of any country that does not have a legislative or regulatory
framework enabling the government to intervene in the market for the purpose of maintaining financial stability.

through objective and transparent formalities in establishing financial policies or conducting
supervision over financial institutions , and to exclude unfair outside intervention in management of
financial institutions, etc. so that financial institutions, etc. can operate their businesses more
independently, taking more responsib ility" (emphasis added). We further note that Article 5.1 of the
Decree provides that "[i]f the Financial Supervis ory Agencies request cooperation or assistance of
Financial Institutions, etc. for the purpose of stability of the financial market , etc. (excluding the
request for data in relation to routine management activities), such request shall be made in writing or
through a meeting" (emphasis added). Whereas Arti cle 5.2 provides that in cases of urgency such
request may be made orally or by telephone, it furt her provides that "[i]n this case, the Financial
Supervisory Agencies shall notify such request to th e relevant Financial Institutions, etc. in writing
without delay". Pursuant to the Decree, therefore, the GOK does appear to have the power, in certain
circumstances, to compel private banks to undertak e certain actions related to maintaining stability in
the financial markets. The EC has provided no ev idence, however, that "stability in the financial
markets" encompasses or is related to corporate restructuring.
7.392 In any event, we emphasize that the issue of en trustment or direction does not have to do with
a government's power, in the abstract, to order economic actors to perform certain tasks or functions.
It has instead to do with whether the government in question has exercised such power in a given
situation subject to a dispute. In this regard, we note that the EC has provided no evidence that the
Prime Ministerial Decree No. 408 was ever invoked or relied on by the GOK in the context of any
restructuring.
7.393 For these reasons, we are not persuaded by the EC's reliance on Prime Ministerial Decree
No. 408 as evidence of GOK entrustment or directi on of private creditors in respect of the
restructurings at issue in these proceedings.
 - Kookmin Bank Statement
7.394 The EC submits that one of the creditors par ticipating in the Daewoo workout, the Kookmin
Bank, publicly stated that the Korean Governme nt has indeed compelled banks to agree to
restructuring measures that were not in accordance w ith their own credit review policies. In support,
the EC refers to the following statement by Ko okmin on 18 June 2002 in connection with a planned
offering of shares on the New York Stock Exchange:
The Korean government promotes lending to certain types of borrowers as a matter of
policy, which we may feel compelled to follow. The Korean government has
promoted, and, as a matter of policy, may c ontinue to attempt to promote lending to
certain types of borrowers. It generally has done this by requesting banks to
participate in remedial programs for troubled corporate borrowers and by identifying
sectors of the economy it wishes to promote and making low interest loans available
to banks and financial institutions who lend to borrowers in these sectors. …
government policy may influence us to lend to certain sectors or in a manner in which
we otherwise would not in the absence of the government policy.
226
7.395 Korea submits that the EC omitted the following extract from the abovementioned Kookmin
statement:
The government has in this manner prom oted low-income mortgage lending and
lending to technology companies. We expect that all loans made pursuant to
government policies will be reviewed in accordance with our credit review policies.

226 Kookmin Bank brochure, p. 22, (Exhibit EC-100).

7.396 According to Korea, the omitted text makes it clear that Kookmin's statement was actually
made in respect of GOK promotion of low-income mortgages and lending to technology companies,
rather than the shipbuilding sector . Korea also submitted a letter from Kookmin's lawyers explaining
that the above statement "does not state, nor was it intended to impl y, that the Korean government
exercises control over the banking sector generally or over bank lending decisions either generally or
with respect to particular borrowers such as Hynix”.
7.397 Taking into account that part of the Kookmin statement omitted by the EC, we accept Korea's
argument that it was actually made in respect of GOK promotion of low-income mortgages and
lending to technology companies, rather than th e shipbuilding sector. The statement therefore
provides no evidence that Kookmin was entrusted or directed to participate in the restructuring of
shipyards. In any event, we note that the statement refers to GOK "requesting" banks to participate in
remedial programs for troubled corporate borrowers. In the absence of any other probative material,
we do not consider that a government "request" s hould be treated as evidence of entrustment or
direction, since it does not imply the requisite elem ents of delegation or command. Since we do not
consider that the Kookmin statement constitutes ev idence of government entrustment or direction in
respect of the restructurings at issue in these proc eedings, there is no need for us to consider the
explanatory letter prepared by Kookmin's lawyers.
- 1998 December Agreement / Guarantee Against Loss
7.398 The EC submits that GOK further established its ability to entrust and direct the financial
institutions’ participation in the corporate rest ructuring by guaranteeing against losses arising from
these workouts. The EC notes in this regard that the 1998 December Agreement for the Restructuring
of the Top Five Chaebols ("December 1998 Agreement") stipulates that the Government “will
monitor implementation of the agreed restructur ing plan from the viewpoint of upholding soundness
of financial institutions” and “support the restructur ing efforts of corporate sector and financial
institutions.”
227
7.399 Korea submits that the relevant Agreement did not apply to the restructurings at issue in these
proceedings, and that it is unrelated to the CRA.
7.400 We do not consider that the December 1998 Agreement has any bearing on allegations of
government entrustment or direction in respect of the restructurings at issue in these proceedings,
since it did not apply to them. The December Agreement envisaged self-restructuring by the top five
chaebols – including Daewoo – through inter alia Capital Structure Improvement Plans,
228 while they
were still solvent. There are no such self-restructur ings before us in these proceedings. Instead, these
proceedings concerns restructurings required by creditors under the CRA and corporate reorganization
procedures. Accordingly, the December 1998 Agre ement is of no relevance to the question of
whether or not GOK entrusted or directed creditors to participate in the restructurings of Daewoo,
Halla and Daedong.
7.401 The EC submits that a precursor to the De cember 1998 Agreement was concluded between
the top five chaebols and the President of Korea in January 1998. The EC requests an adverse
inference under Annex V.7 of the SCM Agreement, on the basis that Korea failed to provide a copy of
the January 1998 Agreement under the Annex V proce dure. Korea submits that it did not provide a
copy of the January 1998 Agreement because it has nothi ng to do with the corporate restructuring of
insolvent companies. Korea asserts that the January 1998 Agreement ceased to apply to Daewoo after
it became insolvent and entered the workout proce dure. The EC alleges that the January 1998
Agreement was concluded between the top five ch aebols and the President of Korea. The only
restructuring at issue in these proceedings involving a chaebol is the Daewoo workout, dating from

227 December 1998 Agreement, Articles 18, 20 (Exhibit EC-40).
228 See Section 2(10) of the December 1998 Agreement, Exhibit EC-40.

2000. As the December 1998 Agreement is not rele vant to our examination of the Daewoo workout,
we fail to see how an earlier version of that agre ement could be of greater probative value, especially
as it was concluded over two years before the Daewoo workout. Furthermore, we note that the EC
asserts that the January 1998 Agreement "shows the degree of intervention of the [GOK] in the
corporate sector".229 However, government intervention in the corporate sector does not necessarily
amount to government entrustment or direction in r espect of a particular restructuring. For these
reasons, we decline to treat Korea's failure to pr ovide the January 1998 Agreement in the context of
the Annex V procedure as "non-cooperation" in the meaning of Annex V.7 of the SCM Agreement.
We therefore reject the EC's request for an adverse inference under that provision.
 - Liquidation as a source of capital
7.402 The EC asserts that proof of entrustment or direction lies in the fact that, under normal market
conditions, the financial institutions ' need for capital would have le d them to pursue all means to
increase cash inflows by inter alia liquidating – rather than restructuring - troubled borrowers. Thus,
the EC submits that the very fact that these financia l institutions engaged in restructuring is evidence
of government entrustment or direction.
7.403 We are unable to accept this argument, sin ce the question of whether or not market
considerations would have caused creditors to liquid ate, rather than restructure, Daewoo, Halla or
Daedong relates more directly to the issue of "benefit".230
 - Government ownership
7.404 The EC claims that further evidence of entrustmen t or direction lies in the fact that many of
the domestic creditors participating in restructurings were partially or wholly owned by GOK.
7.405 Korea submits that government ownership is not the same as government entrustment or
direction.
7.406 We are not prepared to accept that some de gree of government ownership, by itself,
constitutes proof of government entrustment or direction.
231 Although a government ownership share
in an entity may increase the ability of a government to entrust or direct that entity, there must still be
evidence of an affirmative act of delegation or co mmand before a finding of entrustment or direction
may be made.232
 - Conclusion
7.407 In light of the above, we reject the EC's claim th at private creditors were entrusted or directed
to participate in the three restructurings at i ssue in these proceedings. Although the EC may have
provided evidence of general GOK intervention in the financial services market, we do not consider

229 See EC First Written Submission, note 31.
230 Since we find below that the EC fails to establish that market considerations would have required
liquidation rather than restructuring, there would be no factual basis to the EC's argument even if it were
considered as potential evidence of government entrustment or direction.
231 We note that government ownership would seem to be more directly relevant, in the first instance,
to the application of Article 1.1(a)(1) of the SCM Agreement, i.e., to whether or not the entity in question is or is
not a "public body", rather than to entrustment or direction. That is, would the extent of government ownership
be sufficient to confer government control, such that the relevant entity was a public body? Here, we recall that
the EC has not alleged that any of the domestic cred itors other than KAMCO, KDIC, BOK, KDB, IBK, AND
KEXIM are public bodies.
232 In addition, we note that, according to Attachment 3 to the EC's replies to the Panel's questions after
the first substantive meeting, many of the private creditors participating in the restructurings at issue were not
owned to any extent by GOK. The factual basis of the EC's argument is to some extent, therefore, undermined.

that the circumstantial evidence relied on by the EC indicates any affirmative act of delegation or
command in respect of the three restructurings at i ssue. Similarly, even if the GOK had the authority
and potential to entrust or direct private creditors to participate in the restructurings, the EC has not
demonstrated that the GOK exercised such power.
(iii) Transfer of Pecuniary Value
Arguments of the parties

7.408 Korea submits that the debt-for-equity swaps, interest rate reductions, interest forgiveness and
interest deferral at issue in these proceedings did not constitute "financial contributions" because there
was no transfer of pecuniary value to the compan ies under workout or corporate reorganization, but
rather an increase in the value of recovery by the financial instituti ons engaging in those transactions.
Korea asserts that at the time of commencemen t of the workout or corporate reorganization
procedures, Halla and Daedong went bankrupt and Da ewoo was also insolvent, thereby reducing the
actual value of the credits extended by the financial institutions to the level of the liquidation values of
these distressed companies. Korea considers that, in this context, the creditor financial institutions did
not forego anything of value, but undertook the de bt-for-equity swaps and other debt restructuring as
a means of preserving the going concern value which was determined to be higher than the liquidation
value.
7.409 The EC asserts that, from the perspective of both the grantor and the grantee, a debt-for-
equity swap is a financial contribution. First, it includes the element of debt forgiveness, as the
creditor no longer can demand interest payments or repayment of debt principal after a debt-for-equity
swap. Second, it also requires the purchase of equity in the company by the former creditor. These
are both, independently, financial contributions to the recipient.
7.410 The EC also submits that Korea confuses fina ncial contribution and benefit when it argues
that the debt-for-equity swaps and other debt rest ructuring cannot constitute a financial contribution
because the creditors agreed to these measures “as a means of preserving the going concern value
which was determined to be higher than the liquidation value.” 233 According to the EC, the question
of whether the creditors received something in exch ange for their financial contribution, such as the
preservation of going concern value, is a question of benefit, not of financial contribution.
Evaluation by the Panel
7.411 We are not persuaded by Korea's arguments that debt-for-equity swaps and interest reductions
and deferrals are not financial contributions. In th e first place, we recall that there is a financial
contribution in the sense of Article 1.1(a)(1)(i) of the SCM Agreement if there is a "direct transfer of
funds", and that grants, loans and equity infusions are listed only as three possible examples of such
transfers. Thus, we view Article 1.1(a)(1) as iden tifying in its respective s ubparagraphs the kinds of
instruments or transactions that could be considered to be "financial contributions". Of course these
instruments would only be covered by the Agreemen t if they were made "by a government or public
body", and they would only be subs idies covered by the Agreement if they both conferred a benefit
and were specific. Thus, the con cept of financial contribution is but one in a set of cumulative, and
independent, elements all of which must be pr esent for a measure to be regulated by the
SCM Agreement.
7.412 We find the examples listed in Article 1.1(a)(1)(i) to be illuminating in respect of the scope of
the term "direct transfer of funds". Most importa ntly, considering the "medium of exchange" in the
listed examples, we note that all of the examples in volve transfers of money ("funds"), as opposed to
in-kind transfers (of goods or services, in the sense of Article 1.1(a)(1)(iii)). The fact that the listed

233 First Written Submission by Korea, 2 February 2004, para. 318.

kinds of direct transfers of funds (grants, loans and equity infusions) are identified as only examples
clearly indicates that there may well be other types of instruments that would equally constitute direct
transfers of funds in the sense of Article 1.1(a)(1)(i).
7.413 Turning to the particular cases of the transactions involved in the restructuring, we find that
all of them are of the same nature as those explicitly listed in Article 1.1(a)(1)(i). First we note that
interest reductions and deferrals are similar to ne w loans, as they involve a renegotiation / extension
of the terms of the original loan. We see no reason why loans would constitute financial contributions
while interest reductions and deferrals would not. Further, we consider that interest / debt forgiveness
is comparable to a cash grant, as funds that were previously provided as a loan, against interest, are
now provided for free, given the removal of the repayment obligation. All of these transactions
therefore constitute direct transfers of funds in the sense of Article 1.1(a)(1)(i) of the SCM Agreement.
Regarding debt-for-equity swaps, we note that equity infusions are explicitly listed as a type of direct
transfer of funds in Article 1.1(a)(1)(i). Since we have also found that debt forgiveness constitutes a
direct transfer of funds, we see no reason why a comb ination of equity infusion and debt forgiveness
should fall outside the scope of that provision. Th e reason why creditors agree to such transactions
(i.e., whether or not it is in order to preserve going concern value) is not relevant to the issue of
whether or not the transactions constitute financial contributions. Rather, it relates to the issue of
benefit (in the sense of whether or not creditors operating on market principles would have undertaken
such transactions on the same terms).
(iv) Financial Contribution to Oneself
Arguments of the parties

7.414 Korea submits that the various debt restructur ings challenged by the EC are not "financial
contributions" since they involve transactions between companies and the owners of those companies.
Korea submits that one cannot make a "financial cont ribution" to oneself. Korea argues that, in order
for a “financial contribution” to exist, there mu st be at least two separate identifiable entities.
According to Korea, the EC has failed to iden tify which party receive d the alleged financial
contribution, because when the creditor financial ins titutions of the three Korean shipyards undertook
a debt forgiveness or other debt rescheduling, they had already taken, or at least simultaneously took,
the ownership or control of the subject companies. Thus, they have forgiven the debt of the companies
which they owned or controlled and the beneficiari es of this debt forgiveness were the financial
institutions themselves.
7.415 Korea asserts that its argument is based on the WTO case-law indicating that “any analysis of
whether a benefit exists should be on ‘legal or natural persons’ instead of productive operations.” 234
Korea submits that such case-law regarding the exis tence of benefit also has consequences regarding
the definition and recipient of “financial contribution”, in the sense that if one looks through the assets
to the actual owners to determine if there is a benefit, one should also do so to determine if there is a
financial contribution. According to Korea, this means that if the owner and the contributor are the
same “person”, the issue arises as to whether there has actually been a financial contribution at all.
7.416 The EC (and US) submit that Korea's argument is incorrect, because if the drafters of the
SCM Agreement had contemplated having ownership of a company operate as an exemption from
subsidies disciplines, they would not have listed equi ty infusions as an example of a form of financial
contribution in Article 1.1(a)(1)(i). According to the EC and US, Korea’s argument is therefore at
odds with the text of the SCM Agreement.
7.417 The EC also argues that Article 14(a) of the SCM Agreement provides relevant context, as it
permits an authority investigating the potential fo r imposing countervailing duties to find a benefit to

234 Appellate Body Report, US – Countervailing Measures on Certain EC Products, para. 110.

recipients based on “government provision of eq uity capital.” Accordin g to the EC, if the
simultaneous action of the transfer of funds and the creation of equity interest in a company prevents a
finding of financial contribution, then Article 14(a) would not have been included in the
SCM Agreement.
7.418 Korea counters these arguments by distinguishing debt / equity swaps from equity infusions /
government provision of equity capital. Thus, in re sponse to the EC and US arguments that equity
infusions by public entities can constitute financial contributions, Korea asserts
235 that "equity
infusions are legally distinct from debt-for-equity swap s", and that "there is no logical relationship of
debt-equity swaps to the term equity infusion". In particular, Korea asserts236 that equity infusions are
often covers for direct subsidies to cover operating losses, in the sense that the purported capital calls
generally were mere shams reflected by the unw illingness of minority shareholders to respond.
According to Korea, the issue in a debt-for-equity sw ap made in an insolvency situation is different.
In such cases, where the company is insolvent and, therefore, in the hands of the creditors, the swap
reflects a change in form of financial instrument. Korea asserts that in the present case, the creditor
financial institutions were not holding cash which they could invest in a range of financial
instruments; they were holding debt and the issue w as what they could do with the debt in order to
maximize their return.
Evaluation by the Panel
7.419 We do not agree with Korea's argument that a debt-for-equity swap should be treated as a
transaction with oneself. Clearly, creditors and the debtor company are separate legal entities. In an
insolvency situation, the credito rs may decide to acquire ownership of the company in order to
maximize the return on their debt-holding (or minimi ze their losses). One way of doing so is through
a debt-for-equity swap. Such a transaction between separate legal entities results in a change in
ownership of the debtor company, and the issue befo re the Panel is whether the changes in ownership
of certain Korean shipyards conferred subsidies. Korea relies on WTO case-law 237 concerning the
changes in ownership in the context of privatiza tions to argue that a financial contribution, like
benefit, must be conferred on a le gal or natural person, rather than on productive operations / assets.
We are not persuaded that such case-law is rele vant, however, since this is not a case involving
privatization. In those privatization cases, the a lleged subsidy took place prior to privatization, and
the question was whether the benefit from those ear lier subsidies was extinguished upon the change-
in-ownership. The change in ow nership in those cases was undertaken at arm's length, and for fair
market value. In the present case, however, the change in ownership is the alleged subsidy. In any
event, even the Appellate Body privatization case-law relied on by Korea has clarified that a
distinction may be made between a company and its owners in certain cases, such that the owners of a
company may be found to confer a benefit on that company. 238 That being the case, we see no reason
why the owners of a company could not also provide a "financial contribution" to that company.239
7.420 Furthermore, we consider that the EC and US arguments regarding Articles 1.1(a)(1)(i) and
14(a) of the SCM Agreement are both compelling. In particular, the fact that equity infusions are
explicitly designated as "financial cont ributions" suggests to us that the SCM Agreement does not
preclude the owner of a company making a "financi al contribution" to that company. Equity
infusions and debt-for-equity swaps have the same effect, in the sense that equity changes hands

235 See Korea's response to Question 22 from the EC.
236 See Korea's response to Question 46 from the Panel.
237 See, for example, Panel and Appellate Body Reports in US – Lead and Bismuth I,US – Lead and
Bismuth II, and US – Countervailing Measures on Certain EC Products.
238 See US – Countervailing Measures on Certain EC Products, para. 118.
239 For instance, a government injecting equity into a government-owned enterprise, or a holding
company injecting new capital into one of its subsidiaries, are examples of cases where the owner of a company
provides a financial contribution to that company.

against consideration in both cases (and subsidization arises if the amount of consideration is less than
the market would have provided). Also, a debt/equi ty swap comprises an element of equity infusion.
Accordingly, we consider that the references to e quity infusions in Articles 1.1(a)(1)(i) and 14(a) of
the SCM Agreement provide a strong contextual basis for reje cting Korea's argument that there is no
financial contribution because one cannot make a financial contribution to oneself.
7.421 Korea responds by seeking to distinguish equity infusions from debt-for-equity swaps.
Korea's distinction, however, is premised on an assumption that "equity infusions" are necessarily
subsidies, and that debt/equity swaps necessarily are not (since, according to Korea, they involve the
maximization of return). Such an approach, however, prejudges the substantive issue before the Panel
(i.e., was there subsidization?), and overlooks the fact that an equity infusion may be undertaken by a
market operator on market terms (in which case there would be no subsidy).
7.422 Furthermore, Korea's argument would mean that a cash grant by a government to a
government-owned company would not constitute a fi nancial contribution (and therefore could never
be a subsidy). Such an outcome would be absurd . Indeed, when this i ssue was put to Korea in
Question 46 from the Panel, Korea did not actually an swer the question. Instead of addressing the
issue of government cash grants (which the Panel’ s question was about), Korea again reverted to the
alleged distinction between equity in fusions and debt/equity swaps. However, if there is truth in the
statement that one cannot make a financial cont ribution to oneself, it should apply in all cases,
including to cash grants.
7.423 In light of the above, we reject Korea's argumen t that the owners of a company are unable, in
law, to make a financial contribution to that company.
(v) Financial contributions "by" public bodies
7.424 In respect of the Daewoo workout, Korea asserts that there were no financial contributions
"by" individual public bodies or private bodies allege dly entrusted/directed by GOK because financial
contributions were effected pursuant to the aut hority of the creditors' councils or meetings of
interested parties. In respect of the reorganiza tions of Halla and Daedong, Korea submits that there
were no financial contributions "by" public bodies or private bodies allegedly entrusted/directed by
GOK since the reorganization of Halla was legally effected by the court's decision approving the
corporate reorganization plan and not by the approval of individual creditors.
7.425 We are unable to accept Korea's argument, si nce entities participating in a financial
contribution must assume responsibility for that partic ipation. Thus, to the extent that a public body
participates in a loan agreed by a creditors' council, that part of the loan attributable to the public body
may be treated as an individual financial contributi on by that public body falling within the scope of
Article 1.1(a) of the SCM Agreement . Otherwise the disciplines of the SCM Agreement could be
easily circumvented by groups of public bodies deci ding collectively, or under court approval, to
provide financial contributions.
(vi) Conclusion
7.426 For the above reasons, we conclude that KAMCO, KDIC, BOK, KDB, IBK, and KEXIM are
"public bodies", and that their participation in the Daewoo, Halla and Daedong restructurings
constitutes a "financial contribution" covered by the SCM Agreement. We further find that the private
creditors participating in the restructurings were not entrusted or directed to do so, such that their
participation does not constitute a "financial contribution" covered by the SCM Agreement.

(c) Benefit Issues
7.427 We recall that a "financial contribution" only constitutes a subsidy if it confers a "benefit". It
is now well established that the existence of "benefit" is determined by reference to the market. Thus,
there will be a "benefit" if a financial contributi on is made available on terms more favourable than
those that the recipient could obta in on the market. The parties' arguments on "benefit” are primarily
concerned with the identification of appropriate market benchmarks against which to judge the
conduct of the creditors engaging in the restruct urings. Thereafter, the parties make specific
arguments relating to each of the restructurings at issue.
7.428 Our approach to the issue of benefit in the cont ext of the restructurings is to ask whether the
EC has demonstrated that each of the restructurings was commercially unreasonable. In this context,
the parties have advanced general horizontal argum ents as to the participation of domestic versus
foreign creditors in the restructurings, as well as company-specific arguments as to the decisions to
restructure each of the companies and as to the te rms of the restructurings as implemented. We
consider all of this evidence in its totality in respect of each restructuring, taking up first the general,
horizontal question of the creditors' participation, followed by the company specific arguments and
evidence pertaining to the individual restructurings.
(i) The creditors' participation in the restructurings
7.429 The EC asserts that the assessment of the co mmercial reasonability of the restructurings
should be based on the behaviour of foreign cred itors / investors, because these were the only
creditors / investors operating outside the influence of the GOK. The EC asserts that the decision by
foreign creditors / investors not to participate in th e relevant restructurings demonstrates that these
restructurings were not conducted pursuant to market considerations.
7.430 Korea submits that foreign creditors' non-participation in the restructurings does not constitute
an appropriate benchmark, because the alleged s ubsidy was provided by domestic Korean financial
institutions. Korea asserts that the market-conf ormity of the restructurings was assured by
determinations in each case that the going concer n value of the restructured company exceeded its
liquidation value.
7.431 We understand the EC to argue in the first instan ce that private domestic creditors / investors
participated in the restructurings as a result of g overnment entrustment or direction, rather than
commercial principles. However, as discussed above, we have rejected the EC's claim of government
entrustment or direction in respect of the private domestic creditors' participation in the restructurings.
7.432 We pursued this issue with the EC, in our Question 149:
If the Panel were to reject the EC's clai m of government entrustment / direction of
private creditors, would this mean that those private creditors provide a reliable
market benchmark for determining whethe r 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.
7.433 In response, the EC stated:
The tremendous government influence over th e actions of private creditors (even if
the Panel were to find that it does not ri se 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 be nchmark -- either to foreign investors,
outside investors, or another reliable source.
7.434 We note that of course there could be circum stances in which a government influences the
market to such an extent that it becomes distorte d, so that private entities no longer operate pursuant
to purely commercial principles. 240 In the case before us, however , the evidence on the reasons for
and significance of the differing behaviour of domestic versus foreign creditors is mixed. We note
that certain creditors did participate in the restruct uring while others opted not to. We note that there
was a certain generalized flight of foreign capital from Korea during the financial crisis, reflecting
investors' wariness of the overall situation, and ne ither party has provided information as to whether
the foreign creditors' decisions not to invest in th e restructured shipbuilding companies were purely a
reflection of this general wariness, or also reflect ed more specific concerns of these creditors over the
prospects of the individual companies.
7.435 We next turn to the evidence and arguments on each of the individual restructurings at issue.
(ii) The Daewoo workout
The Anjin report
7.436 In response to the EC's argument that Daewoo' s creditors failed to act pursuant to market
considerations, Korea submits that Daewoo's creditors acted on the basis of a report by Anjin to the
effect that the going concern value of Daewoo ex ceeded its liquidation value. Although the EC
accepts that a proper going concern analysis might have provided a basis for establishing that the
decision to restructure Daewoo was market-based,
241 the EC questions whether the report did
constitute such a proper analysis, and further asserts that the 1999 Anjin report does not demonstrate
whether or not the individual components of the workout were based on market principles.
7.437 We consider that the evidence and arguments c oncerning the Anjin report are very relevant to
the commercial reasonableness of the decision to restru cture Daewoo. In this respect, we first take up
the Anjin report's conclusion that the going-concer n value of Daewoo exceeded its liquidation value,
and we then take up the individual elements of the workout. On the report, we consider the question
whether a reasonable commercial actor could have use the report as the basis to decide that
restructuring made better economic sen se than liquidation. Here, our initial reaction is that the report
on its face appears credible and bona fide . It was prepared at the time and in the context of the
decision on whether to restructure Daewoo, and even the EC's expert consultant, Price Waterhouse
Coopers ("PWC")242 stated as a general observation that the report was good given the timeframe that
Anjin had had to prepare it.243
7.438 Korea initially presented detailed argumentation in respect of the Anjin report in response to
the EC's argument that independent commercial i nvestors would not have restructured Daewoo, but
instead would have opted for liquidation. Accord ing to Korea, the 1999 Anjin report was a thorough
and comprehensive report based on in-depth analysis that gave the creditors reliable information in
deciding to restructure DHI. Korea asserts that the Anjin report shows that when Anjin made its
assessment, it considered carefully all of the releva nt data and circumstances relating to the Korean
economy, shipbuilding industry and individual ship builders, as well as the business plans of DHI, in
order to provide an objective and independent assess ment of the real situation of DHI and of the

240 Indeed, a similar consideration influenced the findings of the Appellate Body in US – Softwood
Lumber IV, para. 103.
241 See, in particular, the EC's reply to Question 23 from the Panel.
242 Price Waterhouse Coopers was engaged by the EC as an expert consultant for purposes of this
dispute. The EC submitted a number of critiques prepared by PWC of various aspects of the Anjin report.
(Exhibits EC-112, 118, 133, 145 and 148).
243 Exhibit EC-112 at 3.

various options available to the creditor financia l institutions. Korea submits that creditor banks
therefore acted prudently when they decided on the DHI restructuring taking into account the findings
and recommendations contained in the report.
7.439 The EC challenges the integrity and substantive accuracy of Anjin's conclusion that the going
concern value of Daewoo exceeded its liquidation va lue. The EC submits that the Anjin report
(1) was commissioned by Daewoo-HI and its main cred itor, KDB, a public body; (2) could not have
been thoroughly reviewed before creditors voted on th e workout plan for the first time; and (3) in any
event did not properly demonstrate that the going concern value of DHI exceeded its liquidation
value. The EC asserts that the Anjin report was "pre-cooked",
244 and that prudent creditors would not
have agreed to any solution other than liquidation w ithout requiring a much more in-depth analysis.
Referring to a series of alleged errors / shortcomings identified by PWC in the context of this dispute,
the EC asserts that the Anjin report was not a proper basis for market-driven creditors to decide to
restructure DHI because the report did not make an adjustment for existing shareholders, and
therefore assumed that all benefits from the restru cturing would accrue to the creditors; the report
double counted tax shield benefits; the report did not provide for sufficient investment to maintain
residual value; the report used an excessively high EBIT margin of earnings before interest and taxes
("EBIT") for Daewoo in the going-concern projections; the report assumed an overly optimistic
perpetual growth rate in the going-concerning projecti ons; the report used incorrect interest coverage
ratios; the report did not account for unbooked liab ilities; and the report made no adjustment for
payables and receivables from five affiliated companies. The EC submits that, if the Anjin report had
not contained these errors, and if it had applied a pe rpetual growth rate of less than 2 per cent and a
discount rate above 12 per cent, liquidation valu e would have been found to exceed going concern
value. We shall examine each of the issues raised by the EC.
245
 - Commissioned by DHI and KDB
7.440 We understand the EC to argue that the Anjin report should not have been relied on by DHI's
creditors since the report was commissioned by DHI and KDB, a public body, both of which had an
interest in seeing DHI restructured rather than liquidated.
7.441 Korea submits that Anjin was re tained by the KDB, on behalf of all creditors. Korea asserts
that, although DHI was mentioned in the retain er agreement, this was only because DHI was
responsible for paying Anjin's fees.
7.442 [BCI: Omitted from public version.]
 246
7.443 The EC has not challenged these stat ements by Anjin. In particular, the EC has not disputed
that it is standard practice for companies under receivership / workout to pay the fees of professional
advisors. Nor has the EC disputed that DHI "was not in a position to receive reports and/or updates
thereof from Anjin". We also note that the cove r letter accompanying Anjin's report was addressed
exclusively to KDB, and not to DHI.247 Since we have no reason to believe that DHI was in a position
to influence the substance of Anjin's report, ther e is no reason to discredit the Anjin report merely
because Anjin's fees were paid by DHI.

244 EC oral statement at first substantive meeting, para. 83.
245 Korea submits that, since the EC's critique of th e Anjin report is a central part of the EC’s
affirmative case, the Working Procedures and basic consid erations of due process require that it should have
been submitted earlier in the proceedings. We note, howe ver, that the EC's critique of the Anjin report only
became necessary after Korea sought to defend itself on the basis of that repo rt, which it did in its first written
submission. We have no objection, therefore, to the EC presenting a critique of the Anjin report in its second
written submission.

246 See Exhibit KOREA – 78.
247 See English translation of Attachment 3.1(17) provided by Korea under the Annex V procedure.

7.444 Similarly, we do not believe that the integrity of the report is ipso facto impaired by the fact
that it was commissioned by a public body. This is particularly so given that the KDB was the lead
creditor, who was responsible for commissioning a report on behalf of all creditors. Since the EC has
not disputed Korea’s assertion that the KDB commissioned the report on behalf of all other creditors,
and in the absence of any allegations of improper influence by the KDB over Anjin, we are not
prepared to reject the integrity of the Anjin report merely on the basis that it was commissioned by the
KDB (acting on behalf of all other creditors). In short, while the issue raised by the EC is not
irrelevant, we do not find that the evidence before us on this point reaches the level of undermining
the credibility of the report's conclusions.
 - Amount of time for review
7.445 The EC submits that the Anjin report was not made available to creditors in sufficient time to
allow for a thorough review before voting on the workout plan for the first time. In particular, the EC
submits that the Anjin report was made available to creditors on the same day that they voted on it for
the first time, and that all major decisions regarding the restructuring were taken only two days later.
7.446 Korea submits that Anjin actually began the due diligence of DHI on [BCI: Omitted from
public version] when the initiation of the DHI workout procedure was announced by the creditor
financial institutions. Anjin submitted its due diligence report concerning DHI and its foreign
subsidiaries on 23 October 1999
248 and submitted a workout report in summary form to creditor
financial institutions on 30 October 1999 (Exhibit Korea – 64). Korea asserts that these reports
confirmed that the going concern value of Daewoo was higher than the liquidation value, and
recommended that the creditor financial institutions pr oceed with a workout rather than liquidation.
Korea states that, based on these reports, KDB as the lead bank prepared a workout plan and
submitted it to the third Council of Creditor Fina ncial Institutions ("CCFI") meeting held on
24 November 1999. Korea asserts that the fully- compiled workout report by Anjin was submitted to
the KDB on 24 November 1999. According to Korea, therefore, th e creditors were well briefed in
advance of the third and fourth CCFI meetings on 24 and 26 November 1999 respectively.
7.447 The EC claims that there are inconsistencies regarding the timing of this newly presented
report. The EC asserts that the Anjin report was assigned on 7 October 1999,
249 allowing only three
weeks to perform the enormous task of evaluating Daewoo’s financial affairs. Considering that Anjin
was also assigned to prepare a due diligence re port on Daewoo-HI’s assets that needed to be
completed before a workout analysis could be gin, and that this report was submitted on
23 October 1999,250 the EC asserts that the time remaini ng for the preparation of the summary
workout report was effectively only one week (from 23 to 30 October). Furthermore, the EC asserts
that Korea referred to an earlier KDB report provided to creditors. The EC asks the Panel to draw
adverse inferences against Korea, given that Kore a had failed to reveal th e existence of that KDB
report earlier in the proceedings. The EC also asserts that Korea stated that Anjin began work on the
due diligence and workout reports on [BCI: Omitted from public version] , the day after the
Daewoo group requested a workout,251 although Anjin was not appointed as the financial advisor until
8 September 1999.252 The EC also notes Korea's reference to Anjin’s 30 October 1999 summary
workout report. The EC requests the Panel to draw adverse inferences for Korea’s failure to make an
English version of that summary report available to the EC by the deadline for responses to the
Panel's questions after the first substantive meeting.

248 See Korea Annex V Response Attachments 3.1(17)-2 &3.
249 Exhibit Korea-64, p. 110.
250 Responses to Questions from the Panel by Korea, 22 March 2004, Question 78.
251 Responses to Questions from the Panel by Korea, 22 March 2004, Question 78, n. 4.
252 First Written Submission by Korea, 2 February 2004, para 341.

7.448 Korea refers to the EC's request for adver se inferences against Korea for not providing the
"KDB report" to the Panel. Korea asserts that there was no “KDB report”, and denies having
mentioned that there was one. Korea asserts that it merely stated that KDB proposed a DHI workout
plan, and that this DHI workout proposal was based on the Anjin report. Korea submits that it
disclosed to the EC the relevant information on KD B’s proposed workout plan in the course of an
earlier EC Trade Barriers Regulation proceeding.
7.449 In terms of timing, we do not consider that the fact that the KDB's proposed workout plan was
presented to creditors at the fourth CCFI meeting (on 26 November 1999) means that creditors did not
have a reasonable opportunity to review that plan (before adopting it at that same meeting), since
KDB's proposed workout plan was based on the Anjin workout plan presented to creditors at the third
CCFI meeting (on 24 November 1999).
253 Indeed, the KDB prepared its workout plan in response to
creditors' opposition to the Anjin workout plan. No r do we consider that creditors had not had
sufficient time to review Anjin's (earlier) proposed workout plan , since although it was presented by
Anjin at the third CCFI meeting on 24 November 1999, Anjin's due diligence report (concluding that
the going concern value of DHI exceeded its liq uidation value) was submitted to creditors on
23 October 1999, 254 and a workout report in summary form was presented to creditors on
30 October 1999. In cases involving the proposed restructuring of insolvent companies, it is to be
expected that decisions will need to be made expe ditiously. In such circumstances, parties may need
to act with greater speed than they would otherwise want to do. As noted by the banking expert relied
on by Korea, "[i]t is essential in circumstanc es such as these that reorganising and restructuring
decisions are made as quickly as possible. Th is not only maintains direction, management
confidence, morale and motivation within a comp any, but also quickly recreates confidence amongst
the company's customers." 255 We also note that Anjin itself was acting under the "principle of
promptness".256 In light of these considerations, although DHI's creditors may have felt hard-pressed
to review the Anjin report and various proposed wo rkout plans in the time available to them, we do
not consider that the time was so short that they could not have had sufficient time to conduct an
adequate, market-based review of the relevant documents.257
7.450 We consider that the EC's request for adve rse inferences regarding the "KDB report" is
unfounded, since there is nothing on the record to suggest that any such report ever existed. In
particular, Korea has never referred to any such repo rt. Korea has merely referred to a workout plan
proposed by the KDB (on 26 November 1999) on the basis of a workout report prepared by Anjin
(submitted in final form on 24 November 1999).
7.451 Regarding the EC's request for adverse infe rences concerning the 30 October 1999 summary
workout earlier in these proceedings, we see no reas on why, having submitted an English version of
the full Anjin workout report under the Annex V procedure,
258 Korea should also have submitted an
English version of the summary report. We note th at Annex V question 3.1.3(17) merely requested a

253 We acknowledge that Korea's description of the facts may cause some confusion, especially as
Korea submits that the KDB presented its proposed workout plan at the third CCFI meeting. On the basis of
Korea's first written submission, however, we understan d that the KDB only presented its proposed workout
plan at the fourth CCFI meet ing, and that Anjin was the author of the proposed workout plan submitted at the
third CCFI meeting.
254 See Korea Annex V Response Attachments 3.1(17)-2 &3.
255 See Exhibit KOREA – 105, page 3.
256 See page 89 of the Anjin report, section 2.2.1.
257 The EC asserts that there is an anomaly between the fact that Korea repo rts that Anjin commenced
its due diligence work on 26 August 1999, whereas the retainer agreement was only concluded on
7 October 1999. Since there is no basis for us to doubt Korea’s assertion that such procedure is normal practice,
we do not consider this situation anomalous. Rather, it suggests that Anjin was conscious of the need to
complete its work as early as possible.
258 See Attachment 3.1(17) of Korea’s Annex V response. That Attachment also includes a cover letter
from Anjin to the KDB dated 24 November 1999.

copy of the "full report with all annexes", so we do not consider that Korea was required to provide a
copy of the summary report under the Annex V procedure. As for whether or not Korea should in any
event have submitted an English ve rsion of Anjin’s summary report earlier in the Panel proceedings,
we consider it appropriate that Korea only submitte d the summary report when it sought to rely on it
in response to a question from the Panel (which in turn was prompted by arguments from the EC).
Since the report had not already been translated in to English, we consider it reasonable that Korea
would not be able to make an English version of that report available to the Panel until some time
after the deadline for the reply to the Panel's question. For these reasons, we reject the EC's request
for adverse inferences.
 - Existing shareholder adjustment
7.452 The EC submits that, when comparing the pr esent value of the cash flows generated on a
going-concern basis with the liquidation value, Anjin 's analysis should have taken into account the
fact that the present value of the going concern cash flows should be shared with the shareholders, and
that the financial lenders would only obtain approximately [BCI: Omitted from public version] per
cent of these cash flows.
7.453 Korea submits that the EC confuses two distinct phases in Anjin's report. In Phase 1, Anjin
estimated the liquidation value and going concern values of DHI, and compared the two to determine
which one was greater. Then, having confirmed that the going concern value exceeded the liquidation
value, Anjin undertook Phase 2, which involved an analysis of three alternative restructuring
scenarios. According to Korea, Anjin therefore only considered the effects or implications of
restructuring in the context of Phase 2. Korea s ubmits that the EC is seeking to introduce (Phase 2)
issues relating to the effects of restructuring into the analysis of Phase 1 of Anjin’s report. In
particular, Korea argues that, because DHI was insolven t in 1999, the adjusted equity value of DHI as
of 31 July 1999 was [BCI: Omitted from public version] . Accordingly, creditor financial
institutions had priority claims on DHI over the sh areholders in both liqui dation and going concern
scenarios. Since this analysis was performed under Phase 1, there was no need for Anjin to consider
what value may have accrued to shareholders under any of the three restructuring scenarios. Thus,
there was no error in attributing [BCI: Omitted from public version] per cent of DHI's value to
financial creditors prior to any restructuring scenario . Korea asserts that a partial allocation of value
[BCI: Omitted from public version] to shareholders was, however, made under Phase 2.
7.454 The EC does not reply to this argument by Kor ea, and to us it appears that a value of zero
could plausibly be attributed to shareholders in the context of a determination of whether to
restructure an insolvent company.
 - Tax Shield Effect
7.455 The EC alleges an error concerning the alleged double counting of a tax shield effect.
7.456 Korea accepts that Anjin did erroneously double count tax shield effects, and attributes that
error to an electronic spreadsheet link error. Korea submits, however, that the correction of this error
would not cause the liquidation value to exceed the going concern value, and thus that the basic
conclusion of Phase 1 of the Anjin report remains unaffected.
7.457 Given the agreement between the parties on the s ubstance of the EC's allegation, there is no
need for us to consider this matter further. We note, however, that the EC has not contested Korea’s
assertion that this error alone would not undermine An jin's conclusion that the going concern value of
DHI exceeded its liquidation value.

- Investment amounts used in calculating DHI’s residual value
7.458 The EC criticizes the Anjin report for having assumed, in its computation of the residual
value of DHI, that investment amounts would be fore ver smaller than depreciation. According to the
EC, in calculating a residual value, investment shou ld be at least equal to depreciation (and greater
when inflation is positive). The EC asserts that, wh en computing the value of a company on the basis
of perpetual cash-flows, investments should be set at a higher level than depreciation to take into
account the impact of inflation: depreciation expe nse is fixed over the depreciation period, whereas
replacement investments get more and more expensive with time.
7.459 Korea responds that, in fact, the amount of inv estment used by Anjin in the residual value
calculation effectively was not lower than deprecia tion. In particular, in 1998 DHI revalued its
property, plant and equipment (“PPE”) in accordance with Korea’s Asset Revaluation Law. This
revaluation increased the value of depreciable PPE without increasing the company’s cash outflows,
and increased as well the amount of depreciation as from the year 1998. According to Korea, if this
additional depreciation resulting from the revaluation, which had no impact on cash flow, were
excluded from the calculation, the capital investment and depreciation amounts used in the residual
value calculation would be almost the same. Furthermore, Korea asserts that DHI presented a
business plan to Anjin which assumed that a substant ial amount of capital expenditures was treated as
maintenance and repair expense, rather than capital expense, considering the nature of the business as
heavy industry, with large investments in the beginning stage of business.
7.460 The EC responds that even if assets were revalu ed in the past, at some point in the future
investments would need to be made to replace th e existing asset base and these investments should be
in line with the depreciation for the computation of the residual value. Korea contends that the
investments to replace existing assets would be affect ed by the market value, foreign exchange rate
and inflation at the time of replacement. Accord ing to Korea, the 1998 revaluations and the forecasts
performed by Anjin were affected by the depreciati on of the Korea Won against the US dollar, with
the result that the replacement amount in Korean Won to be spent in the future would be smaller than
the nominal value of the existing asset base.
7.461 We take note of the EC’s point that gene rally in residual value calculations, amounts
projected for future investments normally will be greater than amounts for depreciation, given inter
alia the effects of inflation. We also take note, however, of the points raised by Korea, including the
effects of the asset revaluation and of the Won’s depreciation, points on which the EC did not provide
a response. On the basis of this exchange of view s, we do not consider that the EC has established
that the lower level of projected investments than projected depreciation constitutes an error in the
Anjin report.
- EBIT margin
7.462 The EC further criticizes Anjin’s calculation of DHI’s residual value for using a perpetual
ratio of earnings before interest and taxes (“EBIT ”) that the EC considers is too high. The EC
questions whether an EBIT margin of more than [BCI: Omitted from public version] per cent, the
highest level of the forecast period, is a long-term sustainable margin.
7.463 Korea responds that, in forecasting DHI’s fu ture performance, Anjin assumed that DHI's
operations would stabilize from 2003 forward, after gradually recovering from low levels during the
initial two or three years of the forecasted period. Korea states that in respect of DHI's estimated
EBIT ratios, Anjin considered the EBIT margins of major Korean competitors of DHI during 1997,
1998 and first-half 1999. These companies recorded av eraged EBIT margins that were higher than
the level forecast for DHI. According to Korea, Anjin’s analysis and DHI’s business plan supported
the forecast that DHI would achieve comparable pe rformance levels to those of its major Korean
competitors.

7.464 The EC notes that the very high EBIT margins for DHI’s major Korean competitors, used as
the basis for the forecast for DHI, were based on a very short period, and th at these levels probably
were due to the fact that Korean shipbuilders were selling ships in dollars and buying inputs in Korean
Won, and that the Won was under heavy pressure at the time. The EC argues that according to
standard practice, residual values should be calcula ted when the period of competitive advantage has
disappeared and the market is in equilibrium. Fo r the EC, it is not clear that EBIT greater than [BCI:
Omitted from public version] per cent is the “perpetual equilibrium”, looking at EBIT margin before
and after the period presented by Anjin and for othe r Asian companies active in the sector (the EC
presents statistics for Korean companies Samsung, Hyundai, and Hanjin, and for Japanese companies
Mitsubishi HI, Kawasaki HI and Hitachi HI, for 1994-2002).
7.465 Korea responds that the exchange rate effect on the estimated EBIT margin was limited --
exchange rates declined steadily while average EBIT margins increased from end-1997 through mid-
1999. Korea also disputes the relevance of the EBIT margins of the Japanese companies cited by the
EC, as the fact that these margins were substan tially lower than those of the Korean shipyards
suggests that the cost and profit structures of the two sets of companies were not comparable.
7.466 The EC responds to Korea’s argument in respect of exchange rates by asserting that the effect
on EBIT of the Korean Won’s depreciation in 1997 could have been much greater than Korea asserts.
In particular, the EC argues that the Won’s deprecia tion alone could have created an EBIT margin of
34 per cent on US dollar contracts of one year or mo re signed before the financial crisis in 1997.
Thus, the EC argues, the Won’s depreciation could have explained the high EBIT margins realized by
Korean shipbuilders in 1997-1999.
7.467 Korea disputes the EC’s estimate of the effect of the Won’s depreciation by arguing, first, that
the EC assumes that costs would be entirely in Won and revenues entirely in dollars, whereas
shipbuilders incur costs in both currencies. Kor ea also argues that although the currency depreciation
only began in late 1997, the EBIT margins of Ko rean shipbuilders already had reached high levels
during the course of that year, such that the depr eciation could not have affected them more than
minimally. Furthermore, Korea argues, the forecast ed EBIT margins used fo r DHI were lower than
those actually realized by the other major Korean shipyards.
7.468 We take note that, as the EC points out, the EB IT margins for other Korean shipbuilders,
which were used by Anjin as th e starting point for its forecasts for DHI's EBIT margin, were
relatively high during the period considered by Anjin. To us, however, this by itself does not mean
that these margins were incorrect or unrepresentative, particularly give n that the EBIT used by Anjin
in the projections for DHI was in any case below tho se of the comparator Korean companies. While
the EC advances a number of theories and possible alternatives which would, if correct, result in a
lower forecasted EBIT margin for DHI, the EC has not demonstrated that any of these is
unequivocally superior, nor that Anjin's forecast is clearly wrong.
 - Perpetual growth rate
7.469 The EC criticises Anjin for having applied a perpetual growth rate of [BCI: Omitted from
public version] per cent for cash flows after 2004, wherea s in 2002 Nomura and Credit Suisse First
Boston analysts were using perpetual growth rates of 2.0 and 0 per cent respectively. The EC submits
that, during a period of slow economic growth, Anjin should not have been using growth rates at least
50 per cent greater than those applied by the market during a period of better economic growth.
7.470 Korea submits that it was appropriate for An jin to use a perpetual growth rate of [BCI:
Omitted from public version] per cent since that was the rate forecast by Wharton Econometric
Forecasting Associates ("WEFA") for 2005. Korea notes that Anjin chose the WEFA global growth
rate, even though higher growth rate forecasts were available for the shipbuilding sector. Korea also

asserts that the Nomura and Credit Suisse First Bost on 2002 forecasts were not available in 1999, and
therefore could not have been taken into account by Anjin.
7.471 We see no reason to consider that Anjin erred in applying WEFA's forecast rate of world
economic growth, as we see no evidence that WEFA ra tes are in any way unsatisfactory or unreliable.
Furthermore, we note that the EC refers to market growth forecasts made in 2002, three years later
than the forecasts made and relied on by Anjin. Given the propensity for economic conditions to
change rapidly over relatively short periods of ti me, we are doubtful that these growth rates can be
directly compared.
 - Interest coverage ratio
7.472 The EC criticises the Anjin report on the basis that the interest coverage ratio reflected in the
report, [BCI: Omitted from public version] , was comparable to that of non-investment grade
companies (i.e., B and CCC rated companies).
7.473 Korea submits that the interest coverage ratio re ferred to in the Anjin report in respect of DHI
was an assumed ratio used only to determine the si ze of debt restructuring, and was not directly
related to any credit rating as suggested by PWC. Korea further argues that in fact the interest
coverage ratios of DSME and DHIM in any event exceeded the ratio assumed in the report.
7.474 We understand the EC to argue that DHI should not have been restructur ed since the interest
coverage ratio used in the Anjin report indicated that DHI and its eventual spin-off companies were
below investment grade.
259 We note, however, Korea's explanation that the ratio of [BCI: Omitted
from public version] was used to calculate the size of debt restructuring, rather than being directly
related to a credit rating, a point that the EC acknowledges. 260 Moreover, there is no question that
DHI was insolvent, and therefore below investment gr ade, at the time of Anjin's report, but this is a
separate issue from whether it was economically unreasonable to restructure it.
 - Unbooked liabilities
7.475 The EC criticises Anjin for not taking into account commissions owed by DHI to Daewoo
London. The EC asserts that these liabilities should have been taken into account by Anjin since their
omission resulted in an inflation of going concern va lue relative to liquidation value. According to
the EC, if a claim of X KRW had been booked in DSME, the value computed under the going concern
scenario would have reflected the future payment of the X KRW claim and hence would have been
lower than the value presented in Anjin's report. The EC asserts that the value under the liquidation
scenario on the other hand would not have been affected by the same amount, as most of the assets
had been provided as collateral fo r loans. Thus, the addition of a new claim would have had a much
lower impact on the value of the liquidation scenar io (indeed, if 100 per cent of the assets had been
provided as collateral, the impact on the liquidation value would have been zero).
7.476 Korea submits that these liabilities did not need to be booked since they had not been
confirmed by Daewoo London. In addition, Anjin co nsidered they would not make any difference to
the analysis since they would have the same impact under both the liquidation and going concern
scenarios. Furthermore, Korea ass erts that the liabilities would not have had any impact on the going

259 Our understanding is based on page 5 of Exhibit EC – 145, where PWC stated that "[t]he point we
wanted to highlight was that at the ti me of the restructuring and for the fi rst three years of the forecast period,
the financial ratios ... were foreseen to be in the range of the ratios of US companie s having below investment
grade ratings..." (emphasis in original).
260 The EC also acknowledges that the actual experience of DSME was better than had been forecast.
"We understand that the interest coverage ratio was used to estimate the size of the debt restructuring and we
appreciate that the actual results of DSME were better than foreseen." Exhibit EC-145 at 5.

concern value of the two spun-off companies, since on ly those assets and liabili ties that were directly
related to operating activities were allocated to them.
7.477 We agree with Korea that Anjin was not require d to take into account the relevant liabilities
towards Daewoo London, since they were not confirmed at the time of the report. We also note that
the EC does not challenge 261 Korea's statement that such liabilities would in any event not have been
allocated to DSME.
 - Receivables from Daewoo Affiliates
7.478 The EC notes that DHI receivables from certain Daewoo affiliates were not included in the
going concern value because, according to the Anji n report, of "the non-finalization of the due
diligence investigations of affiliated companies".
262
7.479 Korea submits that the relevant receivables we re included under Phase 1 of Anjin’s analysis,
but were attributed a value of [BCI: Omitted from public version] when Anjin calculated the
liquidation and going concern values because, at th e time of valuation, Daewoo affiliates were
undergoing due diligence review by other accounting firms. Korea submits that the exact amount
reported for receivables from Daewoo affiliates does not affect the Phase 1 comparison of the
liquidation with the going concern value, since in any event the same amount would be used for both
the Phase 1 liquidation and going concern values. Korea submits that the recoverable amount of
receivables from affiliates was valued at 30 per cent of receivables under Phase 2, and was included in
both the liquidation and going concern scenarios under Phase 2. Again, Korea submits that the exact
amount of value booked to receivables from affili ates does not really matter, provided the same
amount is booked under both liquidation and going concern values.
7.480 The EC has not made any arguments to cause us to doubt Korea's assertion that the exact
amount of receivables from affiliates would have had no impact on Anjin's Phase 1 and 2 analyses,
provided the same amount was included in the liqui dation and going concern values used for Phases 1
and 2 respectively. In particular, we note that the EC has not disputed Korea's argument in its
comments on this issue in Exhibit EC – 158.
7.481 In Exhibit EC – 158, the EC instead asserts that the [BCI: Omitted from public version]
per cent recovery rate on DHI assets was almost the same as the [BCI: Omitted from public
version] per cent recovery rate on DSME/DHIM assets. The EC submits that this does not seem to
reflect the objective of the restructuring. Korea subm its that, in deciding whether or not to restructure
a company, what matters is whether going concern value exceeds liquidation value. Korea asserts that
the ratios of recovery from different business divi sions in the event of liquidation are simply not
relevant to the decision whether or not to restructure.
7.482 While we note that Table 3 on page 11 of Ex hibit EC – 158 demonstrates that the recovery
rate for DSME/DHIM in the event of liquidation would only be slightly better than the recovery rate
for DHI under liquidation, we fail to see the signifi cance of this to the case at hand, since it has no
relevance to the issue of whether or not the going concern value of DHI exceeds the liquidation value
of DHI (Anjin's Phase 1). Once a determination is made that the going concern value of DHI does
exceed the liquidation value of DHI, the relevant is sue becomes which of the restructuring scenarios
would provide the greatest rate of return for credito rs (Anjin's Phase 2). Again, the Table 3 is of no
relevance to this issue, since Table 3 is based on asset recovery rates under liquidation, whereas
Phase 2 of Anjin’s report concerns the effect of different restructuring scenarios.

261 The EC’s comments on Exhibit KOREA-141 do not address this issue (see Exhibit EC – 158,
page 3).
262 See Exhibit EC – 145, page 6.

 - Conclusion
7.483 We recall that the EC has pointed to the decision of foreign creditors not to participate in the
restructuring, as well as to certain alleged shortcomings or flaws of the Anjin report, in support of its
argument that the decision to restructure Daewoo w as not on market terms. As above, we approach
the question of benefit from the Daewoo restru cturing by considering whether the EC has
demonstrated that the decision to restructure Da ewoo was commercially unreasonable. As discussed
above, the evidence concerning the reasons for th e differing behaviour of domestic and foreign
creditors is mixed. Furthermore, while the EC has raised certain questions and doubts about the Anjin
report, we do not consider that the EC has demonstr ated that any of these alleged flaws constitutes an
unequivocal error or distortion such that the c onclusion that Daewoo’s value as a going concern
exceeded its liquidation value was manifestly incorr ect or biased, and the decision to restructure was
clearly commercially unreasonable. While another an alyst performing the same task might have used
assumptions closer to those preferred by the EC, this does not mean that the assumptions used by
Anjin are demonstrably incorrect. We therefore do not consider that the EC has established that the
decision to restructure DHI instead of liquidating it was commercially unreasonable.
7.484 We recall that the EC also has argued that th e terms of the DHI restructuring were not on
market terms. We thus now turn to this issue.
The debt write-off / rescheduling

7.485 The EC submits that the write-off / rescheduling of DSME's debt constitutes a subsidy. Since
the EC has not made any arguments regarding th e terms on which DSME's debt was written-off /
rescheduled, we understand that the EC's claim concerns only the fact that the write-off / rescheduling
actually occurred. In other words, the EC claims that the write-off / rescheduling as such confers a
benefit and therefore constitutes a subsidy because market operators – as was the case with foreign
creditors – would not have participated in it.
7.486 Korea submits that the debt write-off / reschedu ling did not constitute a subsidy since it was
based on the Anjin report, and therefore consistent with market principles.
7.487 Regarding the issue of whether or not market ope rators would have participated in the debt
write-off/rescheduling, we recall that the EC has relied on the decision of foreign creditors not to
participate. As discussed above, while this is cer tainly relevant, we do not find it decisive on this
issue. As the very essence of restructuring is th e writing off and rescheduling of debts, we disagree
with the EC that the fact that such write-offs and rescheduling took place, as such, conferred a benefit.
The existence of a benefit would ha ve to be determined on the par ticular terms and conditions of the
write-off / rescheduling, about which the EC h as presented no evidence or argument. We do not
consider, therefore, that the EC has established th at the debt write-off/rescheduling was commercially
unreasonable under the circumstances at the time of the restructuring.
Debt-for-equity swap
7.488 The EC submits that the debt-for-equity sw ap constitutes a subsidy because it was not
conducted on the basis of market principles. In pa rticular, the EC submits that DSME's creditors
overpaid for the equity in the debt-for-equity swap by [BCI: Omitted from public version] million,
based on a comparison of the share value paid at time of the swap and when it was first publicly
traded several months later. The EC asserts that the share price as valued by the stock market, which
is the best approximation of a free and undistorte d market, is the only available benchmark, even
though it acknowledges that it is an imperfect (and conservative) benchmark. The EC also asserts that
two months after the spin-off, an Australian inv estor offered to purchase Daewoo-SME for what it
deemed to be the market price, based on the actual value of shares on the stock exchange at the time,
which was lower than the price agreed in the context of the debt-for-equity swap.

7.489 Korea submits that the debt-for-equity swap could not have resulted in benefit because
creditors merely exchanged their debt for equity , and therefore could not have overpaid for their
equity. Korea asserts that the debt-for-equity swap was conducted on the basis of Anjin's market
assessment of the value of DSME's equity. Korea rejects the EC's ex post comparison of the terms of
the debt-for-equity swap with the price at which DS ME shares were subsequently publicly traded.
Korea asserts that DSME's share price exceeded the terms of the debt-for-equity swap soon after
DSME's shares were publicly traded, and that the Au stralian investor referred to by the EC offered a
price higher than that paid by DSME's creditors in the context of the debt-for-equity swap.
7.490 In principle, we accept the EC's argument that a benefit could be conferred through a debt-
for-equity swap if creditors exchange too much debt for equity. Although Korea argues that creditors
could not have overpaid since there was no more that they could have demanded, we consider that
they could have overpaid by exchanging too much debt for a given amount of equity. This could
occur if the equity were over-valued, which is precisely what the EC alleges in the present case.
7.491 Regarding the substance of the EC's claim, we consider that the terms of the debt-for-equity
swap should not be analysed ex post, on the basis of the price at which DSME's shares were publicly
traded, or the price offered by potential buyers of DSME. Instead, the terms of the debt-for-equity
swap should be assessed in light of the facts before creditors at the time they decided upon them. This
is because facts may change over time, to the extent that a market's assessment of the value of DSME
shares on one day will not necessarily be the same as its assessment of the value of those shares on
another day. Indeed, even the EC would appear to agree with such an approach, since it stated at the
first substantive meeting with the parties that:
Moreover, Korea cannot invoke in its favor the fact that the share value of the
restructured yards increased over time. As also pointed out by the United States,
there is no room for an ex post analysis. The only relevant question is whether a
private creditor/investor would have agreed to the restructuring packages on the basis
the information available to him at the time of the restructuring . 263 (italics in
original)
7.492 We note that the EC has not presented any argum ents against the terms of the debt-for-equity
swap based on the information available to DSME's creditors at the time that they decided to
participate in it. Although the EC has argued that market operators would have liquidated DHI rather
than participate in the debt-for-equity swap, this argument is based on the EC's foreign creditor
market benchmark that we have already rejected. In the absence of relevant argumentation by the EC,
we reject the EC's claim against the DSME debt-for-equity restructuring.
Conclusion
7.493 We have found that the various instruments involved in the restructuring of DHI were
financial contributions in the sense of Article 1.1(a)(1)(i) of the SCM Agreement. We also have found
that certain creditors of DHI at the time of its in solvency and restructuring were public bodies, but
that the EC has not established that the private cred itors were entrusted or directed by the government
to make financial contributions to DHI via their participation in the restructuring. In terms of whether
the financial contributions by public bodies confe rred a benefit, we have based our analysis on
whether the EC has demonstrated th at the decision to restructure DHI rather than liquidate it, and/or
the terms of DHI's restructuring, were commercially unreasonable. In this regard we note that when a
company is insolvent, a creditor operating on a co mmercially reasonable basis will be seeking to
minimize its losses / maximize its recovery.

 263 EC’s Oral Statement, para. 85, page 21.

7.494 Concerning the arguments advanced by the EC relevant to the commercial reasonableness of
the decision to restructure rather than liquidate DHI, we have found that while the absence of foreign
creditor participation in the restructuring is releva nt, it is not determinative, given the mixed evidence
as to the reasons for it, and its significance. We have further found that the EC, while raising a
number of relevant points concerning the credibility and validity of the Anjin report's analysis and
conclusions, has not demonstrated that any of them individually or all of them collectively represents
manifest error to the point that no reasonable co mmercial investor would have relied upon the report
in reaching the decision to restructure DHI. Finally, we have found that the EC has not demonstrated
that the terms of the restructuring, in particular, the write-off and restructuring of debt, and the debt-
for-equity swaps, were commercially unreasonable.
7.495 For the foregoing reasons we find that the EC ha s not demonstrated the existence of a benefit
in respect of the restructuring of DHI, and theref ore has not demonstrated that the restructuring
involved subsidization. Accordingly, we reject this claim of the EC.
(iii) The Halla reorganization
The Rothschild determination – the decision to restructure

7.496 In response to the EC's argument that Halla’s creditors failed to act pursuant to market
considerations, based on the non-participation of fo reign creditors in Halla's restructuring, Korea
submits that the reorganization was market-ori ented as it was based on a report from Rothschild, a
consulting firm retained by Halla, that the goi ng-concern value of Halla exceeded its liquidation
value. Korea also argues that , in any event, any benefit resulting from the restructuring was
extinguished when HHI acquired Samho at arm’s length for fair market value.
7.497 We recall that our approach to determining whethe r the restructurings conferred benefits is to
ask whether the EC has demonstrated that the d ecisions to restructure, and the terms of the
restructurings, were commercially unreasonable. On the first point, Korea relies on Rothschild’s
determination that the going-concern value of HHI exceeded its liquidation value, and we note that
the EC has not challenge d this determination. 264 Accordingly, we do not consider that the EC has
demonstrated that this determination was commercially unreasonable.
Terms of the restructuring
7.498 As for the second point, although the EC purports to challenge the terms of the Halla
restructuring, it relies exclusively on the non-partic ipation of foreign outside investors in support of
this argument, and makes no detailed arguments rega rding the terms of the debt forgiveness, debt-for-
equity swap, interest forgiveness and conversion of short-term debt. For example, there is no
suggestion by the EC that the value of equity provi ded in the debt/equity swap was excessive, as the
EC claims in respect of the Daewoo workout. In the absence of such detailed arguments, we do not
consider that a simple reference to the non-participation of foreign investors is sufficient to establish
that the terms of the restructuring were commerc ially unreasonable, especially given our finding
above that the evidence is mixed as to the reasons for and significance of this non-participation.
7.499 We note Korea’s defence that any “benefit” resulting from the reorganization of Halla was
extinguished when HHI acquired Samho’s shares at arm’s length for fair market value. In response,
265

264 The EC complains in reply to Question 150 from the Panel that Korea has not provided a full going
concern / liquidation value analysis in respect of all members of the Halla group. However, since Halla-HI was
the only part of that group to be restructured (the others were liquidated), we consider that only the going
concern / liquidation value analysis conducted in respect of Halla-HI is relevant to the present proceedings.
265 Paragraph 54 of the EC’s second oral statement makes it clear that the EC’s argument was made in
response to Korea’s alternative “extinction” argument: “the fact that Hyundai-HI’s purchase of Samho took
place at less than fair market value means that it did not extinguish the be nefits from the subsides”. This

the EC asserts that HHI’s acquisition of Samho was not at arm’s length for fair market value because
HHI underpaid for the Samho shares. In light of our finding in the preceding paragraph, that the EC
has not demonstrated that there was a benefit, th ere is no need for us to consider the parties’
arguments regarding Korea’s defence.
7.500 We have found that the various instruments involved in the restructuring of Halla were
financial contributions in the sense of Article 1.1(a)(1)(i) of the SCM Agreement. We also have found
that certain creditors of Halla at the time of its restructuring were public bodies, but that the EC has
not established that the private creditors were entrusted or directed by the government to make
financial contributions to Halla via their participation in the restruct uring. In terms of whether the
financial contributions by public bodies conferred a benefit, we have found that the EC has not
demonstrated that the decision to restructure Halla ra ther than liquidate it, and/or the terms of Halla's
restructuring, were commercially unreasonable.
7.501 For the foregoing reasons we find that the EC ha s not demonstrated the existence of a benefit
in respect of the restructuring of Halla, and ther efore has not demonstrated that the restructuring
involved subsidization. Accordingly, we reject this claim of the EC.
(iv) The Daedong reorganization
7.502 In response to the EC’s claim that the Daedong reorganization plan
266 was not market-based
because creditors approved it despite Daedong not be ing creditworthy, Korea asserts that creditors
participated on the basis of a determination th at the going concern value of Daedong exceeded its
liquidation value.
7.503 We recall our approach to the restructurings is to ask whether the EC has demonstrated that
they were commercially unreasonable. Here, as a fi rst issue, we note that the EC has not argued that
the determination that the going concern value of Daedong exceeded its liquidation was not proper.
We therefore consider that the EC has not estab lished that this determination was commercially
unreasonable.
7.504 Turning to the terms of the restructuring, alt hough the EC purports to challenge the terms of
the Daedong debt restructuring and interest exemption, it relies exclusively on the non-participation of
foreign investors, as it also did in the case of the Halla restructuring. It does not make any detailed
arguments regarding the terms of the debt restructur ing or interest exemption. For the same reasons

statement also makes it clear that the EC was concerned with “the subsidies” resulting from earlier transactions,
rather than the terms of HHI’s acquisition of Samho per se. Furthermore, the EC’s request for establishment
only refers to “corporate restructuring subsidies in the form of debt forgiveness, debt and interest relief and
debt-to-equity swaps”. It does not refer to subsidies resulting from straightforward share acquisitions.
266 We note that the reorganization plan adopted by creditors envisaged three elements: (i) debt
restructuring / exemption from interest; (ii) a capital in fusion; and (iii) the issuance of corporate bonds. While
the terms of the debt restructuring / interest exemption were determined by creditors when they adopted the
reorganization plan, the creditors did not determine the terms of the capital infusion and issuance of corporate
bonds. These were finalized after the reorganization plan was adopted, on the basis of advice from KPMG, and
in negotiation with the providers of the new capital and th e purchaser of the bonds, i. e., STX. The EC’s claim
against the Daedong reorganization plan, therefore, do es not include the terms on which STX acquired the
relevant shares and bonds. It is confined to the terms of the debt restructuring / interest exemption, and the
decision to seek a capital infusion and issue corporate bonds. We consider that the terms of the share and bond
acquisition are only relevant to these proceedings to the extent that Korea relies on them as a defence to argue
that the share and bond transactions extinguished any benefit conferred by the debt restructuring/ interest
exemption. Accordingly, we shall only examine the terms of the share and bond acquisition to the extent that
we uphold the EC’s claim against the debt restructuring/ interest exemption.

as enunciated above in respect of Halla, we reject the cl aim of the EC that the restructuring of
Daedong involved subsidization.
2. Daewoo tax concessions
(a) Arguments of the parties
7.505 The EC claims that the Daewoo workout prov ided for subsidies in the form of tax
concessions. The EC initially claimed that the ta x concessions were provided pursuant to various
provisions of the Special Tax Treatment Control Law ("STTCL") and Corporate Tax Act ("CTA"). In
its rebuttal submission, however, the EC submits th at its "core claim" concerned a KRW 236 billion
tax concession provided under Article 45-2 of th e STTCL and Article 46 of the CTA. The EC
submits that Article 45-2 STTCL extended tax in centives provided under Article 46 CTA to spin-offs
carried out under a workout program approved on or before 31 December 2000. The EC submits that
the Article 45-2 exemption constitutes a financial contribution because "government revenue that is
otherwise due is foregone or not collected" in the sense of Article 1.1(a)(1)(ii). The EC argues that
the Appellate Body interpreted the phrase “gove rnment revenue that is otherwise due” in US – FSC ,
where it held that the term “otherwise” refers to a “normative benchmark” established by the tax rules
applied by the Member in question.
267 The EC asserts that Daewoo-HI/Daewoo-SME would
normally have been required to pay additional ta xes (absent the STTCL), and that this is the
normative benchmark against which the foregoing of revenue should be assessed. The EC argues that
the fact that the tax exemption was not "normal" is shown by the fact that Article 45-2 did not apply
to restructuring before 21 October 2000 or after 31 December 2000.
7.506 The EC also submits that the Anjin report did not analyse the tax consequences of the
restructuring plan. According to the EC, this fact either adds to the flaws of the Anjin Report already
identified by the European Communities and furthe r reduces DHI's going concern value or it shows
that the entire restructuring was precooked from the beginning with Anjin knowing about the tax
exemption well before it was adopted.
7.507 Korea denies that the workout resulted in an y subsidy under Article 45-2 of the STTCL.
According to Korea, Article 45-2 STTCL states th at if a domestic corporation divides itself in
accordance with a workout plan, then the provisions of Article 46(1) CTA apply. Article 46(1) in turn
provides that, if a spun-off company carries out a va luation of the assets it acquires from the original
corporation, an amount equivalent to the valuati on gains may be treated as losses for the purpose of
calculating taxable income for the fiscal year in which the spin-off takes place. Korea emphasises that
Article 46 CTA mandates specific tax treatment with respect to “gain” or “profit” realized to the spun-
off company as a result of the “valuation” of ass ets conducted in the course of spin-off. Korea
submits that, in the case of the DHI spin-off, ther e was no valuation gain or profit because the DHI
assets were simply allocated at “book value” to th e two spun-off companies and what remained of
DHI. Korea asserts that, because the assets were simply moved from one entity to another, there was
no taxable event and no forgoing of any government re venue that was otherwise due. Korea therefore
submits that Article 45-2 did not confer a benefit.
7.508 Korea asserts that while DHI may have enjoyed a tax exemption under Article 99 of the CTA,
the EC has not presented a claim under this provision. Korea also notes that any tax exemption under
Article 99 of the CTA did not need to be taken into account in the Anjin report since it would not have
affected DHI's going-concern value.

267 Appellate Body Report, US – FSC, para. 90.

(b) Evaluation by the Panel
7.509 We note that the "focus" 268 of the EC's tax exemption claim concerns benefit allegedly
accruing to the spun-off companies, DSME and DHIM, under Article 45-2 STTCL and Article 46
CTA. The EC states that Article 45-2 STTCL ex tended the tax incentives provided under Article 46
CTA to the spin-offs carried out under a workout. The EC states that if a newly spun-off company
acquires the assets of an old company, Article 46 provi des that an amount equivalent to the gain on
the transfer of these assets may be treated as an e xpense in the accounts of the new company, thereby
lowering the new company’s taxable income. The parties therefore agree that Article 45-2 STTCL
and Article 46 CTA provide for tax exemptions for spun-off entities in the event that they "gain" on
the transfer of assets from the original company.
7.510 In the context of the Daewoo restructuring, the Spin-Off Balance Sheet at Appendix 10 of the
Anjin report indicates the same total value of assets be fore and after the spin-off. This demonstrates
that the assets were allocated between DHI and the two spun-off companies at book value. Since the
transfer of assets took place at book value, the transfer did not result in any "gain" for DSME or
DHIM. There was, therefore, no basis for any tax exemption under Article 45-2 STTCL and
Article 46 CTA. The EC relies on a press article
269 to argue that a tax exemption was provided under
these provisions. Even were that press artic le to have been sufficient to establish a prima facie case
that a tax exemption was provided under these provisions, the above facts would rebut that prima
facie case. In the absence of any more compelling ev idence from the EC, we therefore reject the EC's
claim under Article 45-2 STTCL and Article 46 CTA.270
7.511 In its reply to Question 116 from the Panel, Ko rea presented information suggesting that DHI
may have benefited from a tax exem ption under Article 90 of the CTA. However, we note that there
is no reference to this provision in the EC 's Request for Establishment of a panel. 271 Our terms of
reference therefore do not include any claims under Article 90 of the CTA.
3. Specificity
7.512 Pursuant to Article 1.2 of the SCM Agreement, a subsidy is only subject to the disciplines of
the SCM Agreement if it is "specific" in accordance with Article 2 thereof. Thus, we may only uphold
the EC's actionable subsidy claims if we find that the relevant transactions are subsidies, and that such
subsidies are specific.

268 See the EC's reply to Question 141 from the Panel.
269 See Exhibit EC – 136.
270 Although the EC's first written submission also refe rs to Article 38 of the STTCL, the EC's legal
analysis does not set out any basis for a claim under that provision. To the extent that the EC makes any claim
under Article 38, we therefore find that it has not established any prima facie case in support of that claim. We
further note the EC's argument that taxation issues were not properly considered by Anjin in establishing DHI's
going concern value. First, we note that the EC has not properly established that there were any tax issues to be
considered. In particular, the EC has not demonstrat ed any tax concessions under Article 45-2 STTCL and
Article 46 CTA. With regard to the possible tax concession under Article 90 CTA, we note Korea's explanation
that any such tax concession would benefit DHI, rather than DSME and/or DHIM. Since DHI's going concern
value was calculated on the basis of estimated cash flows from DSME and DHIM, and these cash flows have
not been shown to have been affected by any tax con cession under Article 45-2 STTCL or Article 46 CTL, and
would not benefit from any tax concession (to DHI) under Article 90 CTA, we do not consider that DHI's going
concern value would be affected by any tax concession provided to DHI under the latter provision.
271 The relevant part of the request for establishment provides that "[t]he Special Tax Treatment Control
Law, more specifically, the special taxation on in-kind contribution (Article 38) and the special taxation on spin-
off (Article 45-2) scheme, establishes two tax programmes limited to companies under corporate restructuring
and provides tax concessions to Daewoo, the combined benefit of which is estimated at won 78 billion."
(WT/DS/273/2).

7.513 We only consider it necessary to address the issue of specificity in respect of those measures
that we have found to constitute subsidies. Since we have rejected the EC's claims of subsidization in
respect of the three corporate restructurings, and th e alleged DHI tax concession, there is no need for
us to consider whether they are specific in the meaning of Article 2 of the SCM Agreement.
7.514 We recall that we have already found that the individual APRG and PSL transactions
identified at para. 7.331 supra are specific subsidies.
272 We made this finding in the context of the
EC's prohibited export subsidy claims, on the basis of Article 2.3 of the SCM Agreement . Korea
argues that such subsidies are not specific for the purpose of the EC's actionable subsidy claims, since
the EC failed to argue any specificity other than Article 2.3 of the SCM Agreement. Korea asserts that
such subsidies are therefore not actionable. In our view, however, the effect of Article 2.3 is not
restricted to prohibited export subsidy claims. Rather , we consider that Article 2.3 applies in respect
of the entirety of the SCM Agreement. Thus, a subsidy that is specific under Article 2.3 (as a result of
export contingency) is specific for the purpose of both Part II (prohibited ex port subsidy) and Part III
(actionable subsidy) claims.
4. Conclusion
7.515 For the above reasons, we reject the EC's claims that the restructuring of Daewoo, Halla and
Daedong involved subsidization. We also reject the EC's claim that Daewoo received subsidies
through tax concessions under Artic le 45-2 STTCL and Article 46 CTA. We recall that we have
upheld the EC's prohibited subsidy claims in respect of certain individual APRGs and PSLs.
D. SERIOUS PREJUDICE
1. Annex V information
7.516 As discussed above, the EC invoked the procedures in Annex V to the SCM Agreement in this
dispute. During the course of the proceedings, bot h parties submitted extensive material in response
to questions posed to one another. We have relied on the parties to br ing to our attention such of that
material as each considers relevant to its case. In other words, we have not ourselves conducted our
own review of this material since, were we to have done so, we would have run the very considerable
risk of making one or the other party's case for it, which of course we must not do.
2. Summary of the claim
7.517 In its Request for Establishment of a Panel, 273 the European Communities refers to claims of
serious prejudice based on price undercutting, price suppression, price depression, and lost sales.
During the course of the dispute, the EC has clarified that it is pursuing its serious prejudice claim
only on the basis of price suppression/price depression.
274 Thus, while the EC provides certain
anecdotal evidence concerning instan ces in which it alleges that EC shipyards lost sales to Korean
yards, it has explicitly confirmed that it has a dduced this evidence to illustrate the suppressed and
depressed price levels alleged to have been caused by subsidized Korean competition.275
7.518 The EC also has clarified that the focus of its price suppression/depression claim is three
particular types of commercial vessels: container ships, product/chemical tankers (that is, tankers that
can be used for either petroleum products or chemic als, rather than tankers dedicated exclusively to
one or the other), and liquefied natural gas carriers, or "LNGs". 276 The EC has presented certain

272 See paras 7.192 and 7.308 supra.
273 WT/DS/273/2.
274 First Oral Statement of the EC, para. 97.
276 First Written Submission of the EC, para. 417; Fi rst Oral Statement of the European Communities,

information and argumentation in relation to the world commercial shipbuilding market as a whole,
but states that in its view the Panel would need to evaluate the existence and causation of price
suppression/depression for each of the three vessel typ es separately, rather than trying to assess them
collectively.277
7.519 In this respect, in response to an oral question at the second meeting, the EC indicated that it
was requesting the Panel to make three separate ser ious prejudice findings, one for each of the three
vessel types. In the written version of its answer to this question, however, the EC indicated the
reverse, stating that serious prejudice is to the inte rests of a WTO Member and that therefore there is
no need for three separate serious prejudice findings. 278 The EC explained that; just as serious
prejudice can be found based on various combinations of Article 6(a)-(d), it also can be based "on
multiple findings of price depression and/or suppression in the global market (albeit in three different
sub-markets of commercial vessels)". 279 According to the EC, the subsidies at issue were granted to
shipyards that produce a variety of commercial ve ssels, such that the same subsidy caused price
suppression and/or price depression in the three produc t markets at issue. Nevertheless, the EC
argues, the finding of serious prejudice should be based on price suppression and/or price depression
in the three "product markets", each of which is a "global geographic market".280
7.520 In respect of price suppression/price depression, the EC argues, first, that the alleged
subsidies have enabled the Korean shipyards to reduce their prices or keep their prices stable, in spite
of strong increases in demand and production cost s which otherwise would have led to price
increases.281 Second, the EC argues, the market for ea ch of the three types of ships is global, 282 and
Korea is the global price leader. 283 Thus, the price pressure caused by the subsidies has set the world
price levels for the three types of ships covered by the EC claim, leading EC shipyards either to
become discouraged from bidding (given the high cost of preparing and submitting bids); or to lose
bids that they do make, due to their inability to meet the Korean/world price level; or to earn less
revenue and profits than they should on the bids that they win, due to the suppressed/depressed global
price levels.
3. Scope of the claim
7.521 We note that the adverse effects claims (under part III of the SCM Agreement) that are before
us are considerably narrower than was indicated in the EC's Request for Establishment of the Panel.
In particular, the serious prejudice claim was narro wed to exclude price undercutting and lost sales,
and thus is based exclusively on price suppression/price depression. In addition, the EC did not
pursue its claim of injury to the EC domestic sh ipbuilding industry which was referred to in the
Request for Establishment. Thus, under Part III of the SCM Agreement, the only claim before us is
that of serious prejudice based on price suppression/price depression.
4. Legal framework
7.522 Before considering the details of the claims and arguments before us in this dispute, we first
consider the legal framework that must be app lied in determining whether a subsidy has caused
serious prejudice to the interests of a Member.

277 First Written Submission of the EC, para. 455.
278 Responses to Questions from the Panel by the EC, para. 120.
279 Responses to Questions from the Panel by the EC, para. 121.
280 Id.
281 First Written Submission of the EC, paras. 446-455, for all types of vessels; Ibid., paras. 430-434
and 458, for LNGs; Ibid., paras. 460-463, for Container Ships; Ibid., paras. 469-473, for Product and Chemical
Tankers.
282 First Written Submission of the EC, para. 424.
283 First Written Submission of the EC, para. 433 and 447, for LNGs; Ibid., para. 460, for Container
Ships; Ibid., para. 470, for Product and Chemical Tankers.

(a) Article 5(c) – serious prejudice
7.523 Under the SCM Agreement, the legal basis of all adverse effects claims pursuant to Part III of
the Agreement is Article 5, which identifies three possible ki nds of adverse effects: (a) injury to the
domestic industry of another Member; (b) nullification or impairment of benefits of another Member,
in particular of benefits from GATT 1994 Article II bindings; and (c) serious prejudice to the interests
of another Member. Given that the EC's adverse effects claim exclusively refers to serious prejudice
(based on price suppression/price depression), the releva nt part of Article 5 is Article 5(c), which
reads:
"No Member should cause, through the use of any subsidy referred to in paragraphs 1
and 2 of Article 1, adverse effects to the interests of other Members, i.e.:

(c) serious prejudice to the interests of another Member.
13
13
 The term "serious prejudice to the interests of another Member" is used in this
Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT
1994, and includes threat of serious prejudice."
7.524 It is clear from the text of Article 5(c) that, in the first instance, a specific subsidy (i.e., a
subsidy referred to in paragraphs 1 and 2 of SCM Article 1) must be found to exist. Our findings in
respect of the EC's claims of subsidization are contained in section VII., supra.
(b) Article 6.3(c)
7.525 Article 6 provides certain specific guidance concerning the establishment of "serious
prejudice" in the sense of Article 5(c). The particular provision cited by the EC in its claim is
Article 6.3, and more specifically Article 6.3(c), which reads as follows:
"6.3 Serious prejudice in the sense of para graph (c) of Article 5 may arise in any
case where one or several of the following apply:

 (c) the effect of the subsidy is a significant price undercutting by the
subsidized product as compared with the price of a like product of another
Member in the same market or significant price suppression, price
depression, or lost sales in the same market."
7.526 Significant price suppression or price depression is the particular basis of the serious
prejudice to its interests alleged by the EC as a r esult of subsidies to Korean shipbuilders. While
Article 6.3(c) also is the pertinent provision fo r serious prejudice based on price undercutting and lost
sales, those parts of that provision are not before us, given the narrowing of the EC's claim.
7.527 The text of SCM Article 6.3(c) in respect of price suppression/price depression, taken as a
whole, identifies a number of discrete elements, in respect of which the parties have argued
extensively. The elements that have been addressed in the parties' arguments are:
• Price suppression or price depression;

• Significance (the price suppression or price depression must be "significant");
• Causation – "the effect of the subsidy" is, inter alia, significant price suppression/depression;
• Like product – The major threshold question joined by the parties in this dispute in respect of
this element is whether the concept of like product applies in price suppression/depression cases;
• Same market – The price suppression/price depres sion caused by the subsidy must be "in the
same market"; and
• Serious prejudice – Is significant price suppression/depression caused by a subsidy in itself
serious prejudice? If not, what in addition must be established?
7.528 The parties have raised two main sets of issues in respect of the legal analysis or framework
to be applied in respect of price suppression/price depression-based serious prejudice claims: First,
how and on what basis is the existence of signi ficant price suppression/price depression as the effect
of a subsidy established? Second, if price suppr ession/price depression resulting from a subsidy is
established, does this in itself constitute "serious pr ejudice" in the sense of Article 5(c), and if not,
what else must be established?
7.529 We start with the text of the relevant provi sions, to identify any gu idance that they may
contain in respect of both of these two main set s of issues. Concerning the establishment of
significant price suppression or price depression as the result of a subsidy, Article 5(c) contains only
the term "serious prejudice to the interests of another Member", while footnote 13 thereto states that
this term is used in the same sense as in Article XVI:1 of GATT 1994 and includes threat of serious
prejudice. Neither the provision nor its footnote , however, defines or elaborates on this term, in
general or as it pertains specifically to price suppression/price depression.
7.530 Turning next to Article 6.3, we note that this Article itself refers simply to "significant price
suppression [or] price depression", without elaboration, and that it is the only provision in Article 6
dealing specifically with price suppression/price depression. The other parts of Article 6 either
address certain aspects of serious prejudice in general, or other specific bases for serious prejudice.
For example, Article 6.5 provides certain specific guidance in respect of the establishment of price
undercutting in the sense of Article 6.3(c) (which of course is not before us).
7.531 As to the second main set of issues, Korea points to the word "may" in the chapeau of
Article 6.3, i.e., that "[s]erious prejudice [...] may arise" where one or several of the situations listed in
subparagraphs (a)-(d) applies. On the basis of the word "may", Korea argues that the existence of one
or several of the listed situations is a necessary but not a sufficient condition for a finding of serious
prejudice, in that serious prejudice is something that must be caused by one of the situations referred
to in (a)-(d). The EC disagrees, stating that the situations in (a)-(d) (i.e., including significant price
suppression/price depression resulting from a subsidy) themselves constitute serious prejudice.
7.532 Both parties have submitted extensive legal ar gumentation concerning the analysis that must
be conducted to determine if subsidies have caused price suppr ession and/or price depression, and
concerning the meaning of the term "serious prej udice". They then apply their respective legal
interpretations to the factual situation. We take a similar approach, that is, we first consider and reach
a conclusion in respect of the analytical framework that we must apply, and we then apply that
framework to the facts and arguments as presented to us by the parties.
5. Meaning of price suppression or price depression
7.533
We begin our consideration of the legal, analytical framework with the terms "price
suppression" and "price depression" themselves. We note that while the Agreement contains no

definitions or other interpretative guidance, these concepts seem more or less understandable on their
own, and the parties do not seem to disagree over their meaning. In particular, both parties use the
term "price suppression" to refer to the situation where prices have not increased when, or have
increased less than, they otherwise would have. Both use the term "price depression" to refer to the
situation where prices decline when they should have remained stable or increased.
284 In particular,
the EC states that the dictionary definition of "dep ression" is "the action of pressing down; the fact or
condition of being pressed down", such that pri ce depression is where prices are pushed downward;
and that the dictionary definition of "suppress" is to "prevent or inhibit (an action or phenomenon)",
meaning that for price suppression there must be a s howing that price increases have been inhibited.
Korea agrees, and in fact quotes the EC on the meaning of the term "price suppression".285
7.534 Based on this reading, as a threshold issue the existence of lower than expected price
increases, or of price reductions, would have to be established as a matter of fact, as one necessary
condition for proving a claim of serious prejudice based on price suppression or price depression
caused by subsidies. We emphasize here, howev er, that trends in prices would not themselves
constitute price suppression or price depression : as discussed infra, we view these terms as implicitly
including a certain built-in concept of causation.
7.535 A related issue is whose prices are to be examined to determine if there is price suppression or
price depression. For Korea, serious prejudice to a Member based on price suppression or price
depression must have to do primarily with that Memb er's prices for the product in question. The EC
states that Korean prices have been suppressed or depressed by subsidies, that this in turn has
suppressed or depressed world ship prices and EC shipyards' prices. For the EC, the suppression or
price depression of world prices is "the critical element".
286 We understand this to mean that for the
EC suppression or price depression of the world price for a product in respect of which the EC
competes in itself constitutes or causes serious prejudi ce to the interests of the EC. Here the parties
seem to agree that the subsidizer's prices inter alia also are relevant.
6. Existence of price suppression/depression
7.536 It may be relatively simple to establish that, as a threshold factual matter, the price of a
particular product has decreased. Similarly, it may be relatively simple to establish that the price of a
product has been flat or has increased only slightly. Conceptually, however, it is likely to be more
difficult to show that prices should not have decrea sed, or should have increased by more than they
did.
7.537 In particular, the existence of a flat or dec lining price trend, on its own, would not be a
sufficient basis on which to conclude that pri ces were "suppressed" or "depressed". For such a
conclusion to be reached, the causes of these observed trends would need to be examined. In other
words, price depression is not simply a decline in prices but a situation where prices have been
"pushed down" by something. Price suppression is where prices have been restrained by something.
In other words, for a finding of "price suppr ession" or "price depression" in the sense of
SCM Article 6.3(c), there must not only be a flattene d or downward price trend as a prerequisite, but
in addition this trend must be the result of an ex ogenous factor, namely the subsidy or subsidies in
question. Thus, the analysis that seems to be called for by the Agreement (by virtue of the concepts of

284 These concepts also are well-known in the area of trade remedies. In the context of anti-dumping
and countervailing measures, for example, price suppression is described as the situation where "price increases,
which otherwise would have occurred" are prevented "to a significant degree".
285 At paragraph 522 of its First Submission, Kore a, citing the EC submi ssion states: "[...] price
suppression can be defined as the prevention of price increases that otherwise would have occurred".
286 EC response to question 35 from the Panel.

price suppression and price depression themselves) , concerns what the pr ice movements for the
relevant ships would have been in the absence of (i.e., "but for") the subsidies at issue.287
7. Does the concept of "like product" appl y in respect of price suppression/price
depression?
(a) Arguments of the parties
7.538 The parties disagree as to whether the concept of “like product” applies in the context of price
suppression/depression. For the EC, it is clear from the text of Article 6.3(c) that this concept does
not apply in this context, and the EC therefore declin es to define any "like products" in the sense that
that term is used in the SCM Agreement. The EC nevertheless indicates that its adverse effects claims
are in respect of the th ree identified kinds of ships (LNGs, product/chemical tankers, and container
ships), which categories it says are "analogous" to like products. Korea takes the opposite view,
arguing that the concept of like product does apply and that the EC, by not addressing the issue or
defining "like products", has failed to meet its burden to establish a prima facie case of serious
prejudice. Furthermore, for Korea, even if the EC had argued that the product categories it identifies
were like products, these categories would be too broad to fit the Agreement's definition of like
product.
7.539 The EC relies on the fact that in Article 6. 3(c), the term "like product" appears only in
connection with price undercutting, and not in c onnection with price suppression/price depression or
lost sales. For the EC, this textual difference must have meaning, and in particular can be explained
on the basis of economic logic: that products that are not identical, but broadly similar and in
competition with one another, can and do influence one another's’ prices.
288 The EC argues that by
not referring to like product in the context of price suppression/depression, the negotiators created
flexibility as to how to determine the “same market” in which price effects occur (which term for the
EC has both a product and a geographic connota tion). That is, according to the EC, SCM
Article 6.3(c) allows the tailoring, on a case-by-case basis, of criteria appropriate to capture price
developments in the relevant product and geographic market affected by subsidization. For the EC, it
is precisely because the like product definition in the SCM Agreement is very narrow that the
negotiators chose to omit it as a requirement for price suppression/depression analysis.
7.540 Korea disagrees, arguing that like product is a strict requirement for price suppression and
price depression (as it explicitly is for price undercu tting), and criticizing the EC for failing to address
this required element. In particular, Korea argues that by declining to define a like product or to
present evidence in respect thereof, the EC has omitted one of the key necessary elements of the price
suppression/price depression analysis, and thus has failed to establish a prima facie case of serious
prejudice. Korea argues that the Panel should dismiss the EC's serious prejudice claim on this basis.
7.541 Concerning the text at issue, Korea argues th at the reason the words "like product" are not
repeated in the second part of Article 6.3(c) (the part dealing with price suppression/price depression
and lost sales), while the words "same market" are re peated there, is that repetition of the former
would be "superfluous" while repetition of the latter is not. That is, the geographic markets to which
the subparagraphs of Article 6.3 refer vary from one subparagraph to another, while the term "like
product" retains the same meaning throughout Article 6. 3. Korea then argues that if like product does

287 We note that the panel in Indonesia – Autos applied an analogous "but for" analysis in its
consideration of the claims of displacement and impedance of imports. We discuss this infra in connection with
causation.
288 Indeed, the EC argues as a theoretical point, althou gh not as the basis for its claim, that the prices
for all types of ships are sufficiently interlinked, due in particular to the broad capabilities of most shipyards to
produce a wide range of different kinds of ships, that a price change for any one ship type will have rippling
price effects on all other ship types. Responses by the EC to Question 29(c) from the Panel.

not apply in respect of price suppression/price depress ion, this would mean that a "new and undefined
standard" has been introduced by negotiators for price suppression/price depression, but with no
express words to that effect, a proposition that Korea does not find credible.
7.542 For Korea, the concept of like product is a cornerstone of the SCM Agreement and of the
WTO Agreement as a whole. To not apply like product w ould imply, for Korea, a series of separate
and distinct causation analyses under the different subpa ragraphs of Article 6.3, based not just on the
different alleged subsidies but also with respect to every causal element (i.e., like product for some
and "something else special" for price suppression and price depression ).
(b) Evaluation by the Panel
7.543 Korea's argument that "like product" is a re quired element of price suppression/depression
analysis seems to presuppose, in the first instance, the identification of a "subsidized product", which,
in Korea's view, the product subject to the dispute must be "like". In particular, the question raised by
Korea's argument is whether the adverse effects on the EC's interests in terms of price
suppression/price depression must relate to a product that is "like" an identified "subsidized product".
7.544 We note that the Agreement contains a detailed definition of "like product", in footnote 46 to
Article 15.1. We note further that this definition applies to the SCM Agreement in its entirety, as
indicated by the definition's introductory phrase ("[t]hroughout this Agreement"):
"Throughout this Agreement the term "like product" ("produit similaire") shall be
interpreted to mean a product which is identical, i.e., alike in all respects to the
product under consideration, or in the absence of such a product, another product
which, although not alike in all respects, has characteristics closely resembling those
of the product under consideration." (Emphasis added.)
Thus, if the concept of like product does apply in respect of price suppression/price depression, it
would have the meaning set forth in footnote 46.
289

7.545 We start our consideration with the relevant text of the SCM Agreement , which we note is
somewhat ambiguous as to the applicability of "lik e product" in the context of price suppression/price
depression. In particular, in SCM Article 6.3(c) which covers price undercutting, price suppression,
price depression, and lost sales, the term "like product" explicitly appears in conjunction only with
price undercutting. To recall, the provision in its entirety reads:

289 The panel in Indonesia – Autos , in interpreting the term "like product" in the serious prejudice
claims before it (which did not include price suppression/price depression), found the definition in footnote 46,
including the term "characteristics closely resembling", to be quite narrow, and to be based principally on
physical characteristics of the product. The panel then conducted a detailed analysis of the physical
characteristics of the particular car models in the mark et segment that it was considering as the possible "like
product" category. On the basis of this approach, the panel excluded as a "like product" a larger and more
powerful car in an adjacent market segment to that of the subsidized car. The panel in Indonesia – Autos
recognized that it could not feasibly limit the like product to strictly identical cars, but recognized as well that it
would not make sense, and would not conform to the definition in SCM footnote 46, to identify the like product
as "all passenger cars". Instead, the Panel considered the li ke product to be the market segment, as defined by a
widely-used and well-respected market analysis firm, in which the subsidized Indonesian national car was
classified. The market segments identified by the mark et analysis firm, although certainly encompassing non-
identical cars, nevertheless were quite narrowly-defined, in terms of size and other basic physical characteristics,
as well as other indicators such as price and customer perceptions which the Panel viewed as being based
primarily on physical characteristics. The physical similarity of the cars within the segment found to be relevant
by the panel, and the dissimilarity of these cars and cars in other segments, was considered and confirmed by the
panel through further analysis of a number of key physical characteristics.

"the effect of the subsidy is a significant price undercutting by the subsidized product
as compared with the price of a like product of another Member in the same market
or significant price suppression, price depression or lost sales in the same market".
7.546 Thus, Article 6.3(c) refers to "significant pr ice undercutting” by the subsidized product in
respect of a “ like product” of another Member in the same market. By contrast, the provision then
continues with the reference to price suppression/depression and lost sales, repeating the term "in the
same market", but making no mention of "like product ". Thus, the question is whether the lack of a
reference to “like product” in the specific cont ext of price suppression/depression means that like
product is not a required element of price suppression/price depression analysis. The answer to this
question would seem to have certain implications for the analysis that needs to be carried out.
7.547 In assessing the legal issue concerning the applicability of like product in respect of price
suppression/price depression, we note first Article 6.3( c)'s lack of an explicit reference to like product
in connection with price suppression/price depression. Thus, the text on its face does not explicitly
impose a like product requirement. Clearly the ques tion before us is whether this text nonetheless
contains an implied reference to like product, as argued by Korea, or whether the absence of an
explicit reference means that like product is not a required element of the analysis.
7.548 In respect of the text, we find significant that the term "the same market" is used twice in
Article 6.3(c), including in connection with price suppression/price depression, while the term "like
product" appears only once, not in connection price suppression/price depression. To us, the
repetition of "same market" strongly suggests that the text also would repeat "like product" had this
term been intended to apply in this connection.
7.549 Turning to the relevant context, the immediate context consists of the other subparagraphs of
Article 6.3, all of which explicitly specify and requi re a particular product scope. Article 6.3(a) and
6.3(b) refer to "like product", and Article 6.3(d) refers to "a particular ... primary product or
commodity". We view these references to product, variously defined, everywhere else in Article 6.3
as contextual support for the proposition that like produc t is not a legally required element in respect
of price suppression/price depression analysis. In ot her words, we infer from the text that where it
was intended that a product scope concept apply, this was made explicit. In this regard, we are not
persuaded by Korea's argument that it would have been redundant to repeat the reference to "like
product" in Article 6.3(c), while the existing repetitio n of "the same market" is not redundant. While
it is true, as Korea argues, that the "markets" referred to elsewhere in Article 6.3 vary from one
subparagraph to another ("the market of the subsid izing Member", "a third country market", "the
world market"), this is clearly not the case within Article 6.3(c), which refers twice to "the same
market". Whatever "the same market" means, it must mean the same thing in both places.
7.550 Korea points to SCM Article 15, which pertains to c ountervailing measures, as relevant
context in support of the applicability of "lik e product" in respect of price suppression/price
depression. While the relevant portion of Article 15.2 is phrased very similarly to that of
Article 6.3(c), we do not see this by itself as determ inative of this question. First, countervail and
serious prejudice concern situations that are consider ably different: material injury to a particular
domestic industry producing a particular "like produc t", on the one hand, and adverse effects in the
form of serious prejudice to a Member's "inter ests", on the other hand. Furthermore, unlike
Article 6.3(c), Article 15 makes
explicit that in the countervail context the price suppression or price
depression referred to must be in respect of the "like product".290

290 In particular, Article 15.1 requires an examination, inter alia , of “the effects of the subsidized
imports on prices in the domestic market for like products ”, while Article 15.2 elaborates, with respect to the
effect of the subsidized imports on prices (i.e., the analys is required by Article 15.1), that the authorities shall
consider whether the effect of the subsidized imports is to depress prices to a si gnificant degree or to prevent

7.551 We also find relevant the negotiating history of SCM Article 6.3(c). In the Uruguay Round,
the first draft version of this provision linked the concept of price undercutting to the concepts of price
suppression, depression and lost sales, as follows:
"there is a significant price undercutting by the subsidized products as compared with
the price of a like product of another signatory in the same market resulting in price
suppression, price depression or lost sales;"
291
In other words, in that early version of the text, a finding of price suppression or price depression
could only result from a significant price undercutting by subsidized products of the like product.
Had this language been retained, the causal linka ge between price undercutting in respect of a like
product and a consequent price suppression/price depression means that the price suppression/price
depression also would have had to have been in respect of the like product.
7.552 The above-quoted original language was not re tained in the final text, however, and the
significant change incorporated in that final text is that price suppression, price depression and lost
sales went from being downstream consequences of price undercutting to separate, independent bases
for serious prejudice. In this respect, we find part icularly significant that when these concepts were
separated, the term "the same market", which ha d appeared only once in the original version,
following price undercutting, was repeated so as to introduce it explicitly also in respect of price
suppression, price depression and lost sales in the final version. No such change was made in respect
of the term "like product", which in both the or iginal draft and the final version of the provision
appears only once, in the specific context of price undercutting.
7.553 On the basis of the foregoing considerations, we conclude that "like product" as defined in
footnote 46 to Article 15 of the SCM Agreement is not a legal requirement for claims of price
suppression/price depression pursuant to Article 6.3(c).
7.554 We now turn to the implications of this conclu sion for the kind of analysis that needs to be
conducted for price suppression/price depression cases. We recall here that Korea argues that if "like
product" were not a required element, the subsid y disciplines would be undermined. We do not find
this argument persuasive for the following reasons.
7.555 In particular, we first consider what the role of the "like product" concept, if applicable,
would be in a price suppression/price depression analys is. We note here that the "like product" as
referred to in the various subparagra phs of Article 6.3 is the product of a complaining Member that is
"like" the subsidized product. In other words, the concept of "like product" presupposes that a
"subsidized product" has been identified. Furthe rmore, where "like product" is referred to in
Article 6.3, it is in the context of a comparison to be made between the subsidized product on the one
hand and the like product on the other hand. Thus, unde r the first part of subparagraph 6.3(c), (price
undercutting), the question to be answered is whethe r the effect of the subsidy is a significant price
undercutting by the subsidized product as compared with the price of the like product of the
complaining Member. Similarly, under subparagraphs (a) and (b), the question to be answered is
whether the effect of the subsidy is to displace or impede the imports or exports of the complaining
Member's like product. Determining displacement or impedance in turn involves an analysis and
comparison of relative levels and trends in volume and market share of the subsidized product and the
complaining Member's like product.
292

price increases which otherwise would have occurred, to a significant degree. Linking these two provisions, the
analysis therefore seems to be an examination of whether “the subsidized imports” have significantly suppressed
or depressed the prices for “the domestic like product”.
291 MTN/GNG/NG10/W/38.
292 SCM Article 6.4 provides certain guidance as to how this comparative analysis is to be performed.

7.556 Thus, if the concept of "like product" applied in respect of price suppression/price depression
analysis, this would seem to imply that it would be necessary to identify and define, in the first
instance, a "subsidized product", as only then could the product that is "like" the subsidized product
be identified. In turn, in the context of pri ce suppression/price depression, the logical reason to
identify a product that is "like" the "subsidized pr oduct" would seem to be so that their respective
price levels and trends could be compared. That is, if the concept of like product applies, its principal
analytical purpose would seem to be to ensure that such a price-to-price comparison would be made in
all cases.
7.557 The main implication of our conclusion that the concept of "like product" does not apply in
respect of price suppression/price depression analysis thus would seem to be that such a structured
price-to-price comparison would not be required in terms of the SCM Agreement . In other words,
given that the relevant text is that "the effect of the subsidy is [...] significant price suppression [or]
price depression", the basic analytical questi on would be how to demonstrate such a causal
relationship between the subsidy or subsidies in question, on the one hand, and movements in the
prices of the product of concern to the complaining Me mber in the relevant market, on the other hand.
In our view, this means that a main focus of the an alysis would be levels and trends in the price for
the product in question, as a whole, in the relevant market (i.e., "the same market"), as a whole, and
the various reasons behind them. In terms of the pr esent dispute, this implies that we are not required
to base our assessment of the EC's claim of price suppression/price depression on a product-by-
product comparison of price levels and trends for identified subsidized Korean products and
corresponding like products of EC shipyards.
293
7.558 We must emphasize, however, that this do es not mean that product considerations are
irrelevant to our analysis. To the contrary, we view product as a necessary, and indeed inescapable,
part of an analysis of price suppression/price depression. Simply put, a price must always be for some
particular thing, which the complaining party must identify. Here we recall that the EC has alleged
that subsidies to Korean shipyards have had th e effect of suppressing and depressing the prices of
three specified categories of ships of interest to the EC, and requests us to conduct our analysis in
respect of each of these categories separately.
7.559 In terms of the breadth or narrowness of the description of the product whose prices allegedly
are suppressed or depressed, and the relationship of th e price levels and trends with the subsidy in
question, we note that of course in any WTO dispute it is always for the complaining party to
determine the basis and nature of its own comp laint. Thus, a complaining party is free to claim that a
given subsidy of another Member has caused pric e suppression or depression to the detriment of the
complainant's interests. Obviously, the prices in qu estion will have to be identified as prices for some
product or products in particular, of interest to the co mplainant, in a specified market. It will then be
the complainant's burden to demonstrate the causal relationship between the subsidy and the particular
price effects that it alleges (i.e., in respect of the particular product or produc ts, however defined, of
interest to the complainant).
294 That is, we view the product issue ultimately as pertaining to the
demonstration of causation, on the basis of such facts as may be relevant to the particular case.
7.560 In this regard, we would observe that the natu re of the demonstration that the complainant
will need to make to establish causation in any give n case, and the difficulty of doing so, will depend
on a number of factors and factual circumstances, including but not limited to the breadth of the
description of the product on which the complainant brings its case. Such factors might include

293 We recall here that Korea considers that the EC is prohibited from advancing any arguments to the
effect that Korea's prices are lower than the EC's for particular ships, as in Korea's view such arguments in fact
constitute a revival of the EC's abandoned price undercutting claim.
294 Given our view that product is an inherent element of price, we do not find it necessary to read the
term "the same market" in the context of price suppression/price depression as combining both a geographic and
a product element, as argued by the EC.

among others the nature of the subsidy, the way in which the subsidy operates, the extent to which the
subsidy is provided in respect of a particular product or products, conditions in the market, the
conceptual distance between the activities of the s ubsidy recipient and the products in respect of
which price suppression/price depression is alleged.
295 Whatever the factual situation in a given case,
the burden will be on the complainant to furnish sp ecific factual evidence affirmatively demonstrating
the causal link alleged, and the difficulty and ways of meeting this burden may be very different from
one case to another.296 In all cases, if the complainant fails to meet this evidentiary burden, its serious
prejudice claim will fail. We note that issues of product definition as they relate to causation are
before us in this case, and these issues are addressed in our analysis in section VII.D.12 and 13, infra.
8. Can "the same market" be the world market?
7.561 SCM Article 6.3(c) provides that price suppression/price depression must be in the "same
market". The parties have different views as to the scope of the geographic market in which price
suppression/price depression can be found, and in par ticular, whether the term "the same market" can
refer to the world market as a whole.
(a) Arguments of the parties
7.562 On the possible scope of the relevant geogra phic "market", the EC argues that nothing in
Article 6.3(c) would preclude defining the "world" market as the "same market" for purposes of price
suppression/price depression analysis. In this regard, the EC cites our statement, in our decision
declining to make a preliminary ruling on this issue, that "the same market" refers to "a market where
Korean and EC producers of commercial vessels compete and where the alleged adverse effects of the
subsidies on prices or sales will need to be substant iated". The EC argues in particular that unlike
Articles 6.3(a) and 6.3(b) which explicitly refer on ly to national markets, Article 6.3(c) leaves the
geographic scope of "the same market" undefined. The EC notes as well that there is precedent for a
finding based on a world market, namely in the GATT EC – Sugar Exports (Brazil) dispute, where the
panel found serious prejudice based on suppression/depression of the world market price level.
297
7.563 In its request for preliminary rulings, Korea cha llenged the idea that "the same market" could
be the world market and since then has reiterated th is objection. Korea argues that "the same market"
can only refer to a national market, not to the worl d market. Korea refers to Article 6.3(d), which
does refer to "world market", as contextual support fo r this argument, by negative inference (i.e., the
negotiators would have explicitly referred to the world market in Article 6.3(c), as they did in
Article 6.3(d), if they had intended that it could be used as the market of reference there). Korea
further argues, by way of context, that where the te rm "market" is used in Articles 6.3(a) and 6.3(b),
this is a national market, and there is no reason to interpret the same word, "m arket", in Article 6.3(c)
differently. According to Korea, the language "of the subsidizing Member" in Article 6.3(a) and "a
third country" in Article 6.3(b) only designate "which" national market. For Korea, the term "market"
itself is a "national market". The US agrees with Korea on this point, and takes issue with the EC’s

295 Of course, factors such as these presumably would be relevant in all types of serious prejudice
cases.
296 For example, in a case involving alleged significa nt suppression or depression of the price for a
given kind of narrowly-defined product due to product-specific subsidization of a physically identical product
produced by another Member, product definition issues pres umably would figure little if at all in respect of the
evidence necessary to demonstrate caus ation. The situation presumably would be quite different where the
alleged subsidy was in respect of an input product, while significant price suppression or depression was alleged
in respect of a downstream product of the complainant, or where a subsidy in respect of one product was alleged
to cause significant price suppression or depression in respect of a completely unrelated product. Clearly in the
latter two cases, product definition issues would create a significant, if not insurmountable, evidentiary hurdle in
respect of causation.
297 Second Written Submission by the EC, para. 350, citing GATT Panel Report EC – Sugar Exports
(Brazil), paras. 4.28-4.29.

basic premise, arguing that no matter what the product at issue is, a purchaser always has the option of
importing it from a number of countries, but that this does not change the scope of the market where
the sale takes place.
(b) Evaluation by the Panel
7.564 We note in the first instance that Article 6.3(c) places no geographic limitations on the
concept of "the same market". We find no basis in the text to construe this term as exclusively
referring to "national markets". Nor are we pers uaded that the explicit references to particular
national markets in Articles 6.3(a) and 6.3(b), and the explicit reference to the "world market" in
Article 6.3(d) mean, by implication, that "the sam e market" in Article 6.3(c) can only be a national
market. Indeed, each of these other provisions refers to a particular "market" that is relevant to it,
whether a national market or the world market. By contrast, we find the absence of any geographic
modifier in respect of "the same market" to indicate that Article 6.3(c) leaves flexibility to define "the
same market" broadly or narrowly depending on the fact s of a given case. That is, we view the lack
of modifiers to the term "the same market" in Article 6.3(c) as encompassing (at least) all of the
possibilities referred to in the other subparagraphs of Article 6.3 (the national markets of the
subsidizer, of the complaining Member, or of a third country, and the world market), leaving the
particular market to be defined in accordance with the sp ecifics of each case.
298 Given the very
specific and carefully crafted references to partic ular geographic markets in the other subparagraphs
of Article 6.3, we do not find it plausible that the ab sence of such a reference in Article 6.3(c) either
was the result of an oversight by the drafters, or was intended to imply that the market in question
could only be a national one.
7.565 Our view is consistent with th e approach taken in the two GATT Sugar disputes299, and the
US - Upland Cotton dispute, in all of which serious prejudice was found based on suppression or
depression of world market prices.
7.566 In sum, we reaffirm our statement from our 19 September 2003 decision in respect of certain
requests for a preliminary ruling that however define d, to be "the same market", the market in
question must be one in which the EC and Korea compete for sales of commercial vessels of
particular types (para. 32). In this regard, it woul d seem to be for the EC first to substantiate the
geographic scope in which it alleges that the Europ ean and Korean industries compete in respect of
each of the three types of commerc ial vessels, rather than necessarily having to prove as a general
matter that the overall market for commercial ves sels is a global market. The submitted factual
information and parties' arguments on this point are discussed in section VII.D.12, infra.
9. "Significant"
(a) Arguments of the parties
7.567 The text of SCM Article 6.3(c) refers to serious prejudice based on "significant" price
suppression/price depression. Specifically, Article 6.3(c) provides that serious prejudice may arise
where the effect of the subsidy is, inter alia, "significant" price suppression or price depression. The
parties' views differ as to how this term should be interpreted.
7.568 The EC argues that the term "significant" price suppression/price depression means that
"complainants must show only that the effect on price is large enough to meaningfully affect suppliers
who compete with the producers of the subsidized products". In advancing this argument, the EC

298 We wish to emphasize that we need not and do not here opine on the possibility that geographic
markets of a different scope might be defined, for example, regional markets comprised of more than one
national market.
299 EC – Sugar Exports (Brazil) para. V.(f), and EC – Sugar Exports (Australia), para. 4.9.

explicitly relies on the analysis of this term by the panel in Indonesia – Autos . In addition, the EC
argues that this interpretation of the term is consis tent with the object and purpose of Part III of the
SCM Agreement , in the sense that the degree of price suppression or price depression must be
"important" or "consequential" to be capable of "seriously prejudicing" another Member's interests.
7.569 Korea rejects the EC's argument as to the meaning of the term "significant" in Article 6.3(c).
For Korea, there must first be an assessment of pr ice levels for like products , i.e., a measurement of
pricing trends for specific "like product" vessel type s, and then a determination of whether any price
suppression or price depression that may exist is "significant". For Korea, significance must be
assessed on a case-by-case basis, taking into account specific features of the products and market
involved. According to Korea, the standard to be applied in this case-by-case assessment must be
"strict and high", because a finding of serious prejudi ce has to do with the effect of price suppression
and price depression on the EC shipbuilding industry as well as on "the interests of the EC at large".
Furthermore, Korea argues, because a finding of serious prejudice can be based on a single factor
(price suppression/price depression) unlike the multiple factors (i.e., the injury indicators, such as
production, employment, etc.) involved in an injury analysis (of which, Korea argues, price
suppression/price depression is just one), there must be a greater degree of price suppression/price
depression for a serious prejudice findi ng than would be required for an injury finding. Otherwise,
according to Korea, it would be easier to prove serious prejudice than injury.
(b) Evaluation by the Panel
7.570 We note that the Agreement provides no guidance on the meaning of the term "significant" in
the context of Article 6.3(c), and we note further that no other provision of Article 6 contains this
term. The ordinary meaning of "significant" to us seems relatively straightforward, in the sense that
something that is "significant" is important or consequential.
300 So a "significant" price suppression
or price depression would be one that is "importa nt" or "consequential". Put another way, a price
suppression or price depression that is unimportant, or inconsequential would not be "significant" in
the sense of Article 6.3(c).
7.571 Previous panels that have examined this issu e have taken a similar approach. The panel in
Indonesia – Autos (which had before it a price undercutting claim rather than a price suppression/price
depression claim) found that "the inclusion of this qu alifier in Article 6.3(c) presumably was intended
to ensure that margins of undercutting so small that they could not meaningfully affect suppliers [...]
are not considered to give rise to serious prejudice".301 Thus, the panel read the term "significant" as a
de minimis concept intended to screen out very small, unimportant price effects that might be caused
by subsidies but that would have no real impact in the market. The panel in US – Upland Cotton , in
considering the claim of price suppression before it, noted similarly that the treaty language makes
clear that it is the price suppression itself that must be "significant", in which case it is useful to
consider the degree of price suppression in the c ontext of the prices that have been affected. 302 Thus,
the approach taken by the US - Upland Cotton panel was broadly consistent with that taken by the
Indonesia - Autos panel. We agree, and are of the view that only price suppression or price
depression of sufficient magnitude or degree, seen in the context of the particular product at issue, to
be able to meaningfully affect suppliers shoul d be found to be "significant" in the sense of
SCM Article 6.3(c).

300 The New Shorter Oxford English Dictionary , L. Brown (ed.) (Clarendon Press, 1993), defines
"substantial" in this way: "important, notable; consequential".

10. "Serious prejudice may arise"
(a) Arguments of the parties
7.572 Korea argues, on the basis of the word "may" in the chapeau of Article 6.3 that a two-step
analysis is required to establish the existence of seri ous prejudice, i.e., that the situations listed in
Articles 6.3(a) through (d) are necessary prerequisite s to a finding of serious prejudice, but that they
do not in themselves constitute serious prejudice. Korea argues that serious prejudice is a separate,
distinct concept, which must be a result of the situations in Articles 6.3(a) through (d).
7.573 As for the nature of "serious prejudice", Kor ea argues that it is similar to, but more severe
than, "material injury". To demonstrate the existe nce of serious prejudice, therefore, the EC must
demonstrate the elements set forth in Articles 11-15 of the SCM Agreement , i.e., must conduct an
injury analysis of the EC domestic industry such as that required for a countervailing duty
investigation, but with a higher standard of dama ge than "material injury", namely a significant
overall impairment of the EC shipbuilding indus try (i.e., the same standard as for a safeguard
measure).303 Korea further argues that, because serious prejudice is "to the interests of another
Member", the EC must also show that the economic su rvival of the shipbuilding industry is "vital" to
the overall interests of the EC.
7.574 By contrast, the EC argues that Article 6 sets forth a self-contained regime defining the notion
of serious prejudice, in which Article 6.1 est ablished a (now-expired) presumption of serious
prejudice in certain situations, Article 6.7 excludes the existence of serious prejudice in certain
situations, and Article 6.3 permits a finding of serious prejudice where one or more of the paragraphs
(a)-(d) applies. In other words, for the EC, "may" connotes permission. The EC also points to
footnote 13 to Article 5(c), which provides that th e term "serious prejudice" has the same sense as
under Article XVI:1 of GATT 1994, and notes that the findings of serious prejudice by the Sugar
 and
Indonesia - Autos panels were based solely on price depr ession and price undercutting, respectively.
Thus, for the EC, the situations in Articles 6. 3 (a) through (d) in themselves constitute serious
prejudice.304
7.575 Among the third parties, the US, while agreeing with Korea that serious prejudice is a
separate requirement that must be satisfied (and re lying, like Korea, on the word "may" as the basis
for this view), disagrees with Korea that the provisions of SCM Articles 11-15 are relevant to serious
prejudice. For the US, the relevant requirements are those in Articles 5 and 6. The US argues that the
word "may" functions to ensure that serious prejud ice would not automatically be found in every case
where subsidization gave rise to any market effects, no matter how small.
(b) Evaluation by the Panel
7.576 We see the fundamental issue raised by this asp ect of Korea’s argument to be whether, to
demonstrate the existence of serious prejudice, the SCM Agreement requires additional elements
beyond those referred to in Article 6, such as injury to the domestic industry, and/or the importance of
that industry to the overall interests of the complain ing party. In this respect, we find neither textual
nor contextual support for Korea’s argument that a finding of serious prejudice requires the
establishment of something like “serious injury” to the domestic industry of the complaining Member,
or of the relative importance of the industry to th at Member, and we note that Korea offers none.

303 This argument is closely related to Korea's argument in relation to causation. In that context Korea
argues that:
"it is possible to consider both the causation and injury standards for countervailing duty investigations
as lesser standards subsumed within the standards of Articles 5 and 6. Thus, proving the elements of
injury and causation under Part V could be considered as necessary, but not sufficient, elements of
demonstrating serious prejudice under Articles 5 and 6". (Korea's response to Panel Question 90)
304 See EC response to Panel Question 101.

Rather, Korea's entire argument to this effect is b ased on the premise that the word "serious" connotes
something stronger than the word "material", that mate rial injury is a lesser standard subsumed within
the standards of Articles 5 and 6, and that " serious" prejudice cannot be easier to prove than
"material" injury. As an initial matter, given that the word "material" does not appear in the serious
prejudice provisions of the SCM Agreement, we fail to see the relevance of the juxtaposition of terms
proffered by Korea. Nor do we agree that the absen ce of a requirement for an injury-type analysis in
the context of serious prejudice claims would necessarily make it easier to prove serious prejudice
than material injury. Rather, we view these as two distinct concepts.
7.577 We recall that SCM Article 5, the general provision of the SCM Agreement covering all forms
of “adverse effects” for purposes of the multilateral s ubsidy disciplines in Part III of the Agreement,
clearly separates the concept of “injury to the domes tic industry of another Member”, in Article 5(a),
from the concept of “serious prejudice to the interests of another Member”, in Article 5(c). Given this
explicit differentiation in this single provision of the SCM Agreement between "serious prejudice to
the interests of another Member", on the one hand, and "injury to the domestic industry of another
Member" on the other, we disagree that the former is simply a more severe form of the latter. If
serious prejudice had been intended to refer to, en compass, or require a showing of, injury to a
particular industry, such a separation would be unne cessary, and, furthermore, the negotiators would
have made this explicit, as they did in the context of countervail.
305 Nor are we convinced that the
term "serious injury" in the Agreement on Safegua rds informs the meaning of the term "serious
prejudice" in the SCM Agreement. While the adjective "serious" appears in both places, these are two
separate Agreements, which contain no cross-references to one another. We see no basis to assimilate
them as suggested by Korea.
7.578 In short, we see serious prejudice as an entirely different concept from injury. Rather than
having to do with the condition of a particular domest ic industry within the territory of a Member (the
subject matter of injury analysis), in our view serious prejudice has to do in the first instance with
negative effects on a Member's trade interests in respect of a product caused by another Member's
subsidization. Article 6.3 demonstrates this in providing that the recognized "adverse effects" of
subsides on these interests include, in the context of serious prejudice, lost import or export volume or
market share in respect of a given product (displace ment or impedance, more than equitable share),
and adverse price effects (implying lost trade reve nue/income in respect of the product), or some
combination thereof, in variously-defined markets.
7.579 Of course, negative effects of this type on a Member's trading interests in a product also
would tend to be felt in the performance of the dom estic industry producing that product. In this
regard, we do not mean to suggest that particul ar effects on a given industry (e.g., employment,
profitability, etc.) could not be examined in the context of serious prejudice. 306 Indeed, it is likely that
situations such as those referred to in SCM Article 6 could manifest themselves in an impact on the
state of the industry in question, and this might cons titute relevant information in a given case. In this
regard, we note that in this dispute the EC has presented certain information about the state of its
shipbuilding industry. Our point is, rather, that we disagree that establishment of something similar to
serious injury in the sense of the Agreement on Safeguards to the industry producing the product in
question is a required element for a finding of serious prejudice.
7.580 We find uniform and extensive support for this view in the text of the relevant provisions of
the SCM Agreement , in prior dispute settlement concerning serious prejudice, and in the relevant
negotiating history.

305 For example, in SCM Article 11.2, which requir es applications to contain information on the
“relevant factors having a bearing on the state of the domestic industry, such as those listed in paragraphs 2 and
4 of Article 15”.
306 We note that the US - Upland Cotton panel (at para. 7.1392 and footnote 1493) took a similar view.

(i) Text
7.581 In the first place, we note the explicit cross-re ference to Article 5(c) in the chapeau of
Article 6.3: "Serious prejudice in the sense of Article 5(c)". The plain language of this cross-
reference is a strong indication that the situations listed in Article 6.3(a)-(d) are serious prejudice "in
the sense of Article 5(c).
7.582 Second, in respect of Article 6.3, the specific provision at issue, if the word "may" did not
appear in the chapeau of this provision, the imp lication would be that serious prejudice inevitably
would arise from any price or volume effect listed in Article 6.3 (a)-(d), without the need to consider
the matter in depth. Given this, we see the word "may" in the chapeau as a general cross-reference to
other specific requirements elsewhere in Article 6 for the establishment of serious prejudice on the
basis of the price and/or volume effects referred to in subparagraphs (a)-(d ) of Article 6.3. In
particular, Article 6.4 establishes specific affirm ative requirements for finding displacement or
impedance of exports, while Article 6.7 sets forth particular situations where "displacement or
impedance resulting in serious prejudice shall not arise " (emphasis added). Ar ticle 6.5 establishes
methodological rules for price undercutting which must be followed before any finding of serious
prejudice based on price undercutting can be made. In the same sense, we view the word “may” as a
cross-reference to “significant” in Article 6.3( c), operating to rule out serious prejudice findings
where any price suppression or price depression resulting from a subsidy is unimportant and
inconsequential.
7.583 Another provision that we believe informs the na ture of "serious prejudice" is Article 6.2,
which establishes the basis on which the now-expired presumption of serious prejudice in Article 6.1
could be rebutted. In particular, Article 6.1 iden tified four situations of subsidization that were
"deemed" or presumed, to give rise to serious prejudice.
307 In effect, this provision shifted the burden
of proof from the complainant to the subsidizer as to whether the subsidies in question were causing
serious prejudice. The four situations that gave rise to the presumption were: subsidization of a
product by more than 5 per cent ad valorem ; subsidization of operating losses of an industry;
subsidization of operating losses of an individual en terprise, subject to certain exceptions; and direct
forgiveness of debt. Thus, a complainant would, in the first instance, simply have to demonstrate the
existence of any one of these kinds of subsidization to obtain a presu mption that its interests had been
seriously prejudiced by that subsidization. Howeve r, Article 6.2 provided that the subsidizer could
rebut the presumption (in the sense that "serious prejudice shall not be found") by demonstrating that
the subsidy in question had not resulted in any of the effects enumer ated in Article 6.3 (displacement
or impedance, price undercutting, price suppression/depr ession, lost sales). We thus view Article 6.2
as defining by implication the situations listed in Article 6.3 to be in themselves serious prejudice.
7.584 This reading is further supported by Article 27.8, which provided that no presumption of
serious prejudice pursuant to Article 6.1 could arise in respect of developing country Members, and
that instead such serious prejudice would need to have been demonstrated by "positive evidence, in
accordance with the provisions of paragraph 3 through 8 of Article 6 ". The phrase "in accordance
with the provisions of paragraph 3 through 8 of Article 6" further supports that those provisions
identify both the situations constituting, and the evidence relevant to establishing, serious prejudice.
7.585 The provisions of the SCM Agreement governing the factual information relevant to serious
prejudice disputes (Article 6.6 and Annex V – "P rocedures for developing information concerning
serious prejudice"), underscore that it is the trade effect, as such, on a Member in respect of a product,
caused by another Member's subsidization that forms the substance of "serious prejudice". Article 6.6
requires any Member in whose market serious prejudice is alleged to have arisen to make available
"all information that can be obtained as to the changes in market shares of the parties to the dispute as

307 Article 6.1 lapsed on 31 December 1999, according to Article 31 of the SCM Agreement.

well as concerning prices of the products involved" (emphasis added). In similar vein, paragraph 5 of
Annex V specifies that the information to be gathered through the Annex V process:
"should include, inter alia , data concerning the amount of the subsidy in question
(and, where appropriate the value of total sales of the subsidized firms), prices of the
subsidized product, prices of the non-subsidi zed product, prices of other suppliers to
the market in question and cha nges in market shares. It should also include rebuttal
evidence [...]".
7.586 The provisions concerning rebuttal of serious prej udice also are relevant here. As mentioned,
the former presumption of serious prejudice under Artic le 6.1 could be rebutted by demonstrating that
the subsidy had "not resulted in" displacement or impedance of imports or exports in the sense of
Article 6.3(a) or (b), or price undercutting, price suppression, price depression or lost sales in the
sense of Article 6.3(c), or an increase in world market share of a primary product or commodity in the
sense of Article 6.3(d). Similarly, the situati ons listed in Article 6.7 as rebutting a finding of
displacement or impedance all are concerned with alternative reasons (including, for example,
prohibition or restriction on exports, and situations of force majeure affecting production, qualities,
quantities or prices of the product available for e xport) for declines in the overall volume and/or
market share of the complaining Member in respect of the product at issue , that is, changes in trade
flows.
7.587 In short, none of the information referred to in the Agreement as required for/relevant to
either the establishment or the rebuttal of serious prejudice goes to the sorts of domestic industry
"injury" indicators that would be relevant for a serious injury finding, and that Korea argues must be
examined. Rather, the required information has to do with trade (volumes and/or prices) in the
product at issue in particular markets. We concl ude from this that serious prejudice to a Member's
interests, in the sense of SCM Article 5(c), consists of adverse effects on that Member's trade in a
particular product in a specified market, resulting fro m subsidization by another Member. That is, the
situations listed in Article 6.3(a) –(d) in themselves constitute serious prejudice.
(ii) Prior dispute settlement
7.588 This view is fully consistent with the approach taken in all prior serious prejudice disputes. In
this respect, we consider particularly relevant footnote 13 to Article 5(c):
"The term 'serious prejudice to the inter ests of another Member' is used in this
Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT
1994, and includes threat of serious prejudice."
7.589 This footnote does two things. First, it makes clear that the concept of serious prejudice
includes threat of serious prejudice (just as the term "injury" in the SCM Agreement includes "threat
of material injury"). Second, it states explicitly that the meaning of serious prejudice in the
Uruguay Round Agreement is the same as under Article XVI:1 of GATT 1994. Turning to the text of
Article XVI:1 of GATT 1994, we note that it contai ns no definition of serious prejudice. Instead, it
provides for a right to consultation, with a view to limiting subsidization "in any case in which it is
determined that serious prejudice to the interests of another contracting party is caused or threatened
by any [...] subsidization" that "operates directly or indirectly to increase exports of any product from,
or to reduce imports of any product into" the territory of the subsidizing Member.
7.590 While the text of Article XVI:1 does not c ontain a definition or any guidance as to the
meaning of the term "serious prejudice", there were two serious prejudice cases based on
Article XVI:1 of GATT 1947. Both cases involved EC subsidies (in the form of export refunds) on
sugar, and the bases for the claims of serious prejudice included price suppression/price depression in
both cases. Thus, to the extent that these cases clar ified the meaning of "serious prejudice" in the

sense of Article XVI:1 of GATT, we consider that footnote 13 brings that meaning into the
SCM Agreement.
7.591 In the EC – Sugar Exports (Australia) case,
308 the panel found that the subsidies at issue had
increased at a time when world sugar prices were d eclining sharply, and that there was no effective
limit to the amounts available as sugar refunds (i.e., that the refunds were not capped). Therefore, the
panel concluded, the refund system had contributed to depress world sugar prices, resulting indirectly
in serious prejudice to Australia in terms of Article XVI:1. In other words, Australia's allegation was
of serious prejudice to its interests from the EC sugar export refunds, and in spite of the absence of
any definition of that concept, the panel found that price depression in itself had seriously prejudiced
Australia's interests. The panel additionally fo und that the EC export refund scheme contained no
pre-established limits on production, price or amou nts of export refunds, and thus constituted a
permanent source of uncertainty in world sugar ma rkets which itself constituted a (further) threat of
serious prejudice in terms of Article XVI:1.
7.592 The EC – Sugar Exports (Brazil) case brought the following year
309 resulted in very similar
serious prejudice findings. First, the panel made an affirmative finding of actual serious prejudice in
terms of Article XVI:1, on the same basis as in Australia's case (i.e., on the basis of depression of
world sugar prices due in part to the EC subsidies). The panel also found a threat of serious prejudice
to Brazil, on the basis that the export refund system contained no pre-established or operational
effective limits on production, price or the amounts of export refunds. For the panel this meant that
the refund system would not prevent the EC from having a more than equitable share of world trade in
sugar, and that the system thus constituted a permanent source of uncer tainty in world sugar markets,
this in itself constituting a further threat of serious prejudice in terms of Article XVI:1.
7.593 It is clear that in both of these cases, the pa nels' affirmative serious prejudice determinations
were based on a conception of serious prejudice the substance of which was the effect of subsidies on
markets, and on trade, in respect of the product, rather than treating these effects simply as stepping
stones to a separate and distinct concept of serious prejudice. In other words, the existence of price
depression in the world market for sugar, to which the EC sugar refunds were contributing, was found
in itself to constitute serious prejudice, in the sense of Article XVI:1, to the interests of Australia and
Brazil. Furthermore, the permanent uncertainty created on world sugar markets by the export refund
system, and the possibility that the EC might obtain a "more than equitable share of world trade" by
reason of the system's operation, also were found, in themselves, to constitute threats of serious
prejudice in the sense of Article XVI:1. In addi tion, although Australia and Brazil both were
unsuccessful in claiming serious prejudice based on displacement or impedance of their sugar exports,
the reason for the failure of these claims was that th e facts did not demonstrate that such displacement
or impedance had taken place.
310 In other words, the concep t of displacement or impedance
potentially constituting, itself, serious prejudice seems to have been accepted by the panels, but the
factual evidence did not demonstrate that it was occurring in those particular cases.311
7.594 We note here that, as the Sugar cases were based on Article XVI:1 of GATT, they did not
involve the issue of the word "may" with which we are confronted here, as this word does not appear
in Article XVI:1. It might therefore be argued th at those findings are not directly relevant to the
matter before us, i.e., the implications of the word "may" for the meaning of "serious prejudice".

308 EC – Sugar Exports (Australia).
309 EC – Sugar Exports (Brazil).
311 In answering a question concerning the significance of the Sugar cases for the meaning of "serious
prejudice", Korea attempted to distinguish them on the ba sis that they concerned export subsidies, which were
the province of Article XVI:3. See Korea's Response to Panel Question 89(c). We note that although the
subsidies at issue were export subsidies, the serious prejudice claims were based and resolved on Article XVI:1.

7.595 We recall that the two serious prejudice cases to date based on the SCM Agreement have
taken an approach consistent with that take n in the pre-Uruguay Round cases. Both panels
considered, implicitly or explicitly, that serious prejudice concerns the effects of subsidies on a
complaining country's trade in a given product as such, i.e., the volumes and prices of such trade, in
markets variously defined. Neither looked to specifi c situations of or effects on the domestic industry
producing the product at issue, or to other conseque ntial situations flowing from the trade effects,
such as the importance of the producing industry to the overall "interests" of the complaining party.
7.596 In Indonesia – Autos the meaning of the word "may" did not arise. That panel treated the
situations listed in Articles 6.3(a) through (d) as in themselves constituting serious prejudice. In the
displacement/impedance claims, the question that th e panel addressed was whether "the effect of the
subsidies [...] [was] to displace or impede [...] exports [...] from the Indonesian market".
312 The panel
concluded in the negative on those claims. In r espect of the price undercutting claim, the question
addressed by the panel was "whether serious prejudice [arose] from price undercutting". 313 The panel
found in the negative in respect of the claim of the United States, but in the affirmative in respect of
the claim by the EC. In particular, the panel firs t found that price undercuttin g existed, then found
that the undercutting was of such magnitude as to be "significant", and then that the price undercutting
was "the effect of the subsidy". (On this latter poi nt, the panel noted that Indonesia had conceded that
the subsidy in question was essentially responsible fo r the price undercutting that had been found to
exist.) On the basis of all of these elements, the panel concluded that the effect of the subsidies was to
cause serious prejudice through a significant price undercutting as compared with prices of like
products of EC origin in the Indonesian market.
314 In other words, establishment of all of the
elements referred to in the relevant portion of Artic le 6.3 was deemed sufficient by that panel for a
finding of serious prejudice. The panel did not find any additional requirements beyond those
explicitly referred to in the pertinent provisions of the Agreement.
7.597 The US - Upland Cotton panel took a similar approach, stating that:
 "the Article 6.3(c) examination is determinative [...] for a finding of serious prejudice
under Article 5(c). That is, an affirmative conclusion that the effects-based situation
in Article 6.3(c) exists is a sufficient basis for an affirmative conclusion that 'serious
prejudice' exists for the purposes of Article 5(c) of the SCM Agreement."
315.
(iii) Negotiating history
7.598 We turn therefore to the origins of the phrase "serious prejudice may arise", to see whether
this history sheds additional light on this issue. We recall that this phrase first appeared in the
SCM Agreement's predecessor, the Tokyo Round Subsidies Code (the Agreement on Interpretation
and Application of Articles VI, XVI and XXIII of th e General Agreement on Tariffs and Trade, or the
"Subsidies Code").
7.599 The Subsidies Code rules on serious prejudice were found in its Articles 8:3 and 8:4.
Article 8:3 was the analogue of SCM Article 5, containing the basic rules on adverse effects, including
serious prejudice. Article 8:3 read as follows:
"3. Signatories [...] agree that they shall seek to avoid causing, through the use of
any subsidy:
(a) injury to the domestic industry of another signatory, [footnote omitted]

312 Indonesia – Autos, para. 14.207.
313 Ibid., para. 14.238.
314 Ibid., paras. 14.255 and 14.256.
315 Panel Report, US – Upland Cotton, para. 7.1390.

(b) nullification or impairment of benefits accruing directly or indirectly to another
signatory under the General Agreement, [footnote omitted] or
(c) serious prejudice to the interests of another signatory.25
SCM Article 6.3, yet the term "may arise" appears in both places. To us, it is clear that the function of
this term in the context of Article 8:4 of the Subsidies Code was to indicate that the list in
subparagraphs (a)-(c) was illustrative, not exhaustive. That is, this lis t consists of examples of some
situations that constituted serious prejudice (and/or nullification or impairment), with the word "may"
leaving open the possibility that other situations as well might give rise to or constitute serious
prejudice. We find support for this view in the fact that the listed situations include some but not all
of the situations that had previously been exam ined by the GATT 1947 serious prejudice panels. For
example, price suppression/price depression are not listed in Article 8:4. That they nonetheless
remained a valid basis for serious prejudice claims is confirmed by the fact that both are explicitly
referred to in SCM Article 6.3(c).316
7.602 In this respect, we find footnote 25 to Article 8:3(c) of the Subsidies Code to be particularly
important, and note that it is virtually identical to footnote 13 to Article 5(c) of the SCM Agreement.
The Tokyo Round Subsidies Code was the first separate agreement interpreting Article XVI of GATT,
and we believe that footnote 25 to Article 8:3(c) must mean inter alia (as we have indicated above in
respect of footnote 13 to Article 5(c)), that the inte rpretations of the term "serious prejudice" that had
previously been developed in disputes based on Article XVI:1 of GATT 1947 remained valid under
the Subsidies Code . That is, the purpose of the footnote was to preserve and incorporate into the
Subsidies Code the status quo ante concerning serious prejudice based on Article XVI:1 of GATT,
including in particular the jurisprudence thereunde r. Thus we see these footnotes as establishing an
unbroken chain of consistent meaning for the term "serious prejudice", beginning with Article XVI:1
of GATT 1947, through the Tokyo Round Subsidies Code, and then carrying through to Article XVI:1
of GATT 1994 and Part III of the SCM Agreement. The fact that price suppression/price depression,

316 In the serious prejudice claim in EC – Wheat Flour brought under the Tokyo Round Subsidies
Code, the panel took a similar approach to that taken by the Sugar panels, in the sense that it considered
(although it did not issue a ruling on) the claim based on the alleged adverse trade effects, as such. The meaning
of the term "may arise" was not an issue.

the basis for two Article XVI:1 serious prejudice findi ngs, although not referred to in Article 8:4 of
the Subsidies Code, now is explicitly included in SCM Article 6.3, confirms this.
7.603 We find it significant that the term "serious prejudice may arise" in SCM Article 6.3, chapeau,
appears to have been directly imported from the Tokyo Round Subsidies Code . In particular, this
phrase appeared in the chapeau of all versions of the negotiating text of what is now SCM Article 6.3
(i.e., in the so-called "Cartland" texts, MTN/ GNG/NG10/W/38 and Revisions). We do not find it
plausible that this directly-transposed phrase from th e Code was intended to take on an entirely new
meaning, for which the SCM Agreement contains neither explicit nor im plicit basis. Again, if the
intention had been to introduce substantial new a nd additional requirements, such as those advanced
by Korea, we find it inconceivable that such a si gnificant departure from all prior practice concerning
serious prejudice would not have been expressed explicitly.
11. Causation
7.604 Concerning causation, Article 6.3(c) provides in rele vant part that "the effect of the subsidy is
[...] significant price suppression [or] price depression [...] in the same market". That is, there must be
a causal relationship between the subsidy and the significant price suppression or price depression.
The question before us is how to establish the existence of such a relationship.
(a) Main arguments of the parties
7.605 A threshold argument made by the EC in respect of causation is that as long as the subsidy is
a cause of significant price suppression, depression or lost sales, the language of Article 6.3(c) is
satisfied. In other words, the EC states, the text doe s not require that subsidies be the sole cause, but
rather permits an affirmative finding where s ubsidies are one among multiple causes of serious
prejudice. In support of this proposition, the EC cites SCM Article 15 as well as the Tokyo Round
panel on US – Norwegian Salmon CVD.
7.606 As to the substance of the causal link, the EC argues that, given the similarity of language
between SCM Article 6.3(c) on the one hand, and SCM Articles 15.5 and 15.2 on the other, the
causation analysis should focus on the impact of "the subsidized product" on price suppression and
price depression. Concerning the kind of subsidy that can potentially cause price suppression or price
depression, the EC argues that Article 6.3(c) is not limited to subsidies that are tied to particular
products or transactions, but also c overs untied subsidies that benefit the total sales or production of a
company. These latter subsidies, including "survi val subsidies" such as debt forgiveness, tax
incentives, capital infusions, or lo ans and guarantees, have the effect of maintaining or increasing
capacity and lowering the firm's total costs, and "may be allocated pro-rata" to individual products or
transactions. Given the fungibility of money, the EC argues, such cost reductions will enable price
cuts across all products produced by the recipient firm, and these price cuts enabled by the subsidies
can ultimately have the effect of significant price suppression or price depression. The EC argues,
however, that it is not legally required to quantify the amount of subsidization.
7.607 Korea disagrees with the "a cause" standard advanced by th e EC, arguing that whether or not
other factors are present, the subsidization independently of these other factors must itself cause
serious prejudice. For Korea, the causation analysis thus requires a quantification of the amount or
degree of subsidization, which then should be co mpared to the degree of price suppression or price
depression that may exist, to determine whether a causal link can be demonstrated. Furthermore,
Korea argues that other causal factors, such as differences in productivity, differences in production
costs, and need for restructuring, should be examined.
7.608 In answer to a question from the Panel concerni ng the kind of analysis that would be needed
to determine the effects of subs idization independent of any other factors, Korea outlines a detailed

multi-step process of analysis, wh ich can be summarized as follows. 317 First, the subsidy must be
quantified with respect to each subsidized producer. Second, the effect of the subsidy on the prices of
the subsidized shipbuilder ("the subsidy effect ma rgin") must be quantified, by estimating the non-
subsidized cost of the product and comparing this w ith the producer's price for the product. Third, a
"price suppression and depression margin" must be quantified, i.e., the margin by which the prices of
the complaining Member's like product have been suppressed or depressed. In this step, Korea
argues, the effects of all other factors on prices (including cost reductions, competition from other,
non-subsidized, sources, etc.) also must be identified and eliminated. In the course of this argument,
Korea emphasizes in several places that because the EC has dropped its original claim of serious
prejudice based on price undercutting, the EC is now legally barred from advancing any argument
based on or referring to price undercutting.
7.609 Korea further argues that because SCM Articles 5 and 7.8 both refer to adverse effects of "any
subsidy", and because SCM Article 6.3 refers in multiple places to "the subsidy", the complaining
Member must prove the effect of each alleged subsidy individually, rather than the combined effect of
the alleged subsidies together. In addition, Korea argues in this regard that at the implementation
stage of a dispute, removal of one subsidy may be sufficient to eliminate the adverse effects of
subsidization, but there would be no way to know th is if no separate assessment of effects was made
for each subsidy. Nonetheless, Ko rea states, after assessing each s ubsidy individually, it would still
be possible to aggregate them for the "final causal assessment".
7.610 China's third party view is similar to that of Ko rea, in that China argues that in order to find a
causal relationship between a subsidy and a significant price suppression or price depression, it should
be found that the subsidy, indepe ndent of other factors, and through the suppressed or depressed
prices of the subsidized product, causes significant suppression or depression of the price for the
complaining party's like product in the same market . China also argues that the degree of price
suppression or price depression should be compared with the extent of the subsidization, to determine
whether a causal link can be established.
7.611 The US as third party takes issue with the basis (although not necessarily the conclusion) of
the EC's argument, stating that the EC incorrectly focuses on the SCM Agreement 's countervail
provisions for contextual support for understandi ng causation while, according to the US, the
causation standard for countervail is quite different fr om that for serious prejudice. In particular, the
US points to the fact that in respect of countervail, it must be shown that "the subsidized imports are,
through the effects of subsidies" (in the sense of the effects of subsidized imports on the domestic
market) "causing injury". By cont rast, the US says, Article 6.3 requires a demonstration that price
suppression or price depression is "the effect of the subsidy" (emphasis added).
(b) Evaluation by the Panel
7.612 As noted supra, we believe that the text of Article 6. 3(c) implies a "but for" approach to
causation in respect of price suppression/price depression. Price suppression is the situation where
prices have been restrained by something, and price depression is the situation where prices have been
pushed down by something. So the question to be answered is whether the "something" is
subsidization. Looking at a counterfactual situation, i.e., trying to determine what prices would have
been in the absence of the subsidy, seems to us th e most logical and straightforward way to answer
this question.

317 Korea's response to Question 91 from the Panel. In its response, Korea notes a concern about
burden shifting and recalls that a panel should not make a complainant's case for it. Thus, Korea reserves its
rights so that its response cannot be interpreted as its agreement to assume a burden belonging to the
complainant.

7.613 This "but for" approach is consiste nt with the approach taken in both Indonesia – Autos and
US – Upland Cotton , the two prior serious prejudice disputes under SCM Article 6.3. Indeed, the
Indonesia - Autos panel explicitly adopted such an approach, in respect of the
displacement/impedance of imports claims. (There was no price suppression or price depression
allegation in that dispute).
318 The panel made a negative displacement finding, noting that the
complainants had not demonstrated that but for the subsidy, the complainants could have expected to
participate proportionately in a growing market. The panel also made a negative impedance finding,
specifically that the complainants had not demonstrat ed that but for the subsidies, their sales and/or
market share would have increased, or would have increased more than they did in fact.
7.614 The US – Upland Cotton panel, while not referring to a "but for" analysis as such,
nevertheless applied a similar framework. In particular, the panel found that increased production and
supply of upland cotton which reaches the world mark ets has an effect on world prices, and further
found that a number of the subsidies at issue were directly linked to world prices, thus insulating US
producers from low world prices, and stimulating production that otherwise (in other words, but for
the subsidies) would have been uneconomic.
7.615 Applying such a framework to the present dispute, the question to be answered in respect of
the affirmative link between subsidies and prices is, in the case of alleged price depression, whether in
the absence of the subsidies prices for ships would no t have declined, or would have declined by less
than was in fact the case. For price suppression, th e question would be whether, in the absence of the
subsidies, ship prices would have increased, or wo uld have increased by more than was in fact the
case. Such a framework implies al so analyzing the various factors contributing to the particular
market situation forming the subject of the compla int, i.e., supply and demand factors, production
costs, relative efficiency, etc.
7.616 In conducting this "but for" analysis, we cert ainly will be mindful of the nature of the
subsidies alleged to be causing price suppression and price depression, i.e., the individual APRG and
PSL transactions, and in particular in relation to th eir alleged effects on general price levels for the
ships at issue. That said, and while we have of course examined the APRG and PSL transactions
individually to determine whether they involve subsid ization, we do not agree with Korea that we are
legally bound to separately determine the degree of price suppression or price depression that may be
caused by each of these subsidies individually. We are unconvinced that references in the singular in
SCM Articles 5 and 6 ("any subsidy", "the subsidy", etc.) constitute or give rise to such a legal
requirement, and recall here that the opposite was tr ue under Article 6.1(a) and Annex IV. Pursuant
to these provisions, in determining the ad valorem subsidization of a product, subsidies under
different programmes were to be aggregated. Any rebuttal under SCM Article 6.2 of a presumption of
serious prejudice arising therefrom also presumably could have been presented in respect of the
effects of the aggregate subsidies. Finally, we cons ider that Korea's concern over how eventually to
"remove the adverse effects" does not pertain to an assessment of whether there are adverse effects
arising from subsidies, but instead pertains to the issue of how to implement an eventual
recommendation to remove any such effects.
7.617 We next consider the issue of non-attribution, in particular, whether and how to conduct a
non-attribution analysis (i.e., an analysis to ensure that adverse effects caused by other factors are not
attributed to subsidies). We note here that unlike the countervail provisions, SCM Articles 5 and 6
contain no specific non-attribution langua ge, and we recall as well that in the Sugar cases, no such
analysis was conducted. The panels in those cas es instead found serious prejudice on the basis that

318 The Indonesia - Autos panel also addressed a claim of pri ce undercutting, the circumstances of
which arguably were quite unique: the panel found that information provided by Indonesia in the Annex V
process effectively conceded that th e subsidies, which were transactio n-specific tax and duty exemptions,
reduced the price of the subsidized Indonesian automobile by an amount large enough to account for all or
virtually all of the price undercutting that was found to exist.

the EC export refunds had contributed to depressing world sugar prices, and also constituted a
permanent source of instability on world markets. The US – Upland Cotton panel, while noting the
distinction between the countervail and serious prej udice provisions in general, and the lack of an
explicit non-attribution requirement in the latter in particular, nonetheless analyzed other possible
causal factors, with a view to determining whether such factors "would have the effect of attenuating
[the] causal link, or of rendering not 'significant' the effect of the subsidy".
7.618 We consider the approach taken by the US – Upland Cotton panel to be logical and
appropriate. In conducting our causat ion analysis, we too will bear in mind the need to take into
account the effects of identified factors other than the subsidies, to determine whether such factors
would attenuate any affirmative causal link that we may find, or render insignificant any price
suppression or price depression effect of the subsidy that we may find.
7.619 We wish to emphasize that the aforementioned c onsiderations make clear that there is no one
single approach to determining causation for all claims of serious prejudice. Each case presents a
unique combination of kinds of subsidies, of products , of markets, and of forms of serious prejudice,
which operate together in a unique way. Causa tion analysis thus necessarily must be case-by-case,
tailored to the particular situation presented in each individual dispute. The considerable variety of
approaches taken by previous panels is simply a reflection of this reality.
7.620 In this respect we disagree with Korea's argume nt that the EC is legally barred from referring
to the fact of price undercutting in support of its price suppression/price depression claims. Korea is
certainly correct that the EC has not pursued its cl aim of price undercutting re ferred to in the Request
for Establishment of the Panel, and we therefor e conduct no analysis and reach no conclusions in
respect of price undercutting as such, in the sense of SCM Articles 6.3(c) and 6.5. This is an entirely
different issue, however, from what sorts of arguments and evidence the EC may advance in support
of its claims. We see no basis in the WTO Agreem ent for proscribing the kinds of arguments that a
party can make; any party to a dispute is entitled to make whatever arguments it wishes in presenting
its affirmative or defensive case. The persuasive ness or relevance of these arguments is a separate
issue.
7.621 We find it entirely plausible, and potentially highly relevant, that a complaining party
claiming price suppression/price depression might in its arguments compare the trends and the levels
of prices for the subsidized product with the trends and levels of prices for its own products. That
said, we do not see that the relative price levels fo r the subsidized product and the complaining party's
product in any case would be dispositive of a price suppression/price depression claim.
12. Summary of the EC's claims and general approach of the Panel
7.622 Having set out the legal and analytical framework that we will apply, we turn now to the
specifics of the EC's claim. As noted above, the EC claims price suppression/price depression in
respect of three categories of ships: LNGs, cont ainer ships and product/chemical tankers. We first
will summarize the basic approach taken by the EC in setting forth its claims of serious prejudice, as
well as the basic approach taken by Korea in its re buttal arguments. We then will turn to a product-
category-specific consideration of the parties' ar guments concerning the EC's price suppression/price
depression claims. Finally, we will present our assessment of those claims, on the basis of the
subsidies that we have found (those in respect of certain APRGs and PSLs).
7.623 Concerning our presentation of the parties' argume nts, we recall that we have rejected the
EC's claims of subsidization in respect of the restructuring of Daewoo, STX/Daedong, and
Samho/Halla. We have upheld the EC's claims that certain individual APRGs and PSLs are
prohibited export subsidies. The EC alleges that the subsidized APRGs and PSLs have caused price
suppression/price depression in respect of the three cate gories of ships at issue in this dispute, and its
arguments in this regard are closely inter-rela ted with its arguments concerning the alleged

restructuring subsidies. While we confine our anal ysis of the EC's serious prejudice claims to the
relevant subsidized APRGs and PSLs, for ease of co mprehension we summarize the EC's and Korea's
arguments as to serious prejudice as they have presente d them. Thus, to the extent that the parties'
serious prejudice arguments in respect of APRGs and PSLs are interrelated with their arguments
concerning restructuring, the restructuring-related arguments are included in the summary of
arguments below.
7.624 We recall that the EC initially indicated that it wanted us to make separate serious prejudice
findings in respect of each product category (LNGs , product/chemical tankers, and container ships),
but subsequently changed its positi on, arguing that while we should analyse price suppression/price
depression separately for each category, we shoul d reach only a single serious prejudice finding.
319
The EC argues that whether we were to find pri ce suppression/price depression in respect of one, two
or all three product categories, our final conclusion would be the same, i.e., serious prejudice to the
interests of the EC. Having considered this ques tion carefully, we conclude that we should make
separate serious prejudice findings in respect of each product category. We view this as necessary for
analytical coherence, i.e., the scope of our final conclusions on serious prej udice will be consistent
with the scope of our analysis of price suppression/price depression.
(a) Main arguments and general approach of the EC
7.625 Concerning the existence of price suppression/price depression, we recall that the EC
allegation is at the level of world prices for each of the three types of ships. The EC argues that each
of these ship types (as indeed commercial vessels gene rally) competes and is sold in a global market.
The EC explains that by world market, or global market, it means that ships are by nature highly
mobile (and transporting them is an insignificant co st compared to their value); that ships do not
normally need to be imported, i.e. cleared through cu stoms or subjected to duties; that regulations and
standards are typically harmonised or international – and the existence of “open registries” and flags
of convenience make attempts to impose signifi cantly different national taxes and regulations
unworkable; that shipbuilders operate on a large sc ale and are active through out the “global market”;
and that ship-owners are also larg e enterprises and are established in many different territories. The
EC submits a number of documents that characterize shipbuilding in this way.
320
7.626 The EC argues that world prices for LNGs ha ve been depressed and suppressed by Korean
subsidies, and that world prices for container ships and product/chemical tankers have been
suppressed. As evidence that these prices should have increased, or increased more, the EC presents
information showing increases in world order levels for each ship type, as well as increases in freight
rates which, along with costs, are the main determ inants of ship prices according to the EC. As
evidence that Korean prices are lo wer than they should be, the EC presents indices of Korean prices
versus estimated Korean costs fo r each ship type. Finally, the EC presents statistics on numbers of
orders by country of building and by shipyard, as evidence that Korean sh ipyards have sufficient
market share to exercise price leadership in the market for each ship type.
7.627 On Korean costs more specifically, the EC argues that ship prices must follow trends in costs,
and must include cost escalation factors due to the several-year interval that normally elapses between
the placing of an order and the delivery of a sh ip. The EC argues that the gap between Korean
shipyards' prices and costs widened during the post-r estructuring period, even after adjusting for any
comparative advantages of the Korea yards. The cost of debt in particular was not taken into account
by the Korean yards, given that the restructuring (w hich the EC alleges to be subsidized) had erased
the debt from the restructured yards. In the absen ce of the restructuring, Korean shipyards' high cost
structure and heavy debt burden wo uld have driven some of them out of business, reducing Korean

319 See para. 7.519, supra.
320 See First Written Submission of the EC at paras. 426 and 427, and Exhibits EC-1 and EC-2. See
also response of the EC to Panel Question 37(a).

capacity. Instead, the restructuring allowed that capacity not only to remain in operation but also
allowed aggressive pricing by eliminating the debt cost from the companies involved. The EC,
although arguing that it is not legally required to do so, presents some calculations of estimated per-
transaction amounts of subsidies. On the basis of these calculations, the EC argues that current
prevailing price levels for the ships at issue w ould be below the break-even point for the Korean
producers if their debts had not been forgiven, i.e., if they had had to pay their debt servicing costs.
7.628 The EC also presents calculations estimating th e degree of subsidization of certain APRGs
and PSLs. In respect of these instruments, the EC argues that the APRGs and PSLs contributed to
rescuing the shipyards and permitting them to aggressively pursue sales: the APRGs and PSLs had an
impact that went beyond particular margins of benef it on individual transactions, in that they enabled
the companies to fill their orderbooks. In the restru cturing process, this in turn made the yards in
question more attractive as “going concerns” than as facilities to be closed. In respect of the non-
restructured yards, the EC argu es that the APRGs and PSLs enable d these yards to compete at the
new, lower price levels. Thus, the EC primarily characterizes the effects of the APRGs and PSLs in
terms of overall effects on the relevant shipyards' ability to compete, as a complement to the effects of
the restructuring, rather than approaching the issu e in terms of a subsidized transaction-by-subsidized
transaction analysis, or as a whole, in isolation from the alleged restructuring subsidies. That said, the
EC also states that the ad valorem benefit from the subsidized financing was as much as 2 per cent,
which the EC argues had a direct price effect on those transactions, and was an important factor in
obtaining these orders.
321
7.629 Concerning prices, the EC presents certain composite data characterized as representing
world price levels and trends, but does not present a specific time series on EC shipyards' prices. It
explains this by saying that, due to low prevaili ng world prices, EC shipyards have had very little
success in winning the bids that they make, and in many cases therefore have become discouraged
from even bidding (a very costly process), due to the suppressed and depressed world price levels. In
other words, for the EC the suppression/depression of world prices constitutes serious prejudice to the
EC's interests, because, due to the global nature of the market for ships, all shipyards must meet the
prevailing world price level in order to make sales. The EC presents specific examples of individual
bids it argues were lost to low-priced competiti on from Korea as evidence of the low and declining
price levels confronted by EC shipyards.
7.630 The EC explains that its "interest" in the three sh ip types is particularly evident on the supply
side in the sense that EC yards are capable of prod ucing the full spectrum of sizes and particular types
of ships in each category, and are interested in doi ng so, as evidenced by their attempts to win bids,
and by information on EC shipyards' websites wh ich identify these types of ships as within their
product range. The EC argues that from a shipyard's perspective, ships are largely fungible, involving
a series of steel panels to be welded together , and components and fittings to be assembled and
installed. Thus, on the supply side, there is little product differentiation. The EC also provides
information showing the participation by EC shipya rds in various size ranges for each ship type, as
evidence that the EC industry is active in all of the ship types at issue.
7.631 As for the pricing of ships of different sizes a nd characteristics within each category, the EC
argues that on the demand side there is consid erable potential for substitution. For example, a
container ship owner can, from the technical point of view, equally operate a range of smaller to
larger ships on a given route because these ships perform the same basic function. For this reason, the
EC states, the decision as to which particular ship to operate on a given route has to do with operating

321 In this regard, in response to our question, th e EC confirmed in respect of alleged APRG and PSL
subsidies that we correctly understand its main argument to be "that these instruments contributed to 'rescu[ing]
th[e] shipyards from liquidation' by improving the attractiveness of keeping them in operation as opposed to
shutting them down", while also stating that "the impact of [individual] APRGs or PSLs can indeed be very
significant (up to 2% of the transaction price)" (EC response to Panel Question 40).

costs based on freight volume, not with fundamen tal functional differences between the different-
sized ships. As a result, the EC argues, prices for different sizes of a given type of ship, e.g.,
container ships, tend to move together. On the supply side, as noted the EC argues that from the
shipyard's perspective, there is little or no techni cal differentiation within ship categories (or even
between them). The combination of these supply and demand factors means that a change in the price
of one particular model of ship in a category will cause proportionate changes in all of the other
models in that category.
7.632 In general terms, the EC argues that the basic factor leading to the alleged serious prejudice
was the restructuring aid, which the EC terms “sur vival subsidies”, complemented by the APRG and
PSL subsidies, which also contributed to the keepin g the yards in operation. In particular, the EC
argues, the alleged subsidies maintained, on non-mark et terms, Korean capacity that otherwise would
have been closed down, and also lowered the cost structure of the subsidized producers, enabling
them to sell at prices that would have been impossi ble absent the subsidies. According to the EC the
main reason for low world market pric es is the subsidized overcapacity in Korea. The EC asserts that
the three restructured yards have more than one-half of total global overcapacity which is estimated at
20 per cent. For the EC, it is not realistic to s uggest, as Korea does, that this capacity would have
remained in business even without the restructur ing, as the other Korean yards could not have
purchased these yards or their assets as they too were in financial difficulties. Nor did any foreign
buyer express any interest in acquiring any of the yards or their assets.
7.633 The EC argues, citing the GATT 1947 Sugar cases and Indonesia – Autos, that correlation in
time between an alleged subsidy and its effects is very important in establishing causation. In this
regard, the EC argues that there is a clear coin cidence in time between the alleged restructuring
subsidies at issue and their price effects. Accord ing to the EC, the subsidies were massive, served to
maintain capacity, and in turn brought down prices. For LNGs, for example, world prices declined
when Daewoo entered the market in 1999, by which point Daewoo knew that it would be restructured.
7.634 The EC argues that the nature of the subsidies and the nature of the alleged serious prejudice
also should be taken into account by the Pane l when considering the methodology to use in
determining causation. In particular, the EC states, its claim is an overall claim of price depression
and suppression resulting inter alia from restructuring aids involving direct forgiveness of
government held debt, as well as from KEXIM subsidies.
322 On the forgiveness of government-held
debt, the EC argues that SCM Article 6.1 recognizes this as a particularly egregious form of
subsidization.
7.635 Concerning price leadership by Korean shipyards, the EC refers to shipyard-specific statistics
of orderbooks as of January 2004, as reported by Lloyd's Register, for three categories of ships. 323
According to the EC, these statistics show that Kore a's shares of the world market for each ship type
are very large. The data as referred to by the EC are set forth below:324
Container ships: HHI 24.3 per cent; Samho-Halla 8.1 per cent; Daewoo 5.3
per cent; all Korea 65.7 per cent

Product tankers
325: STX-Daedong 14.5 per cent; HHI 5.6 per cent; Daewoo 3.1
per cent; all Korea 58.9 per cent

322 Second written submission of the EC at para. 295.
323 The EC indicates that the detailed Lloyd's Register data are reproduced in Attachment EC-2 to its
answers to questions from the Panel following the first substantive meeting.
324 Second written submission of the EC at paras. 371-374.
325 We note that according to Attach ment EC-2, the data on product ta nkers include but are not limited
to product/chemical tankers.

LNGs: Daewoo 29.3 per cent; Samsung 18.1 per cent; HHI 11.5 per
cent; all Korea 58.9 per cent
According to the EC, with market shares of this ma gnitude it is clear that the Korean industry has the
ability to set the world price level for the three ship types, which th e EC argues in fact is the case.
Concerning the fact that in some cases, the Kor ean yards with the largest market shares were not
restructured (i.e., are not alleged to have received subsidies through restructuring), the EC argues that
the restructuring affected the entire Korean industry, such that the restructured yards, even when not
market share leaders, were price leaders, driving down prices for all Korean yards, which in turn
pulled down world prices. First the EC argues that the three restructured shipyards account for around
one-third of the orderbook in Korea as a whole, and 12 per cent of the global orderbook. More
significant in terms of the effect on prices, according to the EC, is the behaviour of concentrations of
capacity with intense competition among a limited number of companies operating in the most heavily
contested market sectors suppressing prices. The EC fu rther states that restructured yards "regularly
appear amongst the small concentration of shipya rds whose capacity is determining prices in many
sectors".326 The EC asserts that the low prices offered by the subsidised ship yards force competing
Korean shipyards to offer low matching prices, i rrespective of the long-term economic consequences
that may not be evident until a number of years late r. Otherwise, these competing shipyards will be
unable to achieve the high volume of orders necessa ry to support their facilities, debt payments, and
large workforces.327 The EC further argues that the subsidized KEXIM financing helped to enable the
non-restructured yards to follow the pricing lead of the restructured yards.328
7.636 On the basis of the foregoing arguments, we understand the EC's basic claim of serious
prejudice to be: restructuring subsidies kept a huge amount of uneconomic capacity in the market,
and greatly reduced the cost of operating that capacity , in particular by removing the companies' debt
service burden. The removal of debt allowed the re structured yards to price aggressively in order to
fill their excess capacity, which in turn led the othe r (non-structured) Korean yards to reduce their
prices. The APRGs and PSLs, also played a role in maintaining excess Korean capacity on the market
by improving the financial strength of shipyards thre atened with closure, and in financing price cuts
by both restructured and non-restructured shipyards. The large market shares and capacity of the
Korean shipbuilders left shipbuilders in the rest of the world with no choice but to follow the formers'
downward pricing lead. For the EC, this has me ant that, as a result of the suppressed and depressed
price levels, EC shipyards either lose bids that they make due to inability to meet the price level set by
Korean competitors or, refrain from bidding at all, knowing that they will not in any case be able to
compete at the prevailing price level. The suppressed and depressed world prices thus seriously
prejudice the EC's interests.
(b) Main rebuttal arguments of Korea
7.637 Korea objects, first, to the EC characterizati on of the shipbuilding industry and market as
"global". Korea argues that some markets are reserved for national producers (citing LNGs, and the
US cabotage market, as particular examples). Kor ea further argues, as described above, that price
suppression/price depression must be established in re lation to (a) particular national market(s).
Korea seems to imply that therefore a case based on a world market must fail on this basis alone.
7.638 Korea further argues that the price information presented by the EC is simply too broad-based
to be meaningful. In particular, Korea argues that information should be presented on a "like product"
basis, and suggests a number of detailed criteria to differentiate the like products within each ship
category. At a minimum, prices should be broken out by size bands within each category which, if

326 Attachment EC-2 at 4.
327 Second written submission of the EC, para. 308.
328 Second written submission of the EC, para. 270.

done, shows considerable price variation, with prices for some size bands in a given category
increasing, some decreasing, and some staying flat.
7.639 Korea takes strong issue with the EC's characterization of the EC's shipbuilding interests. For
Korea, EC yards simply do not compete head-to- head with Korean yards in any of the three
categories. Instead, Korea states, EC yards are conc entrated in smaller ship sizes than Korean yards,
and in many cases are precluded from bidding for the la rgest ships by size constraints, and by lack of
specialization and know-how that are important dete rminants of a yard's effective capabilities to build
particular ships. Korea notes, and criticizes the fa ct, that the EC gave only a partial response the
Panel's request for yard-specific information on EC capabilities and production history. For Korea,
this confirms that the EC is unable to demonstrate that the EC and Korean yards directly compete.
7.640 Concerning the determinants of ship prices, Korea argues that there is no historical correlation
with order levels. Furthermore according to Kor ea, compensated gross tons, the unit of measurement
used by the EC to show the trend in orders, is misl eading. If instead years of workload or number of
ships were used, Korea argues that the trend would be fluctuating, rather than sharply increasing as
alleged by the EC. Korea also takes issue with fre ight rates as a determinant of ship prices, arguing
that currently the ship market is a buyers' market in spite of increases in freight rates.
7.641 On costs, Korea argues that its shipyards enjoy significant a dvantages in terms of materials
(including for domestically sourced inputs, wh ich are increasing in importance), wages and
depreciation of the Won favouring exports, as well as productivity and economies of scale reflecting
Korea's experience in producing in series.
7.642 Concerning the EC argument that the restructur ed yards pulled down the prices of all other
Korean yards, Korea asks, "Why [ ...] stop at the Korean shipyards? If the subsidies triggered a price
war, why then not also blame the Japanese shipyard s or the Chinese shipyards or any other shipyards
for that matter?"
329 According to Korea, the EC is claimi ng that the subsidies allegedly granted to
Daewoo, Halla and Daedong have stimulated price competition among the Korean shipbuilders and
that, therefore, the prices practiced by the other Korean shipbuilders have also caused price depression
or suppression. For Korea, this is a "long stretch". Korea states that Article 6.3(c) requires that price
depression or suppression must be the effect of the subsidies, and that the wording of this provision
does not envisage that it would be sufficient that prices of non-subsidized shipbuilders caused price
depression or suppression.
7.643 Korea argues that the “but for” analysis of cap acity proposed by the EC falls far short of the
standard required by Article 6.3. Rather, Korea states, the SCM Agreement explicitly requires the EC
to demonstrate that the effect of the subsidy is significant price suppression or price depression, which
has then caused serious prejudice. For Korea, this calls for the EC to present factual evidence as to
the effects of the subsidy, rather than to try to establish serious prejudice via a “but for”-based
conjecture. Furthermore, and in any case, Kor ea argues, the capacity in question would have
remained in operation. Korea argues, first, that the restructuring was the most “market oriented”
behaviour in the light of the circumstances at the time. Second, even if the companies had been
liquidated rather than restructured, "liquidation" does not mean "termination" of the insolvent
companies' business. Instead, for the creditors to recoup the “liquidation value” of the insolvent
companies, normally they would repack and sell the production facilities to buyers who would use
them for their original purposes. Therefore, contra ry to the EC’s allegation, the three shipbuilders’
shipbuilding capacity would have remained in ope ration although the ownership of these facilities
might have changed.
7.644 Korea asserts that the EC has not shown the effect of the subsidy on the alleged price
suppression/price depression, which for Korea requires a quantification of the subsidy in relation to

329 Second written submission by Korea, para. 261.

the amount of alleged suppression/depression. In th is respect, Korea argues that a very detailed
subsidy-by-subsidy, like product-by-like product anal ysis would be needed to determine what the
theoretical price level for each ship would have been without the alleged subsidies, and after
neutralizing the effect of all other factors influencing prices, compared with the actual, observed price.
Thus, Korea rejects the notion that there is demand side substitutability of different ships within each
ship category giving rise to mutual price influences . Korea also rejects the argument of general
supply side fungibility of ships, arguing that EC yards in particular have significant physical and
experience constraints that limit their participation in the full spectrum of ship sizes and types. As for
the effect of the subsidies more generally on prices, Korea like the EC argues that only shipyards with
sufficient market share in a given like product could affect prevailing price levels, but Korea disputes
that any of the allegedly subsidized Korean yards have such shares.
7.645 Finally, Korea argues, the EC has not s hown how the alleged price depression/price
depression has seriously prejudiced the interests of the EC, including shipbuilders producing the three
types of ships. As discussed above, Korea views "serious prejudice" as a separate requirement from
price suppression/price depression.
13. Product-specific analysis
7.646 We turn now to our consideration of the EC's price depression claim in respect of LNGs.
Here, as noted, while we present the parties' arguments as to both the restructuring and the APRGs
and PSLs, we confine our analysis of alleged adverse effects to th e APRGs and PSLs, given that we
rejected the EC's subsidization claims in respect of the restructuring.
(a) Arguments of the parties
(i) LNGs
7.647 The EC argues that world prices for LNGs fe ll sharply between 1997 and 2000, stabilized for
nearly two years, then continued their decline, in spite of a significant increase in the number of LNGs
ordered. In support of this ch aracterization of LNG prices, the EC presents Figure 30, entitled
"newbuilding price developments" for LNG carriers from 1997 through 2002. The chart is
reproduced below. As shown, the chart in Figure 30 consists of two price trend lines as well as price
points for Japanese, Korean, and EC ships, for the period January 1997-December 2002. In answer to
a question from the Panel, the EC indicates that th is chart was published by Lloyd's register of
shipping. We note that the same ch art also appears as Figure D in the OECD document
C/WP/SG(2003)10.
330

330 Exhibit EC-157.

FIGURE 30:
331
 NEWBUILDING PRICE DEVELOPMENTS
-- LNG CARRIER (120 000 to 140 000 m3) --
100
125
150
175
200
225
250
275
mill US$
Lloyd's Shipping Economist (125 000cu. m) Clarkson Research Studies (138 000 cu. m) Japan Korea EU Countries
Jan 1997 Jan 1998 Jan 1999 Jan 2000 Jan 2001 Jan 2002 Jan 2003

7.648 The EC also presents a table showing the total number of LNGs ordered in each year from
1997-2002. This table is reproduced below. The EC states that the table s hows that the number of
LNGs ordered increased during the period shown. The EC argument is that world LNG prices
declined, when they should have increased, given the substantial increase in orders. Korea does not
dispute the accuracy of either the price chart or the information on the level of orders.

FIGURE 31: Number of ships ordered

Number of ships ordered332 1997 1998 1999 2000 2001 2002
Total number of ships 9 2 5 17 30 23

7.649 The EC supplements this argument with price and cost indices for Korean LNGs, presented in
Figure 38, reproduced below. According to the EC, costs of production for LNGs in Korea have risen
since 2001, while prices have declined. Furthermore, the EC argues, freight rates also were increasing
at the same time. Thus, the EC argues, the main price determining factors for LNGs – demand, costs,
and freight rates – all were increasing yet prices dec lined. The EC argues that this situation, in
particular the "dramatic" decline in the price of LNGs between 1997 and 2000, coincided with the
industry restructuring in Korea.

331 Source: Lloyds’s register of Shipping.
332 Ibid.

FIGURE 38
Cost and Price Indices for LNGs in Korea333
60
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95
100
105
1997
1998
1999 2000 2001 2002
2003
Ye ar
Index
Cost
Pri ce

7.650 Korea rejects the EC arguments concerning LNGs for a number of reasons. First, Korea
states that the apparent coincidence in time between the decrease in prices and Korea's first LNG sale
on the world market is illusory, as the prices decrease d before the first foreign order for an LNG was
ever placed with a Korean shipyard. Moreover, Korea argues that these price declines began before
the industry restructuring. On these points, the EC responds that even if prices began to decline
before Korean yards entered the ma rket, this does not mean that Ko rea was not responsible for price
declines that occurred after that point. In addition, the EC states that Daewoo's price offer on the
[BCI: Omitted from public version] project reflected the effect of the alleged subsidies, as Daewoo
knew at the time that it made its winning bid that it would receive subsidies.334
7.651 Korea also disputes the causes of the price dec lines as presented by the EC. Korea points in
particular to changes in size specifications to bi gger ships than those produ ced in Europe, movement
of LNGs from a specialty product to an incr easingly standardized product, price pressure from
owners, and technological improvements, as well as industry overcapacity . In this regard, Korea also
disputes the EC's assertion that production costs in Korea are increasing. Korea states that, to the
contrary, the Korean shipbuilding industry enjoys si gnificant cost advantages compared to European
shipyards, due to lower material and wage co sts, higher productivity and the impact of the
depreciation of the Won vis-à-vis the dollar, along with the appreci ation of the euro, affecting the
competitiveness of European yards. Korea states that every component of Korean costs fell further
and faster than newbuilding prices. Korea argues th at, at present, the market for LNGs is a buyers'
market.
7.652 Furthermore, in Korea's view the EC must de monstrate that the shipyards benefiting from the
alleged subsidies led the price declines for LNGs. In other words, Korea states that it is not sufficient
to refer to the Korean industry as a whole.
7.653 On the latter point, the EC responds in part th at because the Korean industry is highly
competitive, the other Korean yards had to follo w Daewoo's lead in cutting LNG prices. The EC
states that these other yards received APRGs and PSLs, which partially offset the cost of the price
cuts (up to 2 per cent of the selling price of a sh ip). Thus, for the EC, the alleged restructuring

333 Source: FMI.
334 Second submission of the EC at pa ra. 368. "...the restructuring subsidies began to cause depression
and suppression from the time when the shipyards first knew that they were expecting to receive benefit from
the restructuring plans".

subsidies (along with subsidized KEXIM financing) to Daewoo have allowed it to set the prices for
the Korean industry as a whole, with subsidized KEXIM financing to the non-restructured yards
helping them to follow Daewoo's pricing lead. In turn, the subsidized low Korean price has forced
down world LNG prices.
7.654 In respect of price leadership by Daewoo, an d by Korea more generally, the EC argues that
the low prices are a reflection of Daewoo's need to fill its capacity, which is capacity that would have
exited the market if there had been no restructuring. In addition, the EC argues, the restructuring
greatly reduced Daewoo's costs, by eliminating debt that otherwise would have had to be amortized
over each vessel sold, and thus reflected in the ships' prices. Korea counters that even if Daewoo had
been liquidated instead of restructured, its capacity would have stayed operational, as it was a modern
facility for which a buyer would have come forward.
7.655 The EC also points to statistics comparing Ko rean and EC world market shares for LNGs.
According to detailed order information on indi vidual shipyards submitted by the EC, as at
January 2004 Daewoo was the leading LNG producer in the world, accounting for 29.3 per cent of the
market measured in terms of compensated gross tons, followed by Samsung with 18.1 per cent. HHI
held a further 11.5 per cent share. Thus, th e EC argues, the Korean industry accounts for
58.9 per cent of total outstanding orders of LNGs.
7.656 Korea objects that it is not possible to determ ine price leadership from market shares for
LNGs. In particular, Korea argues that Koreas shar e of the LNG market has fluctuated greatly, from
0 to 73 per cent since it began selling LNGs. Korea say s that it is therefore impossible to draw any
conclusions as to price leadership from these market shares.
7.657 Finally, the EC presents a number of examples of LNG transactions to illustrate its price
depression arguments. In these transactions, the EC states, EC shipyards bid against and lost to
Korean yards, after a bidding process over the c ourse of which the Korean offer prices were
progressively reduced. According to the EC, in th e end the EC yards were unable to reduce their
prices sufficiently to win the orders. Concerning this EC argument, Korea objects in the first instance
to what it sees as the EC's tryi ng to reintroduce its abandoned pri ce undercutting claim. Korea also
argues that there is no link between the restructuring and the pricing by Korean yards for LNGs,
because it was a non-restructured yard that obtaine d the first foreign order, because Daewoo's first
LNG bid was made before it was restructured, and because non-restructured yards were offering
similar prices at around the same time.
(ii) Product/chemical tankers
7.658 In respect of product/chemical tankers, the EC presents in Figure 42, reproduced below, a
table concerning market shares, in terms of new orders, for the period 1993-2002.
Figure 42: Market Shares in Product and Chemical Tanker Sector for the period 1993-2002

 Average
93/97
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Average
98/02
EU 19% 12% 22% 11% 21% 22% 10% 3% 3% 7% 3% 5%
Skorea 19% 6% 16% 30% 12% 28% 46% 44% 51% 39% 35% 42%
Source: Lloyd’s register of shipping
7.659 According to the EC, this table demonstrates that as from 1998, the year directly following
the Won devaluation, Korean yards gained significan t market shares and became market share leaders
in this sector. In subsequent years, the EC argues, Korean yards consolidated their position, through a
reckless low price policy, notwithstanding the recovery of the Won and increasing cost of production .

7.660 Korea rejects the EC's market share data, stati ng that these data do not support the allegation
that Korea is the price and volume leader for produc t and chemical tankers, first because market share
data lend no support for a conclusion on price leader ship as a matter of course. In addition, Korea
points out that the data in the EC's market shar e table reflect product tanke rs and chemical tankers,
which the EC has admitted belong to different pr oduct categories. According to Korea, the EC's
consultant FMI has admitted that the EC industry pa rticipates only in respect of chemical tankers, and
that China has led chemical tanker prices since 2001.

7.661 The EC also presents in Figure 43, reproduced below, a chart comparing price and cost
indices for certain product and chemical tankers produced in Korea. 335

FIGURE 43336
Cost and Price Indices for Handysize Product and Chemical Tankers in Korea
60
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105
1997 1998 199
9
2000 2001 2002 2003
Year
Inde x
Cost
Pr i ce

7.662 According to the EC, the combination of rising demand, reflected in the high volume of
orders for new ships and the higher freight rates, and the rising costs of Korean shipyards, should have
caused the price of ships to incr ease, or to increase more steeply th an they did. Korea argues in
respect of costs that its industry enjoys significant cost advantages compared to European shipyards,
due to lower material and wage costs, higher produc tivity and the impact of the depreciation of the
Won vis-à-vis the dollar, along with the appreciation of the euro, affecting the competitiveness of
European yards. Korea states that every component of Korean costs fell further and faster than
newbuilding prices. Concerning freight rates, Kore a argues that the information provided by the EC,
which sets forth a single freight index tabulation, is uninformative. Korea argues that freight rates can
vary by vessel segment and should be differentiated on that basis.
7.663 The EC asserts that the price suppression of wh ich it complains is closely linked to price
leadership that Korean shipyards have enjoyed since 1999.
337 The EC states that Korean prices are the
starting point of sales negotiations in the shipbuild ing industry, and are so low that EC producers
often are not even requested to bid for contracts by brokers because the brokers are aware that EC
shipyards will not be able to match the Korean price unless they sell at substantial loss.

335 According to the EC, the size of ship presented (a round 47,000 dwt) is typical of the class built in
numbers in Korea, and also is a class of ship that would be of great interest to EC shipyards if the price were not
so low.
336 Source: FMI.
337 WTO Trade Policy Review Mechanism of 2000 (Exhibit EC-82).

7.664 In this regard, the European Communities provides certain examples of sales that it alleged
were lost by EC shipyards to Korean shipyards in the product and chemical tanker sector. The EC
indicates that it is not making a claim of lost sales, but rather presents the examples to illustrate the
price leadership of Korean shipyards in this sector resulting in suppressed prices.
7.665 The EC asserts that this price leadership help s the Korean shipbuilding industry to make use
of the excess capacity that it brought on line in the mid-1990s.
338 According to the EC, the alleged
subsidies i.e., the restructuring aid and the export subsidies as well as the tax concessions, allowed the
preservation of unneeded facilities, compelling a si gnificant decline in prices with Korean yards
willing to sell at any price above the variable cost of production.
7.666 Korea denies that Korean shipyards are the pri ce leaders for product and chemical tankers, on
the basis of the report of the EC's consultant, an d argues that in some c ases European prices are
lower.. Furthermore, Korea states, the examples of lost sales alleged by the EC are irrelevant,
inter alia because in some cases the Korean shipyards involved were not among the restructured ones,
and because of technical limitations on the part of the certain of the European yards involved.
(iii) Container ships
7.667 The EC presents in Figure 39, reproduced belo w, a table on market shares, in terms of new
orders, in the container ship sector for the period 1993-2002.
Figure 39: Market Shares container ship sector for the period 1993-2002

 Average
93/97
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Average
98/02
EU 23% 34% 22% 26% 13% 23% 15% 13% 12% 20% 10% 14%
Skorea 27% 31% 26% 34% 27% 14% 45% 62% 52% 32% 52% 48%
Source: Lloyd’s register of shipping
7.668 According to the EC, this table indicates that , from 1998, the year directly following the won
devaluation, the Korean yards gained significant market share and became price and volume leaders
in this sector. Yet, despite the recovery of th e won and the increasing cost of production, Korean
prices continued to decrease thereafter, allowing Kor ean yards to consolidate their price leadership
and market dominance in the sector.
7.669 Korea disagrees, arguing that the market share data presented by the EC do not support the
EC’s allegation that Korea has become price and vo lume leader and that Korean prices continued to
decrease thereafter. For Korea, in the first place market share data lend no support for a conclusion
on price leadership as a matter of course. Furthermore, Korea argues that containerships cannot all be
grouped together as the market share table does, because container ships do not constitute a single
"like product". Rather, they show significant technical differences linked to their intended use and are
perceived as such. According to Korea, the EC's own consultant, FM I, explicitly admitted that, as far
as containerships are concerned, the Korean and European Communities’ shipyards only compete for
feeder containers where the prices have been led, again according to this c onsultant, by South Korea
and China but with strong competition from Poland, Singapore and Taiwan. Korea argues that the
European Communities are active in certain sizes of the feeder category, and the EC shipyards
decreased their prices well before the appearance of Korean vessels of the same size on the market.

338 FMI Background Report, at 23 (Exhibit EC-1).

7.670 The EC also presents in Figure 40, reproduced below, a chart comparing price and cost
indices for 3,500 TEU container ships in Korea. 339

Figure 40 Container ship
Cost and Price Indices for 3,500 TEU Container Ships in Korea (USD)340
60
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199
7
199
8
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9
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Cost
Price

7.671 The EC argues that the chart shows (in USD) th at the price of, and the cost to produce,
container ships declined sharply from 1997 until the middle of 1998. Since late 1998, the price has
continued its general downward tre nd while costs have risen. The EC argues that the ability of the
Korean shipyards to lower prices in the face of risi ng production costs is attributable to the alleged
subsidies to the shipbuilding industry.
7.672 Korea's argument in respect of costs is that Korea has significant cost advantages compared to
European shipyards, due to lower material and wage costs, higher productivity and the impact of the
depreciation of the Won vis-à-vis the dollar, along with the appreci ation of the euro, affecting the
competitiveness of European yards. Korea states that every component of Korean costs fell further
and faster than newbuilding prices. Concerning freight rates, Korea argues that the information
provided by the EC, which sets forth a single freight index tabulation, is uninformative. Korea argues
that freight rates can vary by vessel segment and should be differentiated on that basis.
7.673 For the EC, Korea is the recognised world pri ce leader: the downward trend of the prices
charged by the Korean shipyards caused prices in the world market to decline as well. The EC
submits a price index chart (Figure 41, reproduced be low) in support of its argument that the world
market price for container ships is declining. The price chart covers 3,500 TEU and 1,100 TEU
containerships. According to the EC, competition between Korean and EC yards is particularly strong
in the 3,500 TEU segment of container ships, while in the segment of smaller container ships Korean

 339 The EC notes that the term “TEU” stands for “t wenty-foot equivalent unit”, the key measurement
of the cargo carrying capacity of a container ship.
340 According to the EC, this is typical of the cl ass of container ship for which there is strong
competition between Korea and the European Communities. Since 1997, orders have been won by Daewoo,
Halla, Hyundai Heavy, Samho and Samsung in Korea, and Volkswerft, HDW, and Od ense in the European
Communities.

yards are less active, explaining the less-pronounced price decrease for the latter class of container
vessels.
Figure 41: World Market Price for Containerships

7.674 Korea counters with a chart of its own showing prices for feeder containerships, on the basis
of which it argues that the EC shipyards depressed th e price for feeder containership, well before the
appearance of Korean vessels of the same size on the market.
7.675 The EC also submits an example of a sale of a container ship allegedly lost to a Korean
shipyard, as illustration of price suppression by Kor ean shipyards in the container ship sector.
According to the EC, Korean prices constitute the starting point of price negotiations, and no profit-
seeking shipyard can meet these below-cost levels. Korea challenges the relevance of this example,
arguing that one such order is does not constitute even prima facie evidence of significant price
suppression, particularly when it is not demonstrated to be the effect of any existing subsidies.
(b) Evaluation by the Panel
7.676 We recall our findings that the EC has not de monstrated that the industry restructuring
conferred subsidies on certain Korean shipyards. We also have found that the KEXIM legal regime as
such, as well as the APRG and PSL programmes, as such, do not constitute prohibited export
subsidies. We have, however, found that a number of individual APRGs and PSLs do confer
subsidies. Some of these individual transactions involve the three types of ships that we are
considering (LNGs, product/chemical tankers, and container ships), and some of these transactions
involve other kinds of ships (e.g., crude oil tankers, bulk carriers, roll-on-roll-off vessels).
7.677 Thus, most of the alleged subsidies which the EC claims to cause adverse effects in fact
cannot be considered in our serious prejudice analysis . The question that we must answer in respect
of the EC's serious prejudice claim, therefore, is whether the EC has established that, in themselves,
the relatively limited number of APRGs and PSLs that we have found to confer subsidies have caused
significant price depression in respect of LNGs, and significant price suppression in respect of
product/chemical tankers, and in respect of container ships. Applying the analytical framework that

we have described above, the questi on before us is whether the EC has established that but for these
subsidized APRGs and PSLs, the prevailing market prices for these ships would have been
significantly higher than they in fact were.
7.678 We recall here that the main premise of the EC's serious prejudice claim in respect of APRGs
and PSLs is that this financing complemented th e price depressive and suppressive effects of the
allegedly subsidized industry restructuring. Thus , the EC alleges certain effects of these financing
facilities as a whole, on the Korean shipbuilding indu stry as a whole, in the broader context of the
industry restructuring which the EC alleged to confer subsidies. The EC's allegation in respect of the
individual APRGs and PSLs thus is not based on an an alysis of the subsidized transactions pertaining
to LNGs, product/chemical tankers, a nd container ships in relation to the prevailing market prices for
those categories of ships.
341 While the EC asserts that the i ndividual subsidized APRGs and PSLs
played a role in determining which shipyard obtained a particular contract, and states that the effect on
the prices of the individual subsidized transactions was as much as two per cent ad valorem, for the
EC the principal price effect of the subsidized financing was more generalized, i.e., assisting the
restructured yards to maintain excess capacity in operation, whic h capacity in turn suppressed and
depressed overall price levels for the three categories of ships, as well as, in general, helping to enable
the non-restructured yards to follow the pr icing lead of the restructured yards. 342 Thus, the EC does
not distinguish, for purposes of its serious prejudice claims, between individual subsidized APRGs
and PSLs on kinds of ships covered by those clai ms (LNGs, chemical/product tankers, and container
ships), and on kinds of ships not covered by those claims (e.g., oil tankers, bulk carriers, and Roll-On-
Roll-Off vessels, etc.).
7.679 In taking up the EC's claims concerning the APRGs and PSLs that we have found to be
subsidized, we first must consider which of these s ubsidized transactions are relevant. In particular,
we must decide whether to include or exclude from the subsidies whose effects we are considering the
APRGs and PSLs on ship types other than LNGs, pr oduct/chemical tankers, and container ships. We
understand that the EC's rationale for including them was that the availability of subsidized APRGs
and PSLs in general had an impact on which ship yard obtained a sale and on the overall financial
strength of the shipyards. While such an argum ent based on all subsidized APRGs and PSLs might
have been plausible in the context of an affirmativ e finding of broad restructuring subsidies, we now
are left with a relative handful of individual subsidiz ed transactions involving a variety of ship types,
some of which are not covered by the EC's price suppression/price depression claim. The EC has
presented no evidence or argument seeking to demonstrate that subsidized financing of sales of ship
types not covered by its claim (such as bulk carriers) had an identifiable impact on pricing for any of
the ship types covered by its serious prejudice cl aims. In the absence of any such evidence or
argument, we see no basis for taking into account in our analysis the subsidized financing of ship

341 We recall the EC statement that its claim is "an overall claim of price depression and suppression on
the world market resulting inter alia from restructuring aids involving direct forgiveness of government-held
debt, as well as from KEXIM subsidies".
342 The EC states in this regard that it is obvi ous that access to pre-shipment loans and APRGs
at a time when private creditors either would not ha ve 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. The EC quotes from the 1998 KEXIM annual report in support of this argument as
follows: “[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 .” The EC also cites the KEXIM Ch airman's statement in the 1999 KEXIM
Annual Report: "[KEXIM] contributed to the economic recovery by providing a variety of financing
programs 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.” Finally, the EC argues that KEXIM financing caused orders to be
placed with the yards that later were restructured, which led to full orderbooks , which in turn led to
optimistic sales projections for the purposes of establishing going concern value.

types other than LNGs, product/chemical tankers, and c ontainer ships. Rather, we consider that we
should include in our analysis only the subsidized APRGs and PSLs that we know to relate to LNGs,
product/chemical tankers, and container ships. These APRGs and PSLs are listed in Attachment 3.
343
7.680 Furthermore, we recall that the EC has presente d its serious prejudice case, and has asked us
to conduct our analysis, in respect of each of the three categories of ships separately, and we will
proceed on this basis, considering the possible ef fects on the prices for each ship category of the
subsidized financing for ships in that category. In particular, we will consider first whether the
evidence and arguments presented by the EC demonstrate a tangible relationship between the
subsidized APRGs in respect of LNGs and the pr evailing price for LNGs; between the subsidized
APRGs and PSLs in respect of product/chemical tankers and the prevailing price for product/chemical
tankers; and between the subsidized APRGs and PSLs in respect of container ships and the prevailing
price for container ships. That is, we will look fo r evidence of a relationship between the subsidized
transactions for a given ship type, on the one hand, an d the prevailing market price for that ship type,
on the other hand. If we find that there is eviden ce of such a relationship, we then will go on to
consider in more detail questions of product definitions, geographic ma rkets, timing of subsidization,
movements in prices, evidence pertaining to costs, etc. for each product category, which would be
needed for a full analysis of the serious prejudice claims.
(i) LNGs
7.681 Of the APRGs that we have found to be subsidized, three concern LNGs. These APRGs were
contracted between 2000 and 2001, and expired betw een 2002 and 2004. We estimate the benefits of
these subsidies to range from [BCI: Omitted from public version] per cent of the value of the ships
involved. None of the PSLs that we have found to be subsidized concern L NGs. To put this into
perspective, the EC has submitted data showing that as of January 2004, there were 62 LNGs on order
around the world, 37 of them with Korean yards.
344
7.682 While the estimated benefit amounts are relatively small, we do not doubt that even such
modest subsidies may have played a role in obtaining the sales involved. In particular, we consider it
entirely possible that they translated into equiva lent price reductions on those specific transactions.
That said, it is far from self-evident to us that a price reduction of [BCI: Omitted from public
version] per cent on three transactions out of a much larger total would constitute, or lead to,
"significant price depression" for LNGs as a whole.
7.683 Here we re-emphasize that in respect of this price depression claim, the appropriate focus of
our analysis is the overall prevailing price level for the product category as a whole, and the possible
link of the subsidized APRG transactions for LNGs to this price level. Indeed the EC’s claim is based
on overall price effects for this product category, a nd it asks us to resolve the claim on that basis.
While we certainly accept the possibility that the subs idized financing affected the prices in the three
individual transactions, we find nothing in the eviden ce and arguments before us demonstrating that
the aggregate effect of the subsidized transactions is significant price depression for the entire product
category of LNGs.
7.684 We therefore reject the EC's claim that subsid ized APRGs have seriously prejudiced the EC's
interests by causing significant price depression in respect of LNGs.

343 There are a number of APRGs and PSLs that we ha ve found to be subsidized but for which we do
not have information concerning the ship type involved, although we requested this information from the EC
and the EC did not indicate that it was unavailable. ( See, Question 139 from the Panel to the EC, and the EC
response thereto.) Nevertheless, even if we were to a ssume that all of these unidentified transactions concerned
either LNGs, product/chemical tankers, or container ships, this would not change our analysis and conclusions.
344 EC Attachment 6, to answers to questions from the Panel following the first substantive meeting.

7.685 Given this, there is no need for us to consider the parties' detailed arguments as to product
definitions, geographic markets, timing, etc. advanced in respect of LNGs.
(ii) Product/chemical tankers
7.686 Of the APRGs that we have found to be subs idized, two concern product/chemical tankers.
These APRGs were contracted in 1999 and expired in 2001. We estimate the benefits of these
subsidies to range from [BCI: Omitted from public version] per cent of the value of the ships
involved. Of the PSLs that we have found to be subsidized, 24 concern product/chemical tankers.
These PSLs were contracted between 2001 and 20 02, and expired between 2001 and 2003. We
estimate the benefits of these subsidies to range from [BCI: Omitted from public version] per
centage points of interest on the loans involved. (No data are available as to these subsidy amounts
restated on an ad valorem basis.) Data submitted by the EC show that as of January 2004, there were
370 tankers (including but not limite d to product/chemical tankers) on order around the world, 218 of
them with Korean yards.345
7.687 While the estimated benefit amounts are relatively small, we do not doubt that even such
modest subsidies may have played a role in obtaining the sales involved. In particular, we consider it
entirely possible that they translated into equiva lent price reductions on those specific transactions.
That said, it is far from self-evident to us that a price reduction of [BCI: Omitted from public
version] per cent346 on a relatively few transactions out of a much larger total would constitute, or
lead to, "significant price suppression" for product/chemical tankers as a whole.
7.688 Here we re-emphasize that in respect of this price suppression claim, the appropriate focus of
our analysis is the overall prevailing price level for the product category as a whole, and the possible
link of the subsidized APRG and PSL transactions for product/chemical tankers to this price level.
Indeed the EC’s claim is based on overall price e ffects for this product category, and it asks us to
resolve the claim on that basis. While we certainly accept the possibility that the subsidized financing
affected the prices in the individual transactions , we find nothing in the evidence and arguments
before us demonstrating that the aggregate effect of the subsidized transactions is significant price
suppression for the entire product category of product/chemical tankers.
7.689 We therefore reject the EC's claim that s ubsidized APRGs and PSLs have caused serious
prejudice to the EC's interests through price suppression in respect of product/chemical tankers.
7.690 Given this, there is no need for us to consider the parties' detailed arguments as to product
definitions, geographic markets, timing, etc. advanced in respect of product/chemical tankers.
(iii) Container ships
7.691 Of the APRGs that we have found to be subsid ized, eight concern container ships. These
APRGs were contracted between 1997 and 2001, an d expired between 1998 and 2003. We estimate
the benefits of these subsidies to range from [BCI: Omitted from public version] per cent of the
value of the ships involved. Of the PSLs that we have found to be subsidized, 21 concern container
ships. These PSLs were contracted between 2001 and 2002, and expired between 2001 and 2003.
We estimate the benefits of these subsidies to range from [BCI: Omitted from public version]
percentage points of interest on the loans involve d. (No data are available as to these subsidy
amounts restated on an ad valorem basis.) Data submitted by the EC show that as of January 2004,
there were 502 container ships on order around the world, 276 of them with Korean yards.

345 Id.
346 Because the figures cited are percentage points of interest, rather than ad valorem amounts, they
would overstate the possible ad valorem impact of the subsidies involved to the extent that the financing in
question was for less than 100 per cent of the contract value.

7.692 While the estimated benefit amounts are relatively small, we do not doubt that even such
modest subsidies may have played a role in obtaining the sales involved. In particular, we consider it
entirely possible that they translated into equivale nt price reductions on those transactions. That said,
it is far from self-evident to us that a price reduction of [BCI: Omitted from public version] per
cent
347 on a small number of transactions out of a mu ch larger total would constitute, or lead to,
"significant price suppression" for container ships as a whole.
7.693 Here we re-emphasize that in respect of this price suppression claim, the appropriate focus of
our analysis is the overall prevailing price level for the product category as a whole, and the possible
link of the subsidized APRG and PSL transactions for c ontainer ships to this price level. Indeed the
EC's claim is based on overall price effects for th is product category, and it asks us to resolve the
claim on this basis. While we certainly accept the possibility that the subsid ized financing affected
the prices in the individual transactions, we find nothing in the evidence and arguments before us
demonstrating that the aggregate effect of the subsidized transactions is significant price suppression
for the entire product category of container ships.
7.694 We therefore reject the EC's claim that subsidized APRGs and PSLs have seriously
prejudiced the EC's interests by causing significant price suppression in respect of container ships.
7.695 Given this, there is no need for us to consider the parties' detailed arguments as to product
definitions, geographic markets, timing, etc. advanced in respect of container ships.
VIII. CONCLUSIONS AND RECOMMENDATIONS
8.696 For the above reasons, we uphold the EC's cl aim that Korea has provided prohibited export
subsidies in the form of the individual KEXIM APRG transactions set forth at para. 7.223 supra, and
the individual KEXIM PSL transactions set forth at para. 7.330 supra, contrary to Articles 3.1(a) and
3.2 of the SCM Agreement.
8.697 However, we reject the EC's claims that Korea is in violation of Articles 3.1(a) and 3.2 of the
SCM Agreement because prohibited export subsidies were and are provided pursuant to the KEXIM
legal regime "as such", and the KEXIM APRG and PSL programmes "as such".
8.698 We also reject the EC's claim that Korea, by providing subsidies to Daewoo-SME/Daewoo-
HI, Samho-HI/Halla-HI, and STX/Daedong through (i) wo rkout plans and restructuring plans; (ii) tax
concessions provided to Daewoo-HI/Daewoo-SME; and (iii) the grant of KEXIM APRGs and pre-
shipment loans, has caused serious prejudice to the interests of the European Communities in
violation of Articles 5(c) and 6.3(c) of the SCM Agreement.
8.699 Pursuant to Article 4.7 of the SCM Agreement, we are required to recommend that Korea
withdraw the abovementioned individual APRG and PSL subsidies without delay.
8.700 Article 4.7 further provides that "the panel shall specify in its recommendation the time-
period within which the measure must be withdraw n." Taking into account the procedures that may
be required to implement our recommendation on th e one hand, and the requirement that Korea
withdraw its subsidies "without delay" on the other, we recommend that Korea withdraw the
individual APRG and PSL subsidies within 90 days.

347 Because the upper end of this range reflects pe rcentage points of interest, rather than an ad valorem
amount, it would overstate the possible ad valorem impact of the subsidy involved to the extent that the
financing in question was for less than 100 per cent of the contract value.

ATTACHMENT 1

KOREA – MEASURES AFFECTING TRADE IN COMMERCIAL VESSELS (DS273)

Procedure under Annex V of the Agreement on Subsidies and Countervailing Measures

Report to the Panel from the Designated Representative of the Dispute Settlement Body

A. BACKGROUND

1. On 21 July 2003, a Panel was established at the request of the European Communities with
respect to the above matter. In its request for establishment of a panel,
1 the European Communities
alleged, inter alia , serious prejudice in the sense of Article 6 of the Agreement on Subsidies and
Countervailing Measures ("SCM Agreement"), and in this context requested initiation of the
procedure for developing information concerning seri ous prejudice provided for in Annex V to that
Agreement.

2. As provided for in paragra ph 4 of Annex V, the Dispute Settlement Body ("DSB") designated
a Representative, Mr. András Szepesi, to facilitate the Annex V information-gathering process. The
Designated Representative was appointed by the DSB on 21 July 2003, i.e., the date on which the
Panel was established. This date was also considered by the parties to be the date on which the matter
was "referred to the DSB" in the sense of paragraph 5 of Annex V. This meant that the 60-day period
established in that paragraph for completion of th e information-gathering process would have ended
on 19 September 2003.

3. Shortly after the Panel was established, the Designated Representative met with the parties
(the European Communities and Korea) to determ ine a schedule and working procedures for the
Annex V procedure. Also, through out the duration of the information-gathering process, he remained
at the disposal of the parties. As reported below, he was called upon on a number of occasions by one
or both of the parties to assist them by providing gu idance or, if applicable, rulings with respect to
different procedural aspects involved in the process.

B. WORKING PROCEDURES AND SCHEDULE

4. It was recognized that Annex V does not describ e all aspects of the procedures for developing
information concerning serious prejudice. Paragr aph 2 of Annex V clearly foresees the possibility
that parties to a dispute may pose questions to one another. In addition, however, the task of the
Designated Representative is to ensure the timely development of the information necessary to
facilitate expeditious subsequent multilateral review of the disput e, and paragraph 5 contains a non-
exhaustive list of such types of information.
5. In view of these provisions of Annex V, and following consultations with the parties at an
organizational meeting on 23 July 2003, the Designa ted Representative adopted a procedure the first
step of which would be the submission of questions by the parties to the Designated Representative.
The second step in the process was the preparation and transmittal to the parties and third-country
Members of a questionnaire by the Designated Represen tative. That questionnaire would be based on
the questions posed by the parties, but those questi ons could be amended, deleted or supplemented by
the Designated Representative. In response to comments made by Korea, the Designated
Representative agreed to make a draft version of his questionnaire available to the parties for
comment, to allow them to identify any lacunae in the questions. The third step was the submission
by each party and third-country Member of answers to the questions directed to it. The fourth and

1 Document WT/DS273/2.

final step was a brief interval for the submis sion of any follow-up questions (concerning the
clarification of answers received in the prior step) and answers thereto.
6. The schedule for the process as outlined was:
1 August 2003 Parties to submit to the Designated Representative questions to be
posed to one another and to third-country Members
11 August 2003 Transmittal of questionnaires to parties and third-country Members
by the Designated Representative
8 September 2003 Replies to questionnaires due
15 September 2003 Submission by the parties of follow-up questions (concerning the
clarification of answers received by 8 September)
18 September 2003 Replies to follow-up questions due
19 September 2003 End of 60-day period / Report by the Designated Representative to
Panel
7. At a late stage in the 60-day period, in fact just a couple of days before its expiry, the above
schedule had to be modified, with the agreement of the parties, as a result of the additional time
needed for the parties to translate certain vol uminous documentation into one of the three WTO
working languages. The amended deadline fo r completion of the Annex V procedure was
10 November 2003. The Panel was immediately informed of these modifications and the causes
thereof.
C. PROCEDURAL ISSUES

8. A number of procedural issues arose during th e Annex V information-gathering procedure.
Those issues concerned the adoption and applicati on of additional procedures for the protection of
business / strictly confidential information, thir d party access to information, the timing of the
submission of questions, the scope and review of questions, a request for the suspension of the
Annex V procedure, and the translation of documents into a WTO working language.
1. Adoption and application of additional procedures for the protection of business /
strictly confidential information

9. On 22 July 2003, Korea asked the Designate d Representative to adopt additional procedures
for the protection of business / strictly confidential information ("B/SCI"). The
European Communities acknowledged the need for su ch additional procedures at the organizational
meeting on 23 July. Each party submitted draft additional procedures.
10. In a meeting on 13 August, the Designated Re presentative noted that, although he was in
favour of using additional procedures for the protection of B/SCI, the parties had proposed procedures
that covered both the Annex V and Panel proceed ings. While he found this approach fully
understandable and justified, he had to express the vi ew that only the Panel had the authority to adopt
procedures governing both the Annex V and Panel pr oceedings. As a result, the parties asked the
Designated Representative to forward their submi ssions regarding B/SCI to the Panel. The
Designated Representative complied with this re quest. The Panel adopted procedures for the
protection of BCI on 4 September 2003.

11. Subsequently, in a letter dated 15 Septem ber 2003, the European Communities asserted that
in providing information Korea had not exerci sed restraint in the designation of BCI. The
European Communities requested the Designated Re presentative to intervene in a manner envisaged
by paragraph 20 of the procedures for the protection of BCI. In a letter dated 16 September, Korea
asserted that it had acted in good faith, and in accordance with the definition of BCI as provided in the
procedures for the protection of BCI, by designating as BCI information "not otherwise available in
the public domain".
12. In a letter dated 16 September, the Designa ted Representative noted that the majority of
questions asked of Korea were designed to elicit information that was of a commercially sensitive
nature, and that the European Communities had failed to argue that such information was already in
the public domain. He therefore declined to find that Korea had failed to exercise restraint by
designating much of its questionnaire response as BCI, and declined to intervene under paragraph 20
of the additional procedures for the protection of BCI.
2. Third party / third-country Member access to information

13. The European Communities asked the Desi gnated Representative to make information
gathered under the Annex V procedure, including B/SCI, available to third parties or, at the very least,
to third-country Members participating in the A nnex V process. Korea asserted that there was no
basis for doing so. Following a preliminary indication to that effect on 24 July 2003, on 4 September
the Designated Representative informed the parties that, in his view, information gathered under the
Annex V procedure did not need to be made ava ilable to third parties. In accordance with
Article 10.3 of the DSU, third parties were entitled to receive all the submissions made by the parties
to the Panel up to the first meeting of the pane l. Since information submitted under the Annex V
procedure did not constitute a submission to the Pa nel, such information fell outside the scope of
Article 10.3. The Designated Representative saw no basis in the DSU or Annex V for treating third-
country Members (which were also third parties) any differently.
3. Timing of the submission of questions

14. In a letter dated 22 July 2003, Korea asked the Designated Representative to introduce a
staggered questioning process, wher eby the European Communities would be required to submit its
questions to the Designated Representative seven days before Korea.
15. In a communication dated 24 July, and on the basis of comments made by Korea at the
organizational meeting, the Designated Representative stated that he understood Korea’s request to be
motivated primarily by the concern that the Eur opean Communities would submit questions to third-
country Members other than those identified in the European Communities' communication of
10 July 2003 (WT/DS273/3), i.e., China and Japan. The Designated Representative explained that, in
view of the European Communities’ communicati on of 10 July, it could be assumed that the
European Communities would only address questions to those two third-country Members. He
indicated that he would consider carefully whether or not it would be appropria te to include questions
addressed by the European Communities to other third-country Members in his questionnaire.
Accordingly, the Designated Representative conc luded that there was no need for a staggered
questioning process. In light of a further submission by Korea on 25 July, the Designated
Representative informed the parties on 28 July that he would provide them with a brief opportunity to
comment on his draft questionnaire, to ensure that no questions were overlooked.
4. Review and scope of questions

16. On 22 July 2003, Korea asked for an opport unity to review questions submitted by the
European Communities, to determine whether or no t they adequately identified the nature of its
serious prejudice allegations, and to enable Korea to ensure that the scope of the

European Communities’ questions was properly li mited to matters necessary to establishing its
claims.
17. On 24 July, the Designated Representative stat ed that there was useful guidance in Annex V
for identifying the information that would be most relevant to the serious prejudice claims at issue in
this dispute. He noted, however, that it was ultim ately up to each party to decide how it would
respond to questions put to it. Since paragraph 8 of Annex V implied that there may be circumstances
in which unreasonable questions might be put, he co ncluded that Annex V did not require any formal
step providing for the ex ante assessment of the reasonableness of questions. (The provision of a draft
questionnaire to the parties was merely to allow them to identify any questions that might have been
overlooked by the Designated Representative.) He noted, however, that each party would be free to
include comments on the reasonableness of questions when formulating its replies.
18. On 5 August, Korea nevertheless submitted a number of comments regarding the questions
proposed by the European Communities on 1 August (which the European Communities had copied
to Korea directly on that date). The European Communities was invited to respond by 6 August.
Since no ex ante review of proposed questions was envisag ed, the Designated Representative did not
respond to the comments made by the parties.
19. Independently of these comments, and in line with his prerogative specified in paragraph 5
above, the Designated Representative did however ame nd or delete a number of questions submitted
by the European Communities, to ensure that those questions did not exceed the scope of the Annex V
procedure. Incidentally, such amendments / deletio ns also addressed some of the concerns raised by
Korea. In a letter dated 8 August 2003, the Euro pean Communities commented on the scope of the
Designated Representative’s draft questionnaire to Ko rea. The European Communities asserted that,
although the Designated Representative had restricted questions to Korea regarding the KEXIM Act
and programmes to matters involving trade in commercial vessels, the serious prejudice claim relating
to the KEXIM Act and programmes was not confined to exporters involved in trade in those products
or to the shipbuilding sector.
20. On 11 August 2003, the Designated Representative asserted that he considered it appropriate
to focus questions primarily on issues relating to tr ade in commercial vessels in light of the scope of
the European Communities' request for consultati ons (WT/DS273/1) and request for establishment of
a panel (WT/DS273/2).
5. Request for the suspension of the Annex V procedure

21. Consistent with its above mentioned submissions, on 8 August 2003 Korea expressed concern
regarding the scope of certain questions incl uded in the Designated Representative’s draft
questionnaire, and proposed that the Annex V pr ocedure be suspended pending resolution by the
Panel of legal issues concerning the scope of qu estions. Alternatively, Korea submitted that the
Annex V procedure could proceed, but with the questionnaire responses of the parties and third-
country Members being provided only to the Design ated Representative (who would in turn provide
the information to the Panel, but not to the parties).
22. On 11 August 2003, the Designa ted Representative stated that he intended to complete the
Annex V procedure in accordance with his mandate from the DSB. He theref ore declined to follow
either of the courses proposed by Korea. He added that his mandate was to “ensure the timely
development of the information necessary to facilita te expeditious subsequent multilateral review of
the dispute”. He stated that this mandate necess arily required the exercise of discretion on his part,
and that he had exercised that discretion by incl uding information-gathering questions on all issues
that seemed to him to relate to those parts of th e dispute covered by the scope of Annex V. He
asserted that it was then up to Korea to determine to what extent it was prepared to respond to those
questions.

6. Translation into a WTO working language

23. During the course of the information-gath ering procedure, on 8 September both parties
submitted documents drafted in a language other than a WTO working language. In particular, nearly
half of all annexes submitted by Korea were provided, in whole or in part, in the Korean language. In
letters dated 8 and 16 Se ptember 2003, Korea asserted that it was not required to provide all
information in a WTO working language. Korea r ecognised, however, that it could be instructed,
either by the Designated Representative or by the Pa nel, to undertake the necessary translation. On
15 September, the European Communities asserted that provision of a document in a non-WTO
language was tantamount to non-provision of that document, and therefore non-cooperation.
24. On 15 September 2003, the Designated Representati ve informed the parties of his view that,
since the Annex V procedure was a special or a dditional rule or procedure in the meaning of
Article 1.2 of the DSU, it was formally part WTO dispute settlement proceedings. He therefore
concluded that the Annex V procedure must be c onducted in one of the three working languages of
the WTO.
25. With the consent of the parties, in a communication dated 17 September 2003 the Designated
Representative extended the deadline for completion of the Annex V procedure in order to allow
sufficient time for the translati on of certain documentation into one of the working languages of the
WTO. Additional time was also allowed for fo llow-up questions and answers regarding such
documentation. The modified schedule drawn up by the Designated Representative is attached hereto
as Attachment I.
26. The extension of the deadline obviously mean t that the information-gathering process could
not be completed within the deadline specified in paragraph 5 of Annex V of the SCM Agreement,
and this would necessarily impact on the schedule established by the Panel. However, not only does
Annex V fail to provide any guidance that could have been relied upon in addressing the problems
encountered, but also the extension was the only vi able option for ensuring that the information
obtained could meet the requirements specified, in pa rticular, in paragraphs 2 and 5 of Annex V, and
be of immediate use to the parties and the Panel. Furthermore, the deadline was extended with the
consent of the parties, who cooperated in respecti ng the modified schedule. Moreover, the Panel was
immediately informed, and did not express any disapproval, of these developments.
D. INFORMATION GATHERED

27. Questionnaires were sent to the parties a nd two third-country Members (i.e., China and
Japan). A substantial amount of information w as submitted in response those questionnaires. The
questionnaires, replies to questionnaires, follow-up questions and replies to follow-up questions are
contained in Annexes I – IV to this report. These Annexes are organized as follows:
Annex I -A Questionnaire to the European Communities
Annex I-B Replies by the Europ ean Communities to questionnaire
Annex I-C Follow-up questions to the European Communities
Annex I-D Replies by the European Communities to follow-up questions
Annex II-A Questionnaire to Korea
Annex II-B Replies by Korea to questionnaire
Annex II-C Follow-up questions to Korea

Annex II-D Replies by Korea to follow-up questions
Annex III-A Questionnaire to China
Annex III-B Replies by China to questionnaire
Annex IV-A Questionnaire to Japan
Annex IV-B Replies by Japan to questionnaire

ATTACHMENT I

KOREA – MEASURES AFFECTING TRADE IN COMMERCIAL VESSELS (DS273)

MODIFIED SCHEDULE FOR THE COMPLETION OF THE ANNEX V PROCEDURE

Timetable for submission of document translations, and for follow-up questions and answers

15 September 2003 deadline for follow-up questions on information submitted
8 September 2003.

16 September 2003
 provision of certain missing documents by Korea.

18 September 2003, COB
2 deadline for answers to 15 September follow-up questions.

22 September 2003, by 10:00 AM deadline for follow-up questions from EC on missing
documents provided by Korea on 16 September.

26 September 2003, COB deadline for answers of Korea to 22 September EC follow-up
questions on the missing documents provided on
16 September 2003.

2 October 2003, COB deadline for translations by the EC of EC documents as
referred to in EC letter dated 15 September 2003.

 deadline for translations by Korea of documents identified in
Attachment 1 to Korea's letter dated 16 September 2003 as
requiring two weeks for translation.

6 October 2003, COB
 deadline for follow-up questions on newly-translated
documents submitted on 2 October 2003.

10 October 2003, COB deadline for answers to 6 October 2003 follow-up questions.

16 October 2003, COB deadline for translations by Korea of documents identified in
Attachment 1 to Korea's letter dated 16 September 2003 as
requiring four weeks for translation.

20 October 2003, COB deadline for follow-up questions on newly-translated
documents submitted on 16 October 2003.

24 October 2003, COB deadline for answers to 20 October 2003 follow-up
questions.

30 October 2003, COB deadline for translations by Korea of documents identified in
Attachment 1 to Korea's letter dated 16 September 2003 as
requiring six weeks for translation.

2 COB refers to "close-of-business", i.e., 5:30 p.m.

3 November 2003, COB
 deadline for follow-up questions on newly-translated
documents submitted on 30 October 2003.

7 November 2003, COB deadline for answers to 3 November 2003 follow-up
questions.

10 November 2003 submission of Designated Representative's report to the
Panel.

ATTACHMENT 2

KOREA – MEASURES AFFECTING TRADE IN COMMERCIAL VESSELS
(DS273)

PROCEDURES FOR THE PROTECTION OF BUSINESS CONFIDENTIAL
INFORMATION

 The following procedures apply to all business confidential information (BCI) submitted in
the course of the Annex V procedure and the Pane l process. These procedures will not apply to a
party's treatment of its own BCI.

I. DEFINITIONS

1. “Approved persons” means:
(i) representatives or outside advisors of a party, or employees of the Secretariat,
when designated in accordance with the provisions of Article V of these
Procedures;
(ii) the Facilitator
(iii) Panel members; and
(iv) PGE members or experts appointed by the Panel who in the opinion of the
Panel require access to the BCI.
2. “Business Confidential information” means any information that has been designated as
Business Confidential by the party submitting the information, and that is not otherwise available in
the public domain.
3. “Conclusion of the Panel process” means when:
(i) pursuant to Article 16.4 of the DSU, th e Panel report is adopted by the DSB,
or the DSB decides by consensus not to adopt the report;
(ii) pursuant to Articles 16.4 and 17.14 of th e DSU, the Panel report is adopted
(with modification, if any) with the report of the Appellate Body; or
(iii) when the authority for establishment of the Panel lapses pursuant to Article
12.12 of the DSU.
4. “Designated as Business Confidential” means:
 (i) for printed information, clearly marked with the notation ‘BUSINESS
CONFIDENTIAL INFORMATION’ and with the name of the party that submitted
the document;

 (ii) for binary-encoded information, cl early marked with the notation ‘BUSINESS
CONFIDENTIAL INFORMATION’ on a label on the storage medium, and clearly
annotated with the notation ‘BUSINESS CONFIDENTIAL INFORMATION’ in the
binary-encoded files; and

 (iii) for uttered information, declared by the speaker to be “Business Confidential
Information” prior to the disclosure.

5. “Employee of the Secretariat” means a person employed or appointed by the Secretariat
who has been authorized by the Secretariat to work on the dispute, and includes translators and
interpreters and transcribers present at the Panel meetings.
6. “Facilitator” means the Representative of the DSB a ppointed in accordance with paragraph 5
of Annex V of the SCM Agreement.

7. “Outside advisor” means a legal counsel or other adviso r of a party, who has been
authorized by a party to act on behalf of such party in the course of the dispute and whose
authorization has been notified to the Chairman of the Panel a nd to the other party, but in no
circumstances shall this definition include an employee, officer or agent (other than outside legal
counsel who has represented a shipbuilder in connection with these WTO dispute settlement
proceedings) of a private company engaged in the manufacture of commercial vessels.
8. “Panel member” means a person serving on the Panel.
9. “Party” means a disputing party.
10. " PGE member" means a person appointed to the Pe rmanent Group of Experts established
pursuant to SCM Agreement Article 24, and who has been requested to assist the Panel pursuant to
Article 4.5 of the SCM Agreement.
11. “Representative” means an employee of a party or third party.
12. “Secure location” means a locked storage receptacle, to which only approved persons, or
designated representatives of third parties, have access.
13. "Third party" means a Member having notified its interest in the dispute to the DSB
pursuant to DSU Article 10.
II. ACCESS TO AND USE AND DISCLOSURE OF BCI

14. Access by parties to BCI:
(a) Only approved persons may have acces s to BCI submitted pursuant to these
procedures.
(b) Documents or other recordings containing BCI submitted pursuant to these
procedures shall not be copied in excess of the number of copies required by the
approved persons. All copies of BCI shall be consecutively numbered. The making
of electronic copies shall be avoided whenever possible.
15. Use and disclosure by parties and the Panel of BCI:
(a) Approved persons shall use BCI only for th e purposes of the Annex V procedure, the
Panel and possible subsequent appellate review proceedings and for no other purpose.
(b) No approved person shall disclose BCI, or allow it to be disclosed, to any person
except another approved person or designated representative of a third party.

(c) The Panel shall not disclose BCI in its re port, but may make statements or draw
conclusion that are based on the information drawn from the BCI.
16. Access by Third Parties to BCI
(a) Only designated representatives of third parties may have access to BCI, and only to
that BCI contained in the submissions of the parties to the dispute to the first meeting
of the Panel, and only for the purpose of pr eparing their third party submissions and
oral statements in the dispute. The third parties will provide the name(s) of the
designated representative(s) to the parties a nd the Panel before the first submission of
the complaining party. The procedures of Section IV of these procedures shall apply
mutatis mutandis with respect to the third parties.
(b) The submissions of the parties to the dispute to the first meeting of the Panel
containing BCI shall not be copied in ex cess of the number of copies required by the
designated representatives. All copies of such submissions shall be consecutively
numbered. The making of electronic copies shall be avoided whenever possible.
(c) No designated representative shall disclose BCI, or allow it to be disclosed, to any
person except an approved person or another designated representative.
III. STORAGE

17. Approved persons and designate d representatives of third parties shall store all documents or
other recordings containing BCI in a secure loca tion when not in use by an approved person or
designated representative.
IV. DESIGNATION OF APPROVED PERSONS

18. Each party shall submit to the other party, to the Facilitator and to the Panel a list of the
names and titles of its representatives and outside a dvisors who need access to BCI submitted by the
other party and whom it wishes to have designated as approved persons. Each party shall keep the
number of persons on its list as limited as possible, taking into account its administrative and political
structures. The Director-General, or his designee, sh all, in the same manner, submit to the parties, to
the Facilitator, and to the Panel, a list of the empl oyees of the Secretariat w ho need access to BCI in
the dispute. The parties or the Director-General, or his designee, may submit amendments to their
lists at any time.
19. Unless a party objects to the designation of an outside advisor of the other party on the lists
submitted under paragraph 18, the Panel shall designate those persons as approved persons. If a party
objects to the designation of an outside advisor of a party on the lists submitted, the Panel shall decide
on the objection promptly. The possible grounds for objection to the designation of an approved
person include a conflict of interest. If the Pane l rejects the objection, no BCI of the party having
objected to the designation may be disclosed to the person subject of the objection until that party has
had a reasonable opportunity to withdraw the BCI. If that party decides to withdraw any BCI the
Facilitator, the Panel and the other party shall pr omptly return the corresponding documents or other
recordings, which contain the BCI in question, to the party submitting it.
V. SUBMISSION OF BCI BY A PARTY

20. Subject to the provisions of paragraph 21 and in accordance with the definition in
paragraph 4, each party may designate what informa tion contained in its responses to questions posed
in accordance with Annex V of the SCM Agreement (hereinafter “responses to Annex V questions”),
and/or its submissions, shall be treated as BCI. Ea ch party shall act in good faith and exercise the

utmost restraint in designating information as BCI. The Faciliator and the Panel shall have the right to
intervene, in any manner that they deem appropriate , if they are of the view that restraint in the
designation of BCI is not being exercized.
21. To the extent possible, BCI should be submitte d in an exhibit or annex to a response to an
Annex V question, or to a submission. Under no circumstances shall an entire response to an
Annex V question or an entire submission, or significant parts thereof, be designated as BCI.
22. A party or third party that wishes to submit or refer to BCI at a Panel meeting shall so inform
the Panel prior to doing so. The Panel shall exclude persons who are not approved persons or
designated representatives of a third party from the meeting for the duration of the submission and
discussion of the BCI.
23. Where a submission by a party incorporates BCI first submitted by another party, the
submission shall identify that information as BCI of another party.
VI. RESPONSIBILITY FOR COMPLIANCE

24. Each party and third party is responsible fo r ensuring that its approved persons and designated
representatives comply with these procedures to protect BCI submitted by a/another party. The
Secretariat shall take the appropriate steps to ensure that all other approved persons are aware of their
obligations under these procedures.
VII. ADDITIONAL OR ALTERNATIVE PROCEDURES

25. At the request of a party, the Panel may a pply any other procedures that it considers necessary
to provide additional protections to the confidentiality of BCI.
26. The Panel may, with the consent of the parties, waive any part of these procedures.
VIII. RETURN OR DESTRUCTION

27. After the conclusion of the Pa nel process, within a period fixed by the Panel, the Panel and
the parties shall return any documents or other reco rdings containing BCI. Alternatively, the parties
may certify in writing to the Panel that the documents or other recordings will be destroyed consistent
with the parties' record keeping obligations under th eir domestic laws. In the latter event the parties
shall also certify in writing, at the appropriate time, that the documents or recordings containing BCI
have been destroyed. At the conclusion of the th ird party session, the third parties shall return any
documents or other recordings containing BCI. The Secretariat may retain one copy of the documents
or other recordings containing the BCI for the archives of the WTO.
28. If the report of the Panel is appealed, the S ecretariat shall transmit any documents or other
recordings containing BCI to the Appellate Body as pa rt of the record of the Panel proceedings. The
Secretariat shall transmit such information to th e Appellate Body separately from the rest of the
record, wherever reasonably possible.

CONTAINS BUSINESS CONFIDENTIAL INFORMATION

ATTACHMENT 3
List of certain APRGs and PSLs in respect of sales of LNGs, product/chemical tankers
and container ships
 Description Comm. Date Expiry Date
Estimated Subsidy
Amount

CONTAINERS

PSLs
[BCI: Omitted from
public version]

APRGs
[BCI: Omitted from
public version]

LNGs

PSLs - NONE

APRGs
[BCI: Omitted from
public version]

PRODUCT/CHEMICAL
TANKER
PSLs
[BCI: Omitted from
public version]

APRGs

[BCI: Omitted from
public version]

 Source : Attachments EC-10, EC-11 and EC-12.