OF THE PARTIES – FIRST MEETING
Document: Contents Page Annex B-1 Oral Statement of the European Communities B-2 Annex B-2 Oral Statement of Korea B-11
Document codes: WT/DS273/R
Complainant: EU
Respondent: South Korea
Third parties: China, Taiwan, Japan, Mexico, Norway, U.S.
Dispute stage: Panel
Agreements cited: Art. 3.1, 3.2, 1, 2, 5, 6.3, 6.5  Subsidies and Countervailing Measures (SCM)

ANNEX B

EXECUTIVE SUMMARIES OF THE ORAL STATEMENTS
OF THE PARTIES – FIRST MEETING

Contents Page
Annex B-1 Oral Statement of the European Communities B-2
Annex B-2 Oral Statement of Korea B-11

ANNEX B-1

ORAL STATEMENT OF THE EUROPEAN COMMUNITIES

(18 March 2004)

I. INTRODUCTION

1. In its oral statement, the EC first responds to a series of procedural and other obstacles that
Korea is seeking to erect to obstruct the resolution of this case. Thereafter, it comments on a number
of other issues but leaves a thorough refutation of Korea’s many arguments to the rebuttal submission.

II. KOREA’S ROAD BLOCKS

A. BURDEN OF PROOF

2. The EC fully accepts that it has the burden of presenting a prima facie case. The EC worked
on the principle that it is not necessary to state the obvi ous. Such proof is necessary only to the extent
that Korea disputes in a substantiated way what we considered to be clear.

3. For example, the EC believes that it is sufficien t to simply state that EC and Korean Liquefied
Natural Gas carriers (LNGs) compete in the same ma rket. Indeed, Korea even accepts that they are a
product, thus making it otiose for the EC to prove that Korean LNGs compete with those built by the
EC in the same market. As will be explained later, we reject the idea that there is a requirement to
establish “likeness”; however, once there is a product such as an LNG, LNGs from Members are
inevitably “like” each other. They are the same pr oduct. To the extent that Korea now has difficulties
with other statements of fact, e.g. the definitions of other ship types, the EC will respond to that more
fully below and in its rebuttal submissions.

4. Moreover, once the complainant has provided a prima facie case of a claim and the defendant
seeks to refute it by asserting an additional fact, the onus is on the party asserting that fact to
substantiate it. To illustrate this with another example, the EC has provided prima facie evidence that
restructuring aids and other subsidies were a contributing cause for the price depression in the LNG
market. If Korea wishes to counter that case by asserting further factors that may have caused a fall in
prices, Korea must provide proof thereof.

5. The EC does not accept that there is any “fru it of the poisonous tree” doctrine whereby it may
not rely at all (or at least not for the export subs idy claims) on the evidence gathered in the Annex V
procedure because it was allegedly improperly sought. As the Appellate Body clarified in numerous
cases, there is a duty on both parties to collaborate in the establishment of facts. This is particularly
true in cases against subsidies that often involve complex economic facts that may not be easily
accessible to the complaining party. Moreover, it s hould be noted that panels may seek information
from the respondent relating to export subsidies unde r Article 13 of the DSU. The fact-gathering
procedure foreseen in Annex V of the SCM Agreement in effect merely advances the provision of
evidence to before the exchange of submissions by the parties rather than gathering the same
information from the respondent later in the panel process.

B. EXPORT AND ACTIONABLE SUBSIDY – INSISTENCE ON CURRENT SUBSIDIES
AND EFFECTS

6. There is no rule in the WTO that provides that a violation is forgiven once it is in the past.
Obligations are drafted in the present tense to expr ess the intention that they should apply all the time
– in the past, in the present and in the future!

7. Of course, it may not always be possible to remedy past violations of WTO obligations.
However, the Panel is not, in these proceedings, requi red by its terms of reference to specify what
action Korea may have to take to bring itself into conformity with its WTO obligations.

C. PUBLIC BODY AND “ENTRUSTED AND DIRECTED”

8. Nothing in Article 1 of the SCM Agreement limits the types of evidence that may be used to
demonstrate that a subsidy, i.e. a transfer of ec onomic resources, can be linked to the government.
Otherwise, circumvention would be easy. To the contrary, Article 1 of the SCM Agreement is based
on a certain experience with governmental practices when granting subsidies. Thus, governments
often act through public bodies or private bodies that do not formally constitute part of the
government. Instead of requiring that each transfer of resources is linked back to the government by a
piece of evidence, Article 1 of the SCM Agreement presumes that money that is handed out by a
public body, or a private body which is a funding mechanism, can always be linked to the
government.

9. Thus, the purpose of the concepts of “public b ody” and “private body” is to presume a link to
the government in certain situations and thereby to avoid circumvention. Any financial contribution
granted by a public body is necessarily imputed to th e State. Similarly, a benefit granted by a funding
mechanism to which the government contributes is legally imputed to the government.

10. Korea cannot rely on the panel ruling in United States – Export Restraints in support of its
view that there must be proof of an explicit ac tion relating to a specific transaction. That case
concerned a general government intervention in the ma rket – export restraints for a certain product, as
opposed to a specific action of a government in a specific situation.

11. The use of the terms “funding mechanism”, “entrus ts” and “directs” in Article 1.1(a)(1)(iv) of
the SCM Agreement indicates that governments may use many different instruments to make a private
body transfer resources. These terms are not to be in terpreted narrowly in isolation from one another.
They are intended to cover all the many different means by which governments may influence the
behaviour of a private body. Therefore, panels are tasked in accordance with Article 11 of the DSU to
determine the motivations of the private body for tr ansferring the resources. If these can be linked to
governmental action on the basis of all relevant evid ence - even if circumstan tial evidence, including
secondary sources - this is sufficient.

D. KOREA’S CLAIM THAT EXPORT SUBSIDIES ARE EXEMPTED FROM THE
DISCIPLINES APPLICABLE TO ACTIONABLE SUBSIDIES

12. Articles 3 and 5 of the SCM Agreement outlaw different forms of governmental behaviour.
The absolute prohibition of export subsidies in Article 3 of the SCM Agreement targets any subsidy
that is export contingent indepe ndently from its actual trade effect. The obligation not to cause
adverse effects to the interests of another Me mber through the use of any subsidy (be it export
contingent or not) requires demonstr ation of certain well-defined trade effects. Already the Panel in
Indonesia – Autos has recognised that cumulative assessment of different types of subsidies is
possible.

13. Korea’s argument that a double violation would create a double remedy fails. Assume that
Korea implements an adverse Panel finding that KEXIM pre-shipment loans are prohibited subsidies
by making them also available for sales to domestic buyers. In such case, the subsidy would no
longer be de jure export contingent. However, it remains a subsidy benefiting the production of ships
and continues to contribute to serious prejudice. Whether a Member has brought all its subsidies in
compliance with Article 3 and or 5 SCM Agreement may raise new and difficult questions. However,
these are to be addressed in the implementation ph ase and are not relevant to the prior issue of
establishing violations of WTO law.

III. THE EXPORT SUBSIDY COMPLAINT

A. THE THREE LEVELS OF THE EC COMPLAINT

1. The individual export subsidy transactions

14. The EC identified in its first written s ubmission over 200 individual cases in which KEXIM
has provided an export subsidy to the export of a ship. Korea argues that only presently existing
subsidies may be attacked.

15. As discussed above, the EC does not believe that a violation is forgiven once it is in the past.
The EC is therefore entitled to a finding that th e 200 specifically identified KEXIM export subsidies
violate the SCM Agreement.

2. The pre-shipment loan and APRG schemes

16. However, having these specific export subsid ies removed (or expire) will not solve the
underlying problem, which is that KEXIM will continue to grant export subsidies in support of future
exports of Korean ships.

17. That is why the EC also attacked the subsid ies at a second level – that of the pre-shipment
loan and APRG schemes.

18. Korea admits that “until March 1998, KEXIM did not take credit risks into account for its
APRG transactions” and then only gradually developed a credit risk policy.

19. Again, the EC considers that it is entitled to a finding that the APRG and pre-shipment loan
schemes have been inconsistent with the SCM Agreement. Whether or not they still are today is a
matter for the implementation phase of this proceeding.

3. The statutory framework

20. Korea’s arguments illustrate the need to address the fundamental causes of export
subsidisation in Korea and not just the specific export subsidy transactions or schemes – which can
easily be changed in the future to avoid the defects found while still providing a subsidy to exports.

21. That is why the EC also formulated its export subsidy complaint at a third level – that of the
rules governing the operation of KEXIM and effec tively instructing and enabling it to subsidise
exports – the KEXIM Act, the KEXIM Decree and th e KEXIM interest rate guidelines. The EC has
shown that KEXIM was set up to promote Korean exports, receives huge capital injections from the
Korean government, does not have to pay any divi dends to the Korean government, enjoys an
unlimited State guarantee for its liabilities and defi cits, and is prohibited from competing with

commercial banks. This inevitably leads to export subsidisation and therefore, according to the EC,
the contested provisions of the KEXIM Act, the KEXIM Decree and the KEXIM interest rate
guidelines are inconsistent with Article 3 of the SCM Agreement.

22. Korea’s principal argument in response is to invoke the so-called “mandatory/discretionary
doctrine”, relying on the fact that, according to Korea, none of these provisions specifically mandate
the provision of export subsidies.

23. The Appellate Body has warned against the m echanistic application of this doctrine and has
also made clear that an analysis of a measure cannot end with the conclusion that it is in some sense
“discretionary”. It is necessary to continue the analysis to see whether the provisions have the
prohibited effects.

24. One major reason why the mandatory/discretiona ry doctrine cannot be a mechanistic rule is
that state measures are always, by definition, manda tory in some sense and very often leave some
element of discretion. There are always some exceptions possible to any mandatory rule.

25. WTO provisions come in many different shap es and sizes. Some are result-oriented (for
example, “no less favourable treatment”) while others are regime-oriented (for example, those relating
to investigations, transparency and domestic re gimes). A provision that prohibits Members from
maintaining schemes or programmes of a certain desc ription is clearly violated if such a programme
exists, even if it may not be applied.

26. As the EC has explained in its first written subm ission, Article 3, and in particular Article 3.2,
of the SCM Agreement is designed to prevent the maintenance of export contingent subsidy regimes,
as well as the grant of individual export subsidies.

27. In any event, the EC does not accept that th e APRG and pre-shipment loan schemes are not
“mandatory” in any relevant sense. First of all, the KEXIM Act, the KEXIM decree and the interest
rate guidelines are mandatory for KEXIM. It is “mandated” to use the state resources put at its
disposal to carry out the functions attributed to it in its governing instruments. These include the
promotion of exports and the provisi on of financial assistance to expor ters where this is not available
from private sources – or is not sufficiently available or not available on such beneficial terms.

28. Even if it is not stated expressly anywhere that KEXIM must grant loans or guarantees, we do
not believe that the senior management of KEXIM woul d stay in their jobs for long if they were to
defy the statutory objectives of KEXIM, and either al low the resources entrusted to it to lie idle, or to
support imports or domestic commerce. Indeed, the same would surely also happen if KEXIM were
to use its state resources in defiance of the injunc tion in Article 24 of the KEXIM Act and compete
with commercial banks.

29. Accordingly, the EC submits that KEXI M’s statutory framework specifically envisages
 the
grant of export subsidies – and indeed, for all practical purposes, effectively mandates such action. It
is the very purpose of KEXIM to assist exports.

B. THE CONSEQUENCES OF A FINDING THAT ARTICLE 3 OF THE SCM AGREEMENT
DOES NOT APPLY TO “DISCRETIONARY” MEASURES

30. Korea’s position would allow an export-driv en WTO Member to introduce a scheme whereby
the Minister for export promotion could award any sum he considered necessary to ensure that a
Korean exporter wins a contract against foreign co mpetition, when he considers this in the national
interest. Since the award of the subsidy would not be “mandatory” for the Minister, the scheme

would not, according to Korea, violate the SCM Agreement. So WTO Members would be required to
bring action against each individual subsidy grant on ce it has been made. And then, they would only
have a pyrrhic victory. The scheme itself would not have to be changed, according to Korea, because
it would still be non-mandatory.

C. SAFE HAVEN ARGUMENTS

31. Pre-shipment loans and APRGs do not fall within the scope of the first paragraph of item (k)
(in the case of pre-shipment loans) or items (j ) (in the case of the APRGs) of Annex I to the SCM
Agreement.

1. Pre-shipment loans

32. Korea attempts to pass off credits to e xporters as export credits within the meaning of
item (k). There is a clear and important distinction between these two concepts.

33. An export credit is provided to buyers, not exporters, for a period that extends past the time of
delivery. The OECD, for example, defines the notion as follows:

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).
34. Indeed, the fact that export credits may only take the form of ‘supplier credits’ or of ‘buyer
credits’ as defined above, is “the shared understanding” of all OECD shipbuilding nations - including
Korea. The notion was considered so obvious that at the latest discussions on a revised text of the
“Sector Understanding on Export Credit for Ships” the parties agreed to drop a specific reference into
the text.

35. This understanding of the meaning of expor t credits has also been implicit in WTO
jurisprudence discussing the applicability of item (k) of the Illustrative List.

36. Korea’s pre-shipment loans, by contrast, are production loans granted to manufacturers who
engage in exporting certain capital goods from Korea independent of any credit granted to the buyer
(who may be entirely unaware of this loan to the ex porter). Furthermore, the period of the loan is
closely tied to the date of delivery (hence “ pre-shipment loans”). These are not the characteristics of
export credits, which are loans provided, directly or indirectly, to buyers, extending past the time of
delivery. Item (k) is simply not applicable to Korea’s pre-shipment loans.

2. APRGs

37. Similarly, APRGs are neither export credit guarantees nor, as Korea argues in the alternative,
guarantee programmes against increases in costs. APRGs are, instead, guarantees of credits to Korea’s
exporting manufacturers.

38. Export credit guarantees are those provided to a bank or to the exporter to guarantee that the
foreign buyer will repay the export credit that has been accorded to him. APRGs, by contrast, are
made available to foreign buyers to ensure the repayment of sums paid in advance of the delivery of a
capital good, in the event of default by the exporting manufacturer.

39. Korea tries to rely, in the alternative, on a fu rther element of item (j) and to present APRGs as
a guarantee programme against increases in the cost of exported products.

40. Item (j) is expressed to cover guarantee programmes against increases in the cost of exported
products. It is an increase in the cost of the exported product that is to be covered, not the overall
expenses of the exporter or credit risks taken by the purchaser.

41. Korea’s broad interpretation would allow any s ubsidy to the exporter or to exported products
that is formulated as a “guarantee programme” to be covered by item (j) since any such subsidy will
tend to reduce the cost of manufacturing the exported goods for the exporter or of buying the exported
goods for the purchaser.

IV. THE ACTIONABLE SUBSIDY COMPLAINT

A. SUBSIDIES WITHIN THE MEANING OF ARTICLE 1 OF THE SCM AGREEMENT

1. Financial Contribution

42. The Government of Korea controlled the work-out of Daewoo even at the level of the
Corporate Restructuring Agreement. Through that agreement, domestic banks had essentially waived
their rights to act fully independently by committing to the workout as the solution for bankruptcy and
subjecting themselves to penalties for breach of the Agreement. The fact that the Corporate
Restructuring Agreement was negotiated and signed within one week shows that this was not done
voluntarily by the financial institutions

43. The EC provided powerful general evidence w ith respect to how the Korean Government
influenced the decision-making of private banks in the form of the Kookmin Bank brochure. In
addition, public bodies such as KEXIM, KDB and KAM CO were major or substantial creditors for
each of the shipyards. Without their exercise of the voting rights, none of the restructuring measures
would have obtained the necessary approval.

2. Benefit Benchmarks

44. Foreign creditors are the only actual market benchmark. The only key difference between
domestic and foreign creditors in this case was that foreign creditors “behaved independently and in
their own self interest”. Their behaviour serves as th e starting point to consider whether the discretion
of the Korean creditors in the work-out proceedings was bound by the governmental interest to rescue
the companies.

45. Korea cannot refute that evidence of subsidisa tion by claiming that the work-out agreed to by
Korean creditors was based on the results of an evaluation carried out by professional financial
advisors (Arthur Andersen), and their conclusions that the going concern value of the debtor company
was greater than the liquidation value, making the debtor company viable. The EC takes issue with
the Arthur Andersen report on several grounds sh owing that the decision to restructure Daewoo,
instead of liquidating it, was pre-cooked and that the Arthur Andersen Report is nothing but a rubber
stamp, and certainly not evidence that creditors acting under market conditions would have opted for
the restructuring.

B. SERIOUS PREJUDICE

1. In the same market

46. Unlike the provisions in Articles 6.3(a)-(b) and 6.3(d) of the SCM Agreement, Article 6.3(c)
does not have any geographic qualification. In the shipbuilding market, national boundaries have
hardly any effect on the shipbuilding business, b ecause ships are not “imported” but may be entered
on the shipping registry of any country and operated from any country in the world.

47. The idea that a world market is the relevant market in which to consider price depression was
already recognised by the GATT Panel in EC – Sugar (Brazil) , under Article XVI:I. of the GATT
1947. In any case, even under Korea’s own view, th e Panel would need to consider the complaint of
the EC, because the world market can be seen as the sum of the relevant national markets in which the
products compete. Article 6.3(c) of the SCM Agreement does not prevent Members from claiming
price depression and suppression on several - or even all - “national” markets.

2. No formal “like product” test

48. The EC takes issue with Korea’s argument that a price suppression or depression claim under
Article 6.3(c) of the SCM Agreement requires a formal “like product” an alysis. First, the term “like
product” used in Article 6.3(c) SCM semantically refers only to “undercuttin g”. All Article 6.3(c)
requires is that the subsidies have the effect of “price suppression, price depression […] in the same
market”.

49. Ships are made to the specifications of indi vidual purchasers, and no two ships are ever likely
to be precisely “like”. In this respect, the market for ships is very different from that for cars, for
example, where individual purchasers do not determine the size, shape and design of their vehicles
themselves.

50. The term “same market” in Article 6.3(c) ha s not yet been defined in dispute settlement.
Given that the definition of the market must en able the Panel to assess the existence of price
depression or suppression, the existence of cross-pri ce elasticity should play an important role in
defining the relevant market. Korea itself agrees in the context of the discussion of price depression
that ship prices are, of course, deeply influenced by the interaction of supply and demand.

51. Thus, the market must be determined in a wa y that allows consideration of both the supply
and demand side. Korea’s approach of consideri ng only whether, from the perspective of the ship-
owner, products are “like” does not allow a correct understanding of the functioning of the market.
The relevant market should also be determined from the perspective of the producers, i.e. the
shipyards.

52. The EC has identified three distinct market s for which price developments have to be
analysed. These are the markets for LN Gs, container ships, and product and
 chemical tankers as the
EC has clearly stated in its first written submission. Korea does not dispute that LNGs are a relevant
product for which a price and market exists.

53. The contours of the market for container sh ips and product and chemical tankers – like any
other market – are determined by the behaviour of the participants, buyers on one side and sellers on
the other. From the point of view of ship-owners, that is from the demand side perspective,
distinctions between markets are driven by freig ht market considerations. Thus, although it is
practically impossible (or, rather, economically non- sensical) to replace a specialised ship type with

another specialised ship type on major trading relati ons (i.e. substitute a container ship for an LNG),
there is no such clear division within the categories of specialised ship types, e.g. container ships.

54. Although further distinctions can be made by ship size, there is no strict rule for such
distinctions, and sub-divisions de pend on who is making them and for what purposes. Moreover, at
least on smaller routes, there is overlap and different sizes of ships of one type are generally
substitutable.

55. From the point of view of a shipbuilder, that is from the supply-side perspective, there is
even greater potential for substitution between products . In the eyes of a shipbuilder, a ship is an
assembly of steel panels, into wh ich is fitted machinery, pipes, cables, accommodation and so on, and
the ultimate function of the ship is largely irrelevant . In the eyes of a shipbuilder, a tanker, a dry bulk
carrier and a container ship are broadly simi lar products, even though the arrangement and
proportions of the parts that are assembled diffe r in each product. Whilst shipbuilders seek to
improve economic efficiency by building similar pr oducts, very few shipyards specialise in a single
product type.

3. No obligation to quantify

56. There is no obligation to quantify the effect s of subsidies unless a complainant wishes to use
Article 6.1(a) of the SCM Agreement in conjunction with Annex IV, whic h is no longer in force. The
existence of purely qualitative presumptions in Article 6(1)(b)-(d) of the SCM Agreement corroborates
that an adverse effects claim can be made without a quantitative calculation.

4. Actionable subsidy to be de monstrated subsidy by subsidy

57. There is no obligation to make a price depression or suppression case on a vessel by vessel
basis. Article 6.3(c) refers broadly to the effect of a subsidy on prices on a market. A price in the
market is generally the average of numerous sales of numerous products. If Korea had its way, the
reference to price depression or suppression would be redundant since all cases under Article 6.3(c)
would require proving lost sales with respect to one particular vessel.

5. Additional Serious Prejudice requirement?

58. The EC considers that under Art. 6.3(c) of the SCM Agreement, a complainant must show
that:

(1) there is price depression or suppression,

(2) such price depression or suppression is significant, and

(3) subsidies are a cause of significant price depression or suppression;

then

(4) ipso facto, the effect of the subsidies is serious prejudice to the interests of the EC

59. Subsidies need not be shown to be the ex clusive cause of price depression or suppression. A
cause is sufficient. In fact previous GATT Panel re ports referred to the subsidies as “contributing” or
“amplifying” cause.

60. Korea itself acknowledges that no “such other factors are present” and that overcapacity
suppresses prices. The EC demonstrated that the preservation of the capacity of the restructured yards
has led to price suppression in the Korean industry in general and in turn in the rest of the world.
Moreover, the capacity of the three shipyards is substantial.

61. There is no basis in the text of the Ag reement to require as Korea suggests a separate
demonstration of “serious prejudice”. The purpose of Article 6 of the SCM Agreement is to provide a
definition of serious prejudice. Contextually, the st ructure of Article 6 supports the concept that all
that is required is to show that one of the elements in Article 6.3 is fulfilled. Thus, Article 6.1 laid
down a presumption of prejudice in egregious cases, which could only be rebutted according to
Article 6.2 by showing that no serious prejudice exis ted as described in sub-paragraph 3. It follows
that, whenever one of the elements in Article 6.3 is fulfilled, serious prejudice exists, unless there is a
case listed in 6.7 whereby serious prejudice “shall not arise”.

62. Korea’s argument that some additional elem ent of injury was required is contrary to
principles of effective treaty interpretation b ecause it would render the self-standing definition of
serious prejudice in 6.3(c) redundant. However, the European Communities would like to highlight
that its industry is seriously prejudiced by th e price depressing and suppressing effects of Korean
subsidies to shipbuilding.

ANNEX B-2

ORAL STATEMENT OF KOREA

(18 March 2004)

I. INTRODUCTION AND OVERVIEW

1. Korea would like to thank the Panel, the Fac ilitator and the Secretariat for all of their hard
work on a number of difficult matters.

2. Before going further into the legal and factual questions before the Panel, Korea would like to
recall some of the broader aspects of the history of this dispute including the financial crisis that swept
into Korea from Southeast Asia and how the EC has dealt with its shipbuilding industry for decades.

3. The European shipbuilding industry has been the bene ficiary of decades of heavy
subsidization, particularly direct operating s ubsidies meant to convey a focused and specific
competitive advantage. There have also been h ealthy doses of export subsidization which even the
Commission has had to constrain (but certainly not stop). Regional subsidies, research and
development subsidies (including a new programme to provide R&D subsidies of 25 per cent),
restructuring subsidies (totally inconsistent with th e EC’s arguments before this panel) tied aid export
subsidies, and so forth. The amount of subsidization provided to the EC shipbuilding industries is
enormous. Indeed, it is so enormous that it lends new meaning to the term “floating currencies”.

4. Large amounts of these subsidies have provide d short-term bandages and kept in business
small and uneconomical yards that have not had suff icient incentive to grow and learn and expand on
their own. In fact, the EC in its Third Re port on World Shipbuilding admitted that overall the
subsidies, i.e. operating aid, has served to cushio n yards from the full rigors of the market. The
Commission in this report further stipulated that state aid needed to be refocused to promote and
underpin efforts to improve the competitiveness, in particular lagging behind their Far Eastern
competitors.

5. In distinct contrast with the EC’s industrial policy of lavish subsidiza tion, Korea faced, quite
simply, a broad-based financial crisis that threaten ed to destroy the whole Korean financial sector and
then bring the rest of the economy down with it. The inflows of capital that had underpinned Korea’s
economic growth in the past decades was focused on short term borrowing (generally in US dollars)
that had been liberalized. The government had retained limitations on medium and long term
borrowings. Due to restrictions on foreign borrowing by corporations, most of the borrowing was
done by banks. Of course, many aspects of this are quite typical of rapidly developing countries.
Very few countries have the luxury of being able to borrow in their own currency. However, as the
financial contagion spread out of Southeast Asia, funds dried up regardless of the underlying health of
the economy. Rapid depreciation of the currency exacerbated the liquidity problems.

6. The result was a classic credit crunch where m oney was not available for rolling over loans.
Banks, faced with increasing liquidity problems themsel ves, began to call in their loans. Perfectly
viable firms were caught in short term insolvency. In this situation the Government of Korea turned
to the IMF to obtain funds to re-float the financia l sector. After some tough negotiations, agreement

was reached between the Government of Korea an d the IMF and interim funding was provided. In
turn, the Korean government used these funds to provide liquidity to the banks. There were
conditions attached to this provision of funds, but they were market reinforcing conditions. Banks
needed to reduce their outstanding bad debts. They needed to meet BIS standards. They needed to
ensure that all restructurings and workouts were done pursuant to market principles including
maximization of returns from their debt.

7. In the IMF’s view, Korea implemented this ma rket-based approach with great success. As
Korea has pointed out in its First Submission, in responses to the EC Commission’s several requests,
the IMF specifically made the point that they we re very satisfied that Korea was undertaking this
painful process based on market principles. Korea is not arguing that this panel is somehow estopped
from pursuing its inquiries because of the IMF’s position. Rather, the point is simply that the IMF’s
views in this regard are important factual evidence of Korea’s market-based approach to restructuring
to put in the balance when the Panel weighs the facts of the case.

8. Regarding the EC’s approach to this dispute, instead of using its First Submission to set the
framework of the dispute and to advance all of the facts and proof needed to support its prima facie
case, the EC took the route of simply dumping thousands of pages of information in the Panel’s lap
(information provided by Korea, it must be noted) and asking you to take over proving their case for
them. According to the EC, they consider that they do not need to do anything more than make mere
assertions.

9. Obviously, the EC’s approach is not consis tent with the jurisprudence of WTO dispute
settlement and neither is it consistent with the mo st basic tenets of due process required under general
principles of international law. With respect to the Panel’s duties, the Appellate Body in Japan –
Agricultural Products II made it very clear in confirming long-standing jurisprudence. The panel is to
use its information gathering authority to help it understand the parties’ arguments, not to make the
complainant’s case for it.

10. Neither is the burden on Korea in this respect . Korea is designated by the treaty as being the
“respondent” in this case. This means, sensibly e nough, that Korea is obliged to answer the EC’s
arguments and refute its positions, to respond once the EC has established a prima facie case based on
supported arguments and proven facts.

11. As Korea noted in its First Submission, th e Annex V process involved serious abuses by the
EC. Misleading statements were made by the EC to the facilitator and the Panel regarding the breadth
of the product coverage. Related to that, the Anne x V process was manifestly used in an improper
manner to support a fishing expedition for facts to support baseless allegations of export subsidies.
This is irrefutable. The EC’s conflicting statem ents are contained in the record. Moreover, the
“evidence” the EC provided to support its export subsidy claims clearly comes from the Annex V
process. To make it worse, the EC then had the presumption to demand adverse inferences under the
rules of Annex V for claims made under Part II of the SCM Agreement. Annex V is by its terms
meant as a process related to serious prejudice. It h as never been used by any other Member to try to
gather evidence for export subsidies nor to claim le gal authority for adverse inferences and it should
not have been used in such a fashion here. Th ese are serious matters that the Panel will need to
address.

12. The two distinct sets of claims by the EC under Parts II and III of the SCM Agreement with
respect to the same alleged subsidies present a uni que issue for the Panel because failure to take
account of this aspect of the case could result in a double-counting of subsidies in a manner that could
result in inequitable findings and disproportionate remedies. Specifically, the EC has submitted
claims with respect to the KEXIM programmes under both Parts II and III of the SCM Agreement.

These sets of claims raise serious questions about how to evaluate and remedy alleged violations. The
overlapping claims of export subsidization and trade effects with respect to the same alleged subsidies
risks the possibility of finding adverse effects caused by a combination of export and non-export
subsidies when the non-export subsidies alone would not have resulted in an affirmative finding. That
would be inequitable in a situation where the e xport subsidies would be remedied separately under
Part II and should not therefore be included in dete rmining whether a second remedy is appropriate.
That would be double-counting and would be as ina ppropriate in this setting as parallelism problems
have been found to be in Safeguards cases. Therefor e, while it is true that multiple claims sometimes
arise under multiple WTO provisions, no other WTO provisions are like Part III of the SCM
Agreement. Unique circumstances require unique solutions.

II. ALLEGATIONS OF PROHIBITED SUBSIDIES

13. As an initial matter, the EC must establish th at KEXIM bank is a so-called “public body”.
There is no firm definition in the SCM Agreement of what the term “public body” means. It is a case-
by-case assessment that must be established by a complainant to the satisfaction of the Panel.

14. The EC points to government ownership of KEXI M. It is true that KEXIM is majority owned
by the government. But it is well established that ow nership alone is insufficient. The EC also points
to a public policy purpose for KEXIM. Yes, the actions of KEXIM are focused on the export sector,
but privately owned institutions can have sectoral char ters, too. Many countries are familiar with this
in their own banking systems. That does not make such institutions public bodies. Something more is
needed.

15. It seems clear that something more is the i ssue of whether or not the entity is fulfilling a
function that by its nature is “governmental”. These include regulatory and taxation functions most
predominantly. Conversely, entities that function on a commercial basis in their normal activities are
not considered “governmental”, as indicated in Article I of the GATS.

16. The EC has asserted that the KEXIM Act and the APRG and pre-shipment loan programmes
are inconsistent with the requirements of Part II of the SCM Agreement, “as such”. In order to get
there, the EC looks for support in the Appellate Body decision in US – Sunset Review . However, the
issue there was whether a non-legally binding me asure could be challenged, not whether a
discretionary measure could be challenged on an “a s such” basis. In other words, the issue was a
preliminary jurisdictional question as to whether th ere was a justiciable matter; it was not a question
of whether the measure was mandatory or discre tionary. Certainly there was no hint in the US –
Sunset Review case that the Appellate Body intende d to overturn substantial GATT and WTO
jurisprudence regarding the distinction between discretionary and mandatory provisions.

17. Korea would also like to note that the AP RG and pre-shipment programmes are types of
lending activities; there is no underlying written rule to challenge. They are mere practices. This is
the sort of question that was before the Appellate Body in US – Sunset Review. To the question as to
whether the EC is legally permitted to pursue a claim against these practices, Korea would answer
yes, provided of course that the EC presents proven facts and arguments to establish a prima facie
case. However, to argue that two “programmes” th at are really nothing but types of lending practice
can be challenged “as such” as establishing the existence of prohibited export subsidies, simply makes
no sense at all.

18. The KEXIM Act provides authorization for a wi de ranging set of financial activities related to
the export sector. It also requires KEXIM to act on a commercial basis to maximize returns and, in
fact, the evidence is that KEXIM has consistently operated at a profit. KEXIM is required to set its
base rates according to market conditions. Credit risk spreads must be taken into account; collateral is

required accordingly. KEXIM borrows funds from many sources, generally from international
markets. And, contrary to what the EC asserts, KE XIM does in fact compete with other institutions.
This requirement is clear from a review of the w hole KEXIM Act, not just the snippet cited by the
EC. Most importantly, it is quite clear from the facts in the record.

19. The so-called “market adjustment rate” in the APRG and pre-shipment loan programmes does
not mandate below-market rates as is asserted by the EC. In fact, the market adjustment rate is not
relevant to the setting of the basic rate which is built up from the cost of funds to determine the
lending or guarantee rate. Rather, the market adjust ment rate is a limiting factor on how much of a
downward adjustment can be made under the discretion of the lending office. As is normally the case
in any banking business, the bank officials in charge of disbursing loans and guarantees have a certain
amount of discretion that they can exercise in making final offers in order to bring in business. This is
typically based on competitive pressures, the cust omers’ payment history, etc. The “market
adjustment rate” is intended to limit the ability of th e bank officials responsible for that portfolio to
make too large a downward adjustment in setting rates.

20. On the issue of the existence of benefits to the recipients of the APRG and pre-shipment
loans, as complainant, the EC carries the burden of demonstrating that these programmes were
applied in a manner more favourable to the recipients than what was available on the market. The EC
has not met its burden. Indeed, here again, we see only the most cursory analysis of the issue. The
EC has offered the APRG rates charged by a couple of non-Korean banks several years ago to support
its allegations. However, this is far from establishing a legitimate market benchmark. These APRGs
represented a statistically irrelevant sample. Furt her, APRGs are a highly technical and specialized
area and the guarantee rates can be influenced by an assessment of the customer’s past performance
and likely future performance. This can be very difficult to assess for a bank dabbling in the market
from afar. In addition, the EC ignores the substantia lly different characteristics of these APRGs. The
KEXIM APRGs were always secured by substan tial collateral, including the so-called Yangdo-
Dambo which establishes important security interests on the hull and materials. In contrast, certain
foreign supplied APRGs only had a security inte rest in certain bank accounts for a minority of
coverage of the guarantee.

21. It is also worth noting that the alleged belo w-market APRGs were advanced during the period
of the Asian financial crisis. Ho wever, as noted at the outset, this was a difficult period during which
funding and guarantees of any sort were difficult to obtain. The main concern of Korean banks was
with meeting and maintaining BIS standards and issuing APRGs was adverse to maintaining BIS
rates.

22. The selection by the EC of corporate bonds as a benchmark comparison to a pre-shipment
loan is virtually a random grasp for an argument by the EC. The corporate bonds the EC refers to
were of different terms than the programmes the EC compares them to. These bonds were generally
for 3 years. In stark contrast, the pre-shipment loan programmes were for shorter periods of time,
generally less than 6 months. The EC does not ma ke any attempt at all to adjust for these term
differences which is the most basic question in lending or to determine how the financial crisis impact
these term differences. A review of the actual app licable corporate bond rates, as demonstrated in
Korea’s first submission, shows that in every inst ance, the actual bond rate was considerably lower
than the EC’s hypothetical rate.

23. Furthermore, the EC also ignores the fact that pre-shipme nt loans always carried other
assurances. Generally, security interests were o ffered in the form of Yangdo-Dambo as well as other
corporate guarantees and security interests of va rious types. The EC co mpares such loans with
corporate bonds for which collateral was normally not provided. The question of security interests
and guarantees is another major determinant of inter est rate charges. Of the Korean shipbuilders,

Daedong offered collateral for its corporate bonds, but the actual Daedong bond rates were
considerably lower than the hypothetical suggestions of the EC.

24. Finally, the other major factor that determ ines the rates for programmes such as these is the
repayment history of the companies in question. These are narrow, highly technical banking practices
and because they are related to the performance hi story of the companies and close analyses of the
market, it is not something readily participated in by banks outside their familiar territories. This has
been ignored by the EC. Thus, we can see that th e so-called benchmarks offered by the EC against
which to determine whether there was a benefit are quite dissimilar with respect to the three most
important factors influencing interest rates.

25. Korea is confident that the panel will agr ee that the EC has not established its case with
respect to the issue of alleged export subsidies. Nonetheless, again in consideration of the necessity
of providing arguments on all issues, in the alterna tive Korea notes that it is clear that the so-called
safe harbours provided by items (j) and (k) of Annex I to the SCM Agreement apply to the APRG and
pre-shipment loan programmes, respectively.

26. With respect to APRGs, Ko rea notes that an export credit guarantee in item (j) refers to
assistance to the export of a product and does not re fer to who receives the guarantee. Indeed, the
phrase “against increases in cost of exported product s” assumes that it can be with respect to the
exporter rather than the buyer. Costs are an exporters’ concern while prices are the concern of buyers.
As Korea has demonstrated, the APRG programme has always been profitable; it certainly has
covered its long-term operating costs.

27. Pre-shipment loans should be considered expor t credits within the meaning of Item (k); again
there is nothing in the language that identifies who must receive the credit or loan. Moreover, the pre-
shipment loan programme provided for credit at rates above the KEXIM’s cost of funds.

III. ALLEGATIONS OF ACTIONABLE SUBSIDIES

28. There is no more fact-intensive case under the WTO dispute settlement system than a serious
prejudice case brought pursuant to Part III of the SC M Agreement. Here the complainant carries the
full burden of establishing the equivalent of a CV D administrative record upon which to base the
decision. It is a heavy burden indeed. And it is neither the Panel’s nor Korea’s burden. Only when
the EC has satisfied its burden of proof is there an obligation of Korea as respondent to rebut those
arguments and dispute the supporting facts. In the pr esent dispute, the EC has not come even vaguely
close to carrying its burden of proof. There are ma jor and very basic elements of its case that have
been left unaddressed.

29. The EC’s failures in this regard are manifest and multiple. In its First Submission, the EC
failed to identify the financial contributions it act ually was referring to with respect to the three
insolvent companies, Daewoo Heavy Industries (DHI), Halla and Daedong. In fact, as part of its
confused presentation, the EC does not even separ ate out the three compan ies from their successors
and refers to them with compound names separated by slashes. One of the major reasons for this
attempt to blur identities is the failure to establish exactly who the EC is claiming received the alleged
benefits of the restructurings. Indeed, the EC fa ils to establish that anyone at all had received any
benefit from anything at all.

30. With respect to the so-called restructuring subsidies, there was no government direction in
these cases. The Korean economy was in danger of goin g into a free fall and it had to call in the IMF.
As a part of the IMF bailout, restructurings had to be market–based. In fact, all of the banks involved
bargained hard in order to maximize their own re turns. This was required by both financial and

corporate restructuring schemes and that was the extent of the Korean government’s involvement.
The EC certainly cannot maintain that a restru cturing scheme requiring banks to act on market
principles and maximize returns is somehow improper governmental involvement.

31. There were some government-owned banks invol ved in the restructurings. However, these
were banks operating purely on commercial terms; there was no governmental function involved in
their participation. It also should be noted that each bank is somewhat different even though the EC
chose to try to lump everything together. Indeed, it seems the EC wants to lump every entity in the
whole Korean economy into one great government en tity. Aside from being a stale and unfortunate
stereotype, it certainly has no basis in reality in th e present situation nor in the situation that existed
during the financial crisis.

32. The EC simply has offered no evidence that these restructurings did not take place on market
terms. Instead, the EC makes the suggestion that the “market” dictated that these companies be
terminated and cease to exist. One needs to be a little careful with the terminology here for
“liquidation” proceedings often result in the companies emerging simply in another form and
continuing to carry on the same operations. Fo r example, International Steel Group, the second
largest steel manufacturer in the United States, is made up of several bankrupt steel manufacturers
that were “liquidated.” It is a fundamental aspect of a market economy that there be some method of
addressing financially distressed companies short of termination. Certainly there is no functioning
market economy in the world that operates without some sort of mechanisms to restructure such
companies. And indeed, even the French authorities proceed with th e restructuring of and financial
support to the Alstom group with the approval of the European Commission, notwithstanding the
doubts expressed by outside auditors, Ernst & Young and Deloitte Touche Tohmatsu, as to the going
concern value of the group. Having said that, th ere really is not a single norm against which to
measure restructurings. That is the case even within the EC itself.

33. Korea has established insolvency mechanis ms that commentators consider fair and
transparent and which contain elements of US-sty le Chapter 11 procedures combined with a more
German-style civil law approach. Perhaps, give n the difficulty of establishing a single norm against
which to measure the Korean cases, it becomes easier to see why the EC urges the Panel to adopt a
standard that absolutely no country in the wo rld lives by; namely, termination and exit from the
market on the part of insolvent companies. But that is no standard at all.

34. In all three instances in this dispute, the market assessment was that creditors would receive
higher returns if the assets continued to be u tilized. Whether the process happened under court
supervision or pursuant to private agreement as in the so-called “London Approach” makes no
difference. For that also is a function of normal mark et factors. Creditors decide which route to take
to maximize their returns. All routes are available; th ey are not limited. They decide what is best for
them financially and then pursue that path.

35. Furthermore, in the context of these restruct urings, the EC has even failed to identify a
“financial contribution”. The main transfers the EC has identified that could possibly constitute a
financial contribution are the debt-equity swaps. However, it is difficult to see how those could be
financial contributions from the government. T hose transactions consisted only of creditors
exchanging one financial instrument (debt) for another of precisely equal value (new equity).

36. Finally, the EC also has never identified w ho the alleged beneficiaries are of these supposed
financial contributions. In light of the EC’s success in two disputes that focused on this very question
of identifying current beneficiaries, their silence is remarkable. The EC successfully argued that “in
the case of a change of ownership (including pr ivatization), the investigating member is under

obligation to (re)consider the conditions of application of the SCM Agreement.”1 It is remarkable that
they ignore this, but it is not surprising. The fact is the EC cannot identify any current beneficiaries of
the alleged subsidies. The debts were the responsib ility of the prior equity holders. But these equity
holders were virtually wiped out.

37. In the case of DSME and Samho Heavy Industr y, the new owners were the creditors who
found the value of their loans seriously impaired and were left with salvaging the best returns possible
out of the insolvent companies. The new owners simp ly were looking for the best return on their new
equity. In the case of STX Shipbuilding Co., Ltd., a non-creditor buyer (STX) bought out
substantially all the ownership of the old Daedong and the proceeds of this buyout were paid out to
the creditors of Daedong. Presumably, this simple set of facts is why the EC tries to hide the lack of
current beneficiaries behind the blurring of the id entities of the three compan ies when the EC keeps
referring to the companies with compound names linked with slashes. However, that attempt to blur
the identities only shows that the EC is focusing on the assets, not the legal or natural persons. But, as
is also clear from the EC’s successful cases, the Appellate Body found that “any analysis of whether a
benefit exists should be on ‘legal or natural persons’ instead of on productive operations.”
2

38. At this point it might be useful to pr ovide a few observations about the individual
restructurings. In the case of Daewoo Heavy Indus tries (DHI), it went through a workout based on
the London approach. This choice was made by the creditors following a study and assessment by the
Korean affiliate of Arthur Andersen. The Arthur Andersen study showed that the going concern value
of DHI -- and the shipbuilding group, which later became DSME, in particular – was significantly
greater than the value if it were liquidated a nd wound up. This was a totally objective assessment;
Arthur Andersen had no incentive to choose one path over another and a lot of pressure to give an
honest view of the best mean s to maximize creditor returns.
3 Strangely, the EC also argues that the
Korean creditors got less than they should have compared to some foreign creditors. It would seem,
however, that what the creditors got was neither too high nor too low; it was what the market
determined it to be.

39. Regarding these foreign creditors, it is important to recall that they were marginal credit
holders, virtually de minimis. Moreover, the EC’s basis for assessing the returns is not a complete
picture. The foreign creditors largely cashed out their debt. The domestic creditors stayed involved
through a debt restructuring which worked out well over a longer period of time. The foreign
creditors did also receive some quantities of warrants allowing them to participate to a lesser degree in
any later gains from the equity markets. Thus, the small group of foreign creditors chose to take more
up front and less in longer term participation than the domestic creditors. This is perfectly rational
behaviour given the different situations of the tw o groups. Moreover there is simply no evidence that
these terms were anything other than the result of hard bargaining by all parties concerned.

40. The final settlement came pursuant to a l ong series of creditor meetings. The first DHI
workout plan was blocked by some minority debtors, again highlighting the point made above of the
power of small, determined groups in such a process. Further it is worth noting that it is factually
incorrect to state that KAMCO had a significant in fluence in determining the final settlement since
KAMCO participated in the DSME debt equity sw ap at a later stage of the procedure after the
structure and basic terms of the restructuring had already been formulated by the other creditors.

1 EC’s second written submission to the Panel in US – Countervailing Measures on Certain
Products from the EC at para. 108.
2 Appellate Body Report in US – Countervailing Measures on Certain Products from the EC at
para. 110.
3 See Arthur Andersen Report page 3 at para. 2 and annex 1 to the Arthur Andersen Report
which stipulates the purpose of the assessment.

41. Halla took a somewhat different route into its restructuring. Halla went bankrupt and was
sent through court-based restructuring under the Co rporate Reorganization Act. The court-appointed
receiver drew up a reorganization plan based on the assessment of a financial advisor. This advisor,
Rothschilds, assessed that the valu e of the assets as a going concern was higher than the value on
liquidation and wind-up of the business. The advisor recommended that the going concern be
maintained by way of transferring all the assets to a newly established company. This course was
approved by the court and the previous shareholde rs equity was extinguished. Pursuant to the
reorganization plan, the Halla assets were transferred to a newly established company, RHHI, and the
entity was renamed Samho Heavy Industries. Hyundai was given a contract to manage the business.
Hyundai was also given a call option at the par va lue of new shares. When Hyundai did exercise its
call option and purchased all the shares of Samho, the par value was greater than the net asset value so
Hyundai paid the higher par value amount. The new entity now is no longer Samho, but Hyundai
Samho Heavy Industries, Co., Ltd.

42. Daedong also went through the court-based co rporate reorganization proceeding. In the case
of Daedong, the court determined, based on a fina ncial advisor’s valuation report, that the going-
concern value was higher than the liquidation an d wind-up value. The court extinguished the
shareholding of the previous controlling sharehol der and reduced the holdings of the remainder by
80 per cent. The court then approved Daedong’s appointment of an outside advisor, KPMG, to find a
buyer for Daedong. KPMG sent out an Inform ation Memorandum to 13 possible buyers including
foreign interests. Six of these were then identif ied as potential investors. Ultimately, STX was the
winning bidder. In later open-market sales, STX reduced its holdings from 97 per cent to 54 per cent
as of late 2003.

43. The EC also has failed to establish that any of the alleged subsidies were specific to the
recipients. Corporate workouts were widely availa ble to any creditors that wished to use them.
DHI’s creditors used this approach, but so did many others involved in corporate restructurings of all
sorts of companies in all sorts of sectors. If that was not considered appropriate by the creditors, then
court proceedings were also available. The other two shipyards, Halla and Daedong, availed
themselves of this process pursuan t to the Corporate Reorganization Act. And so did thousands of
other companies, again involved in all sorts of sectors.

44. As for the tax provisions, the EC does not seem to have fully understood the facts. The EC
has also failed to show how the tax provisions r esulted in “government reve nue that was otherwise
due” was forgone or not collected. This makes it pr actically impossible for Korea to specifically
respond to the EC allegations on these tax issues. Moreover, there was simply nothing specific to
DSME about the tax provisions in question. They are quite standard sorts of tax provisions generally
available in most WTO Members.

45. While the lack of evidence of the existence of a subsidy in any of the restructurings is quite
plain, it is still necessary for Korea to highlight th e failure of the EC to establish serious prejudice or
causation even if the Panel were to find that subs idies existed. The most elementary aspect of
demonstrating serious prejudice and causation is to identify the “like product”. Without this, nothing
else can be meaningfully discussed. It is literall y impossible to review the state of the EC’s
industry(ies) if they are not defined. One cannot try to assess the impact of the alleged subsidies
unless one knows what like products they are associat ed with and, therefore, can gauge their impact
on the like product market. However, the EC has completely failed to identify the “like products”.

46. Rather remarkably, the EC proposed using an analysis like that in GATT Article III to
establish the like product categories, but then did not provide any such anal yses. Instead, we had
constantly shifting proposals for something th e EC identified as the “market”, presumably as
distinguished from “like products.” But, even then, no supporting evidence was provided for any of

these potential like product categories. No market studies; no descriptions of the relative physical
characteristics; no facts regarding end uses or consumer perceptions. Simply nothing at all.

47. The EC does not address the question of what EC interests have been seriously prejudiced and
how that might have occurred. There is no eviden ce supplied about the state of the EC industry or
“industries”, since we do not know if the EC claims one or several industries. It seems clear from the
scheme of Articles 5 and 6 that a showing of adverse effects must satisfy the requirement of a causal
link to serious prejudice of specific EC industry(ies) producing the like product(s), but it must also
involve something more. Presumably there was a reas on the term “interests” was chosen rather than
injury and it clearly implies something more than ju st the alleged damage to specific industry(ies) for
a Member’s “interests” are necessarily broader than just that. But, once again, the EC has provided
no argumentation or evidence whatever.

48. The EC also did not provide any evidence on th e level of the alleged subsidization. At the
very end of its submission, the EC offered some numbers which it claims could represent the level of
subsidization. These numbers are not broken down by programme; no supporting calculations are
offered; no evidence is provided regarding how thes e numbers are derived. Instead we are presented
with another instance where the EC insists that it reserves its rights to provide some sort of economic
study should either Korea or the Panel challenge its unsupported assertions. Of course, the EC has no
such right; rather, it had an obligation to provide supporting evidence and argumentation.

49. Without knowing what the level of the alle ged subsidies are, it is impossible to make a
causation argument with respect to the issue of se rious prejudice. Perhaps not surprisingly, the EC
makes no causation argument at all except to imply that even an apparently infinitesimally small
effect of subsidization would satisfy the treaty langua ge. One of the problems here is that the EC has
collapsed a two-step analysis into one. The first step is to determine whether the effects of the
subsidy are to cause, for example, significant price unde rcutting. Then, in step two, if the effects of
the subsidy are to do that, Article 6.3 provides th at such price undercutting may be one of several
factors that may cause serious prejudice to the interests of the complaining Member. Actually, the EC
is not just collapsing the two steps, it really is ignoring them altogether and trying to make an
argument that the products have caused serious prej udice regardless of the effects of the subsidies
themselves and regardless of the strength of the cau sal connection. Indeed, it is difficult to see what
relationship the EC’s arguments have to the treaty language at all.

50. It is important to recall that the largest shi pbuilder in Korea by a large margin is Hyundai and
it is not involved in these allegations. There are many others as well. The restructured companies
make up a minority of production and the panel shou ld not accept allegations from the EC based on
the practices of the “Korean industry”. The EC must differentiate the parts of the Korean industry
that it is referring to in order to establish the n ecessary causal link. Vague references to the “Korean
industry” are totally meaningless without both distin guishing the like products and distinguishing the
companies.

51. In this regard, it is important to note that the largest measure of growth in the “Korean
industry” – whatever that might mean exactly -- occu rred prior to the alleged subsidization. That is,
the factors shaping the market are clearly on display during a period in which the EC is not alleging
subsidization. Of course, there are other factors at play here as well such as a severe global downturn,
the rise of other new competitors, such as China, and the practices of longtime competitors such as
Japan, but there is this one large anomaly sitting here at the outset that one must address. The EC has
the most heavily subsidized industry pursuant to practices that have extended over decades and the EC
Commission has acknowledged that these subsidies pr event the EC shipyards from adjusting to the
market, to take into account changes in consumer demand, technology and competition.

52. There is also the question of why the EC narrowed its claims and excluded price undercutting
and attempted to rely on some undefined market mechanism that could have caused the price
suppression and depression that the EC alleges. The r easons are twofold. First, the evidence is weak
with respect to price comparisons and causation base d on the Korean ships. It is non-existent with
respect to the effect of the subsidy. Second, a revi ew of the language of Article 6.5 shows that among
other elements, it refers to a comparison of the prices of the subsidized and “non-subsidized like
products” (which, of course, is also reflected in Ar ticle 6.4). The EC cannot demonstrate that their
ships are non-subsidized because, in fact, they are the most subsidized ships in the world.

53. What is absolutely critical here is that the panel not allow the EC to make a case on price
undercutting but avoid the requirements of Article 6.5. As a matter of law, the EC cannot be
permitted to do this. Thus, at every single step in this process the Panel must press the EC on just
what the market mechanism is -- to the exclusion of allegations of price undercutting -- that is
responsible for the serious prejudice the EC is alleging.

IV. CONCLUSION

54. In conclusion then the Panel is faced with a dispute where the complainant has been unable to
prove facts or establish the requisite arguments to make a prima facie case with respect to any claims.
The EC claims have continued to shrink to avoid ma tters that they cannot prove, but what is left is
based on conjecture, innuendo and broa d generalizations that read more like a newspaper article than
submissions sufficient to carry the substantial burde n of proof required of the complainant in this
dispute.