Document: WT/DS273/R Page C-1 ANNEX C WRITTEN SUBMISSIONS AND ORAL STATEMENTS OF THE THIRD PARTIES Contents Page Annex C-1 Executive Summary of the Written Submission of China  C-2 Annex C-2 Oral Statement of China C-5
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 C

WRITTEN SUBMISSIONS AND ORAL STATEMENTS
OF THE THIRD PARTIES

Contents Page
Annex C-1 Executive Summary of the Written Submission of China C-2
Annex C-2 Oral Statement of China C-5
Annex C-3 Executive Summary of the Written Submission of Japan C-8
Annex C-4 Oral Statement of Japan C-10
Annex C-5 Responses of Japan to Questions from the
European Communities and Korea
C-13
Annex C-6 Written Submission of Norway C-21
Annex C-7 Oral Statement of Norway C-28
Annex C-8 Responses of Norway to Questions from the
 European Communities and Korea
C-31
Annex C-9 Executive Summary of the Written Submission of the
United States
C-33
Annex C-10 Oral Statement of the United States C-38
Annex C-11 Responses of the United States to Questions from the Parties
(First Meeting)
C-41
Annex C-12 Responses of the United States to Questions from the Panel
(Second Meeting)
C-44

ANNEX C-1

EXECUTIVE SUMMARY OF THE WRITTEN
SUBMISSION OF CHINA

(16 February 2004)

1. INTRODUCTION

1.1 In its third party submission, Ch ina focuses on the following key points:

(1) Mandatory/discretionary distinction in the context of Articles 3.1(a) and 3.2 of the
SCM Agreement;

(2) Establishment of a benefit;

(3) Causation analysis in the context of Article 6.3(c) of the SCM Agreement.

2. NON-MANDATORY LEGISLATION IN THE CONTEXT OF ARTICLE 3 OF THE
SCM AGREEMENT

2.1 On the basis of the Panel report in US – Section 301 , the mandatory/discretionary nature of a
piece of legislation is not exclusively decisive on whether it can violate a WTO agreement. Such a
determination depends on, most importantly, the particular obligations imposed by a WTO agreement
at issue. The Appellate Body in US – Sunset Review stated that “the import of the
‘mandatory/discretionary distinction’ may vary from case to case”.

2.2 Panels in previous proceedings have al ready ruled that the mandatory/discretionary
distinction shall be applied in th e context of Article 3.1(a) of the SCM Agreement, and that in order to
establish that a piece of legislation, as such, violates Article 3 of the SCM Agreement, such legislation
must mandate the grant of prohibited subsidies that are inconsistent with Article 3.

2.3 China is of the view that the mandatory/di scretionary distinction should be applied in the
context of Articles 3.1(a) and 3.2 of the SCM Agreement , and therefore, non-mandatory legislation
cannot per se violate these provisions.

3. ESTABLISHMENT OF A BENEFIT

3.1 It has been ruled by the Panel and upheld by the Appellate Body in Canada – Aircraft that in
establishing the existence of a benefit, the focus shou ld be placed on the recipient of a subsidy instead
of the granting authority.

3.2 China takes note that in establishing a bene fit conferred by the KEXIM legal framework and
the workout plan of Daewoo-HI/Daewoo-SME resp ectively, the European Communities attaches
much of its emphasis on the granting authorities at issue and thus fails to comply with the
interpretation made by the Appellate Body in Canada - Aircraft . Therefore, the evidence and
arguments presented by the European Communities in its submission do not persuasively prove that
there is a benefit in each of the instances.

3.3 In Canada – Aircraft , the Appellate Body interpreted th at a financial contribution will only
confer a benefit if it is provided on terms that are mo re favourable than those available in the market.
In China’s view, in the process of conducting such comparison with commercial terms, all pertinent
factors that have a bearing on the comparis on must be taken into account properly and
comprehensively. China finds suppor ts of its view from Article 14 of the SCM Agreement and a
statement by the Panel in Canada – Aircraft.

3.4 In China’s view, the European Communities fails to consider certain pertinent factors when
assessing whether the KEXIM legal framework and the workout program applied to Daewoo-HI
respectively confer a benefit. In the former instance, the European Communities does not take note of
the underlying reason why other commercial banks do not provide loans or guarantees similar to those
provided by KEXIM. In the latter case, the Eu ropean Communities takes the action of foreign
financial institutions as a benchmar k without regard to factors that may affect the comparability of
such a “benchmark”.

4. CAUSATION ANALYSIS IN THE CONTEXT OF ARTICLE 6.3(C) OF THE SCM
AGREEMENT

4.1 China is of the opinion that the phrase “ the effect of the subsidy” in Article 6.3(c) of the SCM
Agreement requires that the subsidy, independent from other factors , must have caused significant
price suppression or depression. In this respect, China shares the same view with Korea.

4.2 China thinks that the European Communities fa ils to correctly consider the implicit meaning
of Article 15.5 of the SCM Agreement and the GATT Panel report in US – Norwegian Salmon CVD ,
and such failure leads to no evaluation of “the effect of the subsidy” in isolation of other factors that
were affecting the price of commercial vessels.

4.3 China is of the view that, in order to est ablish a causal relationship between the subsidy and
price suppression or depression of the like produc t in the same market, two inter-related causal
relationships should be estab lished: first, the subsidy causes the subsidized company to suppress or
depress the price of its own product; second, such suppressed or depressed product price causes the
suppression or depression of the price of like product in the same market. Establishment of these two
causal relationships calls for assessment of three fa ctors:(1) the magnitude of the subsidy; (2) the
effect of the subsidy upon the price of the product supplied by the subsidy recipient; (3) the
suppression or depression effect of the price of the r ecipient’s product upon that of the like product in
the same market. China thinks these three factors should be collectively and consecutively considered
in the causation analysis.

4.4 In China’s view, the word “signifi cant” used in Article 6.3(c) of the SCM Agreement calls for
quantitative examination in the analysis on causal rela tionship. It should be shown that the subsidy
causes significant price suppression or depression to the recipient’s product price and thereby causes
significant price suppression or depression of the like product in the same market. China considers
that the requirement of “significant” should be cons idered and satisfied throughout the entire process
of causation analysis.

4.5 China considers that, the European Comm unities, without presenting any actual figures to
support its argument of quantitative effect of the subs idy measures at issue, fails to establish that the
subsidy causes significant price suppression or depression.

5. CONCLUSION

5.1 In conclusion, China is of the view that,

(1) Non-mandatory legislation cannot, as such, violate Articles 3.1(a) and 3.2 of the SCM
Agreement;

(2) When establishing a benefit, focus should be placed on the recipient of the subsidy,
and proper and comprehensive consideration must be given to all pertinent factors
that affect the comparison with commercial terms.

(3) Article 6.3(c) of the SCM Agreement requires that in order to find a causal
relationship between the subsidy and the significant price suppression or depression
of the like product, it should be established that the subsidy, independent from other
factors, and through the suppressed or depr essed price of the product of the subsidy
recipient, causes significant price suppression or depression of the like product in the
same market; the term “significant” should be taken into account in the entire process
of causation analysis.

ANNEX C-2

ORAL STATEMENT OF CHINA

(9 March 2004)

1. Thank you, Mr. Chairman, and members of the Pa nel. It is a pleasure to appear before you
today to present the views of China in this proceeding. I wish to highlight certain aspects of the issues
addressed in our written submission.

I. NON-MANDATORY LEGISLATION IN THE CONTEXT OF ARTICLE 3 OF THE
SCM AGREEMENT

2. One of the key issues in this dispute is whether non-mandatory legislation can as such violate
Article 3 of the SCM Agreement . In its written submission, China submits that the
mandatory/discretionary distinction should be app lied in the context of Articles 3.1(a) and 3.2 of the
SCM Agreement, and therefore, non-mandatory legislation cannot per se violate these provisions.

3. First, the Panel in US – Section 301 stated that, the mandatory/discretionary nature of a piece
of legislation is not exclusively decisive on whet her it can violate a WTO agreement. That Panel
believed that the most important point under consideration should be the precise obligations contained
in the particular WTO provision at issue. The Appellate Body in US – Sunset Review also had the
view that “the import of the ‘mandatory/discretionary distinction’ may vary from case to case”.

4. Second, WTO precedents show that, in order to establish that a piece of legislation, as such,
violates Article 3 of the SCM Agreement , such legislation must mandate the grant of prohibited
subsidies that are inconsistent with Article 3.

5. Third, China does not agree with the Eur opean Communities that the word “shall” in
Article 3.1(a) of the SCM Agreement should be understood as prohibiting non-mandatory legislation
providing for the grant of export s ubsidy. The Appellate Body in United States – Section 211 held
that it cannot be assumed that a WTO member w ill fail to implement its obligations under the WTO
Agreement in good faith. Accordingly, it may not be appropriate to assume that KEXIM will act,
under the legal framework of the KE XIM Act, inconsistently with the SCM Agreement. In addition,
China believes that in the case of non-mandatory legi slation where the grant of export subsidy and its
export contingency may still be pending on the exercise of discretion enjoyed by the government, it is
not reasonable to come to a conclusion that the legislation per se constitutes an export subsidy and
hence should be prohibited.

6. Nor does China agree with the European Comm unities that the term “not maintain” used in
Article 3.2 of the SCM Agreement should be interpreted as “preve nt”. The European Communities
also submits that the ordinary meaning of “maintai n” is to cause something to continue. Logically,
the term “maintain” only points to existing things while “prevent” is used to address something that
does not exist but may occur in the future. Therefor e, to interpret “not maintain” as “prevent” would
expand the obligation imposed by the SCM Agreement and thus fails to comply with Article 3.2 of the
DSU.

II. ESTABLISHMENT OF A BENEFIT

7. The second key issue China would like to addr ess is establishment of a benefit. In this
dispute, the European Communities challenges certain Korean measures as constituting export
subsidy and actionable subsidy. In demonstrating th e existence of a subsidy, the element of a benefit
is of great importance.

8. In this respect, China firstly submits that, in establishing the existence of a benefit, the focus
should be placed on the recipient of a subsidy instead of the granting authority. This point has been
made by the Panel and upheld by the Appellate Body in Canada – Aircraft.

9. China notices that in establishing a benef it conferred respectively by the KEXIM legal
framework and the workout plan of Daewoo-HI/Daewoo-SME, the European Communities attaches
much of its emphasis on the granting authorities at issue and thus fails to comply with the
interpretation made by the Appellate Body in Canada - Aircraft. For this reason, China thinks that the
evidence and arguments presented by the Euro pean Communities in its submission do not
persuasively prove that there is a benefit in each of the instances.

10. Secondly, China believes that, in the pro cess of making comparison between the terms on
which financial contribution is made to the recipi ent and those available on the market, all pertinent
factors that have a bearing on the comparis on must be taken into account properly and
comprehensively. China finds suppor ts of its view from Article 14 of the SCM Agreement and a
statement by the Panel in Canada – Aircraft.

11. In China’s view, the Europ ean Communities seems to neglect certain pertinent factors when
assessing whether the KEXIM legal framework or the workout program applied to Daewoo-HI confer
a benefit. In the former instance, the European Communities does not take note of the underlying
reason why other commercial banks do not provide loans or guarantees similar to those provided by
KEXIM. In the latter case, the European Co mmunities takes the action of foreign financial
institutions as a benchmark without regard to fact ors that may affect the comparability of such a
“benchmark”.

III. CAUSATION ANALYSIS IN THE CONTEXT OF ARTICLE 6.3(C) OF THE SCM
AGREEMENT

12. The third key issue China would like to highlig ht is causation analysis in the context of
Article 6.3(c) of the SCM Agreement.

13. First, China believes that the phrase “ the effect of the subsidy” in Article 6.3(c) of the SCM
Agreement requires that the subsidy, independent from other factors , must have caused significant
price suppression or depression. In this respect, China shares the same view with Korea.

14. China thinks that the European Communities fails to correctly and properly consider the
implicit meaning of Article 15.5 of the SCM Agreement and the GATT Panel report in US –
Norwegian Salmon CVD , and such failure leads to no evaluation of “the effect of the subsidy” in
isolation of other factors that were affecting the price of commercial vessels.

15. Second, China also submits that, in orde r to establish a causal relationship between the
subsidy and price suppression or depression of the li ke product in the same market, two inter-related
causal relationships should be established: first, the subsidy causes the subsidized company to
suppress or depress the price of its own product; second, such suppressed or depressed product price
causes the suppression or depression of the price of like product in the same market.

16. China thinks that these two in ter-related causal relationships link three factors that should be
considered in the causation analysis:(1) the magnitude of the subsidy; (2) the effect of the subsidy
upon the price of the product supplied by the su bsidy recipient; (3) the suppression or depression
effect of the price of the recipient’s product upon that of the like product in the same market. China
thinks these three factors should be collectivel y and consecutively considered in the causation
analysis.

17. Third, in China’s view, the word “si gnificant” used in Article 6.3(c) of the SCM Agreement
calls for quantitative examination in the analysis on causal relationship. It should be shown that the
subsidy causes significant price suppression or depression to the recipient’s product price and thereby
causes significant price suppression or depression of the like product in the same market. China
thinks that the requirement of “significant” should be considered and satisfied throughout the entire
process of causation analysis. In China’s view , the European Communities in its first written
submission, appears to have not presented any act ual figures to support its argument of quantitative
effect of the subsidy measures at issue, and thus fails to establish that the subsidy causes significant
price suppression or depression.

IV. CONCLUSION

18. This concludes my presentation. Thank you again for this opportunity to express China’s
views.

ANNEX C-3

EXECUTIVE SUMMARY OF THE WRITTEN
SUBMISSION OF JAPAN

(9 February 2004)

1. Japan makes this third party submission to co mment on certain aspects of this case. For the
sake of convenience, this submission uses the same abbreviations as used in the EC First Submission.

2. First, Japan would like to emphasize that , as the EC argues, the market for commercial
shipbuilding is generally considered to be a global market. Shipowners can virtually register their
vessels in the shipping register of any country, and al so operate them anywhere in the world, not just
in the country where they are registered. Nationa l boundaries and laws hardly have any effect on the
shipbuilding business, and traditional tariff and non-tar iff barriers also have a limited effect. This
“global” nature of the shipbuilding market emasculates the traditional antidumping and countervailing
duty laws.

3. Thus, Japan has great interest in this case as it relates to the question of whether and to what
extent subsidies in the shipbuilding sector can be effectively controlled under the WTO Agreement.

4. Second, with respect to the EC’s claims that certain Korean laws and regulations, and certain
financial programs by the KEXIM are in violation of the SCM Agreement as such, Japan would like
to urge this Panel to appropr iately elaborate on the findings of the Appellate Body in US - Sunset
Review (Japan) on the issue of the mandatory law doctrine and properly determine the extent of the
applicability of this decisions to this case.

5. Third, in Japan’s view, the set of facts allege d by the EC indicate that the Korean shipbuilding
companies were subsidized by financial contribu tions provided by their Korean creditor banks in
connection with their restructuring plans, tax conces sions granted in relation to the restructuring and
export credit programs provided by the KEXIM for the shipbuilding companies. Given the facts
alleged by the EC, Japan’s position is that KAM CO, KDIC, BOK, KDB, IBK and KEXIM should be
found to be “public bodies”, as the EC claims. Thus, financial contribution provided by these
institutions can be considered as a “subsidy” unde r the SCM Agreement. Also, Japan’s position is
that the set of facts alleged by the EC indicates th at the Korean government granted a subsidy to its
shipbuilding industry by directing or entrusting non-p ublic Korean banks to make contributions to the
industry. Japan agrees with the EC that the complaini ng party does not have to show a formal or
official command by the government in order to prove “direction or entrustment”.

6. Furthermore, given the facts alleged by the EC , in particular the fact that the government of
Korea has a strong control over the creditor banks of the Korean shipbuild ing companies, Japan
considers plausible the EC argument that financial contributions (e.g. debt and interest forgiveness
and debt-for-equity swap) that were made by cred itor banks of the Korean shipbuilding companies in
their restructuring plans have conferred a benefit to the Korean shipbuilding companies.

7. Japan considers that it is important whether or not Panel supports the EC argument that the
scope of the relevant “market” should not be geographically limited under Article 6.3(c) of the SCM
Agreement. Furthermore, Japan concerns the EC argument that the market for commercial vessels is
indeed a global market, as mentioned above, and that “any assessment of price suppression, price
depression, or lost sales must be conducted with respect to the world market.”

8. Japan is also aware that despite the in crease in demand, following 2000 the price of
commercial vessels has been staying low or even fal ling. It seems to support the EC argument that
the subsidy provided by the Korean government to its shipbuilding industry has resulted in “serious
prejudice” to the EC’s interests.

9. Japan’s position is that the Japanese shipbuildi ng industry has been also adversely affected by
the subsidies at issue. In addition, Japan would like to point out that during the period from 1997 to
2001, Japanese shipbuilders experienced a number of lo st sales of LNG carriers in competition with
offers made by Korean shipbuilders at the prices th at were 10 to 27 per cent lower. During the same
period, it was reported that Japanese shipbuilders also lost sales of some container vessels, since the
prices offered by Korean competitors were 15 to 17 per cent lower.

10. Finally, Japan agrees with the EC’s recognition that overcapacity in global shipbuilding
would no longer exist if the Korean government had not subsidized its shipbuilding industry. Japan
deems it reasonable to consider that the subsid y granted to the Korean shipbuilding industry,
combined with the overcapacity maintained as a result of the subsidy, caused price suppression and
depression in the global shipbuilding market.

11. As stated in the foregoing, Japan supports the EC’s position in regard to its claim that it has
been seriously prejudiced by the subsidies granted to the Korean shipbuilding companies.

ANNEX C-4

ORAL STATEMENT OF JAPAN

(9 March 2004)

1. Mr. Chairman and distinguished Members of the panel, on behalf of the Government of
Japan, I thank you for your attention to this matter. Japan joined this proceeding as a third party to
address its substantial trade interest in the matter befo re this Panel. We would like to focus on four
points presented by other parties regarding the EC claims on the actionable subsidy provided to the
Korean shipbuilding industry.

2. Japan would like to discuss the following four points:

(a) Firstly, Japan will emphasize that the pro ceeding of this dispute should take place,
taking due account of the nature of the globalized shipbuilding market.

(b) Secondly, Japan will demonstrate that Ko rea is erroneously dividing the shipbuilding
market by overly emphasizing differences in the size of commercial vessels and
downplaying the fact that the end-uses for those vessels are exactly the same.

(c) Thirdly, Japan will demonstrate that the EC is not arguing that debt forgiveness
provided in bankruptcy proceedings is an illegal subsidy for bankrupt companies.

(d) Fourthly, Japan will refute Korea’s a pparent claim that th e Japanese shipbuilding
industry is responsible for the alleged injury to the EC shipbuilding industry.

I will now discuss each point in greater detail.

3. First of all, as stated in its third party submission, Japan emphasizes that the shipbuilding
market is indeed globalized. We have to keep this fact in mind in order to discuss this dispute in a
proper manner. The globalized nature of the market renders virtually meaningless to the Members’
right under GATT Article VI of taking antidumpi ng or countervailing duty measures in order to
protect domestic shipbuilding industries from forei gn competitors’ dumped or subsidized exports.
Japan urges the Panel to keep this in mind when examining the EC claims.

4. Furthermore, Japan disagrees with Korea’s argument that the Panel should examine whether
the subsidies at issue are causing “serious prejudi ce” to the EC industry based on national markets
rather than the single globalized market. National boundaries and laws hardly have any effect on the
shipbuilding business. By ignoring this reality of the shipbuilding market, no analysis could produce
a satisfactory result in this dispute.

5. Also, in footnote 272 of its First Submission, Korea refers to an EC paper which argues that
the Japanese market is isolated. In Japan’s view, this statement should simply be disregarded as one
example of the lingering prejudice about the Japanese ma rket. More importantly, this is particularly
untrue because the market is truly globalized. As Japan repeatedly stated, national boundaries and
laws hardly have any effect on the shipbuilding busin ess. Consequently, there is virtually nothing in
the market that prevents the effects of a subsidy to a particular country’s shipbuilding industry from

expanding its activities worldwide. Thus, consideri ng the subsidy measures at issue, Japan believes
that it would be unreasonable to conclude that the subsidy measures have not produced obvious
negative effects on the competitors of the Korean shipbuilders which receive actionable subsidies.

6. Secondly, Japan submits that Korea is also erroneously dividing the shipbuilding market in
terms of products. In the “like product” analysis , Korea overly emphasizes the differences in the size
of commercial vessels, while illegitimately downplayi ng the significance of the fact that the end-uses
are exactly the same. As long as the end-use of these two products is same, they are normally
regarded as competing with each other. Further mo re, it is generally considered in the shipbuilding
market that a lower-priced offer for a type of vessel will generate an immediate market effect on the
market price of any other type of vessel. Cost f actors are largely common for most types of vessels if
it’s not for all, and by this point of view, maritime transport companies usually consider that when a
shipbuilder offered a lower price for a type of v essel, the shipbuilder can o ffer a lower price for all
other types of vessel as well. Following this reasoning, maritime transport companies, then,
increasingly demand a discount for any type of vessel vis-à-vis all other shipbuilders, and
consequently, a low price prevails throughout the market for all types of vessels.

7. Thirdly, Japan does not see the relevance of Korea’s argument that debt forgiveness provided
in bankruptcy proceedings must not be found to be an illegal subsidy for bankrupt enterprises. Our
understanding is that the EC is not arguing that de bt forgiveness provided by banks to certain Korean
shipbuilders in their restructuring proceedings per se impermissibly grants a benefit under the Subsidy
Agreement. Rather, Japan understands that the EC’s argument involves three steps: First, domestic
banks that were under the control of the Governme nt of Korea provided debt forgiveness to the
Korean shipbuilding companies on more favourable terms than foreign banks which were not under
the control of the Government of Korea; second, su ch foreign banks should be deemed to behave in
accordance with market terms; and, as a result, thir d, the debt forgiveness pr ovided by the domestic
banks granted a “benefit” within the meaning of Ar ticle 1.1(b) of the Subsidy Agreement. Korea’s
argument in this regard to this issue misrepresents the EC claim.

8. In Japan’s view, this issue also raises ques tions regarding Korea’s rebuttal on the issue of
specificity. The statutory framework for corporate restructuring may generally be applicable to any
enterprise. In addition to the limited availability of this framework, however, Japan would like to
remind the panel of how the EC defines “subsidy” measures. The issue is whether certain domestic
banks granted debt forgiveness to the Korean sh ipbuilding producers on more favourable conditions
than the market terms, pursuant to the direction or entrustment of the Government of Korea. Again,
our understanding is that the EC is not challenging the corporate restructuring framework per se.

9. Fourthly, Japan would like to point out that Korea’s First Submission attempts to shift
responsibility for the alleged injury to the EC shipbu ilding industry on to th e Japanese industry. This
claim is another attempt to divert the attention of the Panel from the focus of this case. Our
understanding is that the primary issue is not whet her the subsidy to the Korean shipbuilding industry
caused the price decline for comme rcial vessels from 1997 to 1999, but whether such subsidy caused
price suppression after the decline–;and specifically, whether the subsidy caused the market price to
remain at the declined level from 2000 to 2003 despit e the increase in demand and cost. We note that
Korea itself argues that the focus should be on the current situation. Furthermore, Korea’s claim
concerning the Japanese industry is unreliable. Th e complexity of the actual market mechanism
requires the analysis of many transactions and releva nt factors such as negotiation process, in order to
conclude which market participant or participants caused a price effect on the market. Therefore,
Japan is of the view that the EC’s analysis which refers to many transactions is more plausible than
Korea’s rebuttal. Rather, as stated in our third pa rty submission, the Japanese industry has also been
negatively affected by the aggressive pricing of the Korean shipbuilders. Also, Japan notes that

market share does not necessarily determine who is a pr ice leader in the market. Heavily subsidized
enterprises can lead price competition, especially with a considerable production capacity.

10. Thank you, Mr. Chairman and dist inguished Members of the panel.

ANNEX C-5

RESPONSES OF JAPAN TO QUESTIONS FROM THE
EUROPEAN COMMUNITIES AND KOREA

(22 March 2004)

Questions by the European Communities

Question 1: Japan considers in para. 10 of its Third Party Submission that on the basis of the
facts alleged by the EC, KAMCO, KDIC, BO K, KDB, FFIK and KEXIM should be found
"public bodies". In Japan’s view, what fact ors should the Panel consider when determining
whether an entity is a "public body"?

Answer

1. Japan is of the view that there is no sing le controlling factor; the comprehensive and case-by-
case evaluation of all relevant factors may warrant a proper determination as to whether an institution
is a “public body” within the meaning of Article 1.1(a)(1) of the Subsidy Agreement. Relevant
factors include, but are not limited to, whether and what public policy objective the institution has,
whether and to what degree the government has c ontrol over the appointment of management or
budget, whether and to what degree the government ow ns shares in that institution, and whether and
to what degree the government has supervisory power over operational planning.

Question 2: Japan considers in para. 12 of its Third Party Submission that the facts alleged
by the EC indicate that the Korean governme nt entrusted and directed non-public Korean
banks to make contributions to the industr y. Does Japan therefore also agree that
circumstantial and secondary evidence is sufficient to proof entrustment and direction on a case
to case basis?

Answer

2. First, as stated in paragraph 13 of its third pa rty submission, Japan agrees with the EC that the
complaining party does not have to show formal or official command by a government in order to
prove “direction or entrustment”. Second, Japan would like to point out that no provision in the
Subsidy Agreement or the WTO Agreement sets fort h that circumstantial or secondary evidence is
inadmissible as proof for “direction or entrustment”.

Question 3: In Japan’ view, in the context of price suppression or depression claims in
Article 6.3c), what is the geographic scope of the phrase "in the same market"? Please describe
the geographic scope of the market for LNGs, product and chemical tankers, and
containerships.

Answer

3. Japan is of the view that the “same market ” under Article 6.3(c) of the Subsidy Agreement
should mean, in terms of the shipbuilding business, the single global market for the same type of
commercial vessels. It is widely recognized that the shipbuilding market is globalized. In our view,
this recognition is based on the following two characteristics of the market:

4. First, shipowners can virtually register thei r vessels in the shipping re gister of any country,
and also operate them for transporta tion anywhere in the world, not just in the country where they are
registered. Thus, geographical elements are of little significance, in particular, for commercial vessels
that are operated and, accordingly, compete with one another in the overseas transportation market.

5. Second, our observation is that shipowners have no particular preference in the nationality of
shipbuilders. Japanese shipowners may procure vessels from abroad, and Japanese shipbuilders may
export a number of vessels abroad. As indicated in Exhibit JPN-1 attached hereto, Japanese,
European and Korean shipbuilders have competed one another in the LNG carrier market since the
mid-1990s, when the Korean shipbuilders newly entered into this market. For product tankers and
container carriers, as indicated in Exhibit JPN-2 also attached hereto, a number of shipbuilders,
including those from Japan, Europe, Korea, and Ch ina, have been competing one another since the
beginning of 1990s.

Question 4: Japan considers in para. 18 of its Third Party Submission despite the increase in
demand following 2000 the prices of commercial vessels has been staying low or even falling.
What evidence does Japan have concerning the pr ice trends in world shipbuilding market? Do
these trends reflect the demand and supply of vessels?

Answer

6. See the chart contained in Exhibit JPN-3, which indicates the relationship between the price
of commercial vessels, and the aggregate amount of orderbook. This chart was prepared by the
OECD.

7. This chart shows that the price and the a ggregate amount of orderbook correlated with each
other until 1996, when Korean sh ipbuilders increased their production capacity on a large scale, thus
generating overcapacity in the shipbuilding mark et, and further, witnessing a significant price
decrease. Since then, no such correlation can be f ound; rather, despite the increase in the aggregate
orderbook, the price of commercial vessels has been staying low or even decreasing. Japan is of the
view that the subsidy provided to some Korean shipbuilders has prevented the market mechanisms
from dealing with this overcapacity problem by keep ing those companies that were on the verge of
bankruptcy in business as a result of the aforesai d aggressive capacity increase and resulting price
decrease. Those companies would probably have been forced out of the market in the absence of the
subsidy at issue.

Question 5: In Japan's view, the Japanese sh ipbuilding industry has been also adversely
affected by the subsidies at issue. Why couldn't the Japanese shipbuilding industry match the
Korean prices for LNGs and Containerships? Did such a situation prevail before 1997?

Answer

8. As noted in paragraph 18 of its third party submission, the prices offered by Korean
competitors were 15 to 17 per cent lower than thos e offered by Japanese shi pbuilders. These prices

were much lower than that the Japanese shipbuilders expected from th e market situation before 1997,
and thus, they could not keep up with the pricing practices of Korean competitors.

Question 6: Japan in para.16 of its Third Part y Submission supported the EC argument that
the subsidy provided by the Korean government to its shipbuilding industry has resulted in
"serious prejudice" to the EC's interest. Does Japan therefore agree that there were no other
relevant factors that disturb the causal li nk between the Korean subsidies and the price
depression and suppression?

Answer

9. See the Answer to EC Question 4. Japan’s view is that the subsidy granted to certain Korean
shipbuilders has maintained the overcapacity in th e shipbuilding market, and thus, is the primary
cause of the continued low prices despite the demand increase after 2000, i.e. price suppression.

Questions by Korea

Question 1: The EC has indicated in the Sixt h Report from the Commission to the Council
on the situation in world shipbuilding
1 that order intake in Japan comes from domestic demand
and that “[t]hese orders by Japanese shipowners are almost inaccessible to other shipbuilding
countries and therefore provide a captive market for Japanese yards”.

 Did foreign builders participate in bids by Japanese shipowners for the building of
LNGs or other vessels? If not, how does this a ffect the definition of the geographical market
and the causation analysis submitted by the EC in its first submission?

Answer

1. This is simply another example of the lingering prejudice about the Japanese market. It is
erroneous to consider that the Japanese market is a captive market for Japanese yards. First, nothing
in Japan prevents foreign shipbuilders from particip ating in bids by Japanese shipowners. Further,
there is no trade barrier (de jure or de facto) against imports of commercial vessels in Japan.

2. Second, the reality is that Japanese shipowne rs may procure commercial vessels from abroad.
For example, the data compiled by Clarkson indicates that even referring only to current order stock
for Korean shipbuilders, with r espect to LNG carriers, at least Mitsui O.S.K. Lines, Nippon Yusen
and Kawasaki Kisen have placed several orders in total; with respect to container ships, Nippon
Yusen and Kawasaki Kisen have placed more than 10 orders in total.

3. Again, we would like to reiterate that it is widely recognized that the shipbuilding market is
globalized. Shipowners can virtually register their v essels in the shipping register of any country, and
also operate them for transportation anywhere in th e world, not just in the country where they are
registered. Thus, the shipbuilding market is not divided geographically.

Question 2: Japan claims that prices fo r Korean vessels were below prices for Japanese
vessels (paragraph 18 of Japan’s written submission) but the EC has not made a claim on price
undercutting. What is the relevance then of Japan’s claim?

Answer

4. Japan provided examples of lower priced offers by Korean shipbuilders in support of the EC
argument for price depression or suppression caused by subsidies granted to Korean shipbuilders.
Our understanding is that Korean shipbuilders of fered and continue to offer lower prices than
Japanese and other competitors, i.e. price undercuttin g, resulting in price depression or suppression in
the global shipbuilding market.

Question 3: Can Japan provide the criteria on the basis of which it would propose to
determine the like product for the vessels subject to this dispute?

Answer

5. Japan’s view is that the type of vessels (e .g. LNG carriers, product tankers and container
carriers) is a controlling factor in determining th e scope of “like product” for commercial vessels.
The term “like product”, under GATT Article III or other WTO provisions, has taken into

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

consideration, on a case-by-case basis, such as (i) pr oduct properties, (ii) end-uses, (iii) consumers’
preference, and less importantly, (iv) tariff classifications, of subject products. As Japan stated at the
third party session, it is obvious that the type of vessels is closely connected to their end-use; the same
types of vessels are competing with one another in the overseas transportation market.

Question 4: Does Japan consider that for the purpo se of demonstrating that the effect of the
subsidy concerned is significant price depression or suppression, the subsidy must be quantified.
If so, what is the basis for such quantification?

Answer

6. Indeed, it would be easier to evaluate preci sely whether a subject subsidy has caused price
depression or suppression, if the amount of the subsidy is quantified. However, even if it is not
quantified, Japan believes that it is still possible to find such a causal nexus between a subsidy and
price depression or suppression. For example, assume, as the EC claims in this dispute, that certain
producers would have been forced out of the ma rket in the absence of a subject subsidy, and
consequently, the lingering overcapacity problem would have ceased to exist. In this situation, given
that the market price is also staying low despite the demand increase, it is reasonable to find that the
demand increase should have elevated the market price in the absence of the subsidy. In other words,
the subsidy caused price suppression.

A. INTRODUCTION

1. The present case concerns whether the rules set out in the Kexim Act, Kexim Decree and
Kexim Interest Rate Guidelines est ablishing the Korean Export Import Bank (hereinafter referred to
as KEXIM) and the rules concerning some of the programmes implemented by KEXIM violate
Korea’s obligations under the WTO Agreemen t on Subsidies and Countervailing Measures
(hereinafter referred to as the SCM Agreement).

2. The case has been brought by the European Communities (hereinafter referred to as the EC),
which asks the Panel to find that Ko rea has granted subsidies that are inconsistent with its obligations
under the SCM Agreement, because:

■ Through the KEXIM Act, KEXIM Decree and Interest Rate Guidelines, Korea grants
prohibited subsidies that are inconsistent with Article 3.1 and 3.2 of the SCM Agreement;

■ Through the establishment and maintenance of Advance Payment Refund Guarantees
(hereinafter referred to as APRGs) and Pre-shipment Loan Programmes, Korea grants
prohibited subsidies that are inconsistent with Article 3.1 and 3.2 of the SCM Agreement;

■ Through individual APRGs and pre-shipment lo ans, Korea grants prohibited subsidies that
are inconsistent with Article 3.1 and 3.2 of the SCM Agreement;

■ By granting subsidies to Daewoo-SME/Daew oo-HI, Samho-HI/Halla-HI, and STX/Daedong
through (i) workout plans and restructuring plans; (ii) tax concessions to Daewoo-
HI/Daewoo-SME; and (iii) KEXIM APRGs a nd pre-shipment loans, Korea has caused
serious prejudice to the interests of the EC in violation of Articles 5(c) and 6.3(c) of the SCM
Agreement.

3. Norway has systemic interests as regards the interpretation and application of the SCM
Agreement, and has thus reserved the right to pa rticipate as a third party in the present dispute.
Norway will not address all the issues that are raised in the submissions by the two parties to the
dispute, but will concentrate on certain issues of law and legal interpretation that are of importance to
Norway.

1. Introductory comments

4. Norway's point of departure is that the ex istence of national guara ntee institutions, and the
guarantees and loans provided by such ins titutions, do not necessarily constitute a prima facie case of
prohibited or actionable subsidisation under the SCM Agreement. Most countries have such
institutions and arrangements in the field of shipbuilding.

5. However, Norway is of the opinion that the services provided by such institutions should be
provided on market terms. The price of the servi ces offered should not contain any elements of
subsidisation. Where the price of the services offere d are not offered on market terms, then there may
be a prima facie case of prohibited or actionable subsidisati on provided that the relevant conditions of
Articles 1 and 2 of the SCM Agreement are met. Due regard must be given in this respect to the
qualifications contained in Annex I to the SCM Agreement, paras. “j” and “k”, to the effect that not all
practices by such institutions are considered prohi bited export subsidies. In our opinion the rules
governing the Advance Payment Refund Guarantee (h ereinafter the APRG ) and the Pre-shipment
Loan programmes (administrated by KEXIM) as set out in the Kexim Act, Kexim Decree and Kexim
Interest Rate Guidelines would seem to go beyond what is a normal market practice. KEXIM by
granting loans under these programmes may thereby have violated the SCM Agreement . Whether,

and to what extent, there is subsidisation in respect of a particular ship or contract will depend on the
specifics of each case.

2. General interpretative issues in Article 1 of the SCM Agreement

6. The assessment of whether there are actionabl e or prohibited subsidies in the present case
raises certain issues of interpretation related to Article 1 of the SCM Agreement. These are concerned
in particular with whether KEXIM falls within the definition of a “public body”, whether there is “a
financial contribution” and whether “a benefit is thereby conferred”.

(a) A financial contribution

7. It does not seem to be in dispute that loan s and grants have been provided by KEXIM, and
that they may constitute “a financial contribution” within the meaning of Article 1.1.(a)(1)(i). The
argument put forward by Korea
1 centres around the words “government practice” in Article 1.1(a)(1),
which is alleged to restrict the scope of transfers that may be considered as a subsidy.

8. Norway finds it difficult to follow Korea’s ar gument, since Korea appears to be using the
term “government practice” to refer to somethi ng different from “public body practice”. The word
“government” is defined in Article 1.1(a)(1) as including “public body” throughout the SCM
Agreement. Making a distinction based on the argument that “government” in this sub-paragraph
must mean a reference to certain functions that are normally vested in governments (e.g. regulatory
powers or taxation) runs counter to the general definition of “govern ment” in Article 1.1(a)(1), and
should not be upheld.

(b) A public body

9. The term “public body”, which appears in Article 1.1(a)(1) of the SCM Agreement , is not
defined in the agreement.

10. However, the General Agreement on Trade in Se rvices (GATS) has two definitions that are of
interest here. Firstly, the definition of “measures by Members” (i.e. Member Governments) includes
central, regional or local governments and author ities, and also “non-governmental bodies in the
exercise of powers delegated by central, regional or local governments or authorities” (GATS
Article I:3(a)(ii)). Secondly, in paragraph 5(c) of the Annex on Financial Services to the GATS
Agreement “public entity” is defined as:

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 fi nancial services on commercial terms; or a
private entity, performing functions normally performed by a central bank or
monetary authority, when exercising those functions (our underlining).
11. Furthermore, in Annex 1, pa ragraph 6, of the Agreement on Technical Barriers to Trade,
central government body is defined as “central gove rnment, its ministries and departments or any
body subject to the control of the central government in respect of the activity in question ” (our
underlining). While Norway certainly recognises that no definition contains the precise words “public
body”, and that no transposition can be made directly from one agreement to another, the definitions

1 First written submission by Korea, para. 161- 165.

in these agreements appear to be relevant wh en defining “public body” as used in the SCM
Agreement.

12. It would seem from the above that “ownersh ip” by the Government, or “control” by the
Government in respect of the activity in questi on are necessary ingredients when defining “public
body”. However, ownership is not in itself enough, since many state-owned enterprises are not
considered to be public bodies simply by virtue of their ownership.

13. The second element that may be inferred from th e above, that the “body” (in order to be a
“public body”) must carry out governmental functi ons or activities for governmental purposes, is
more difficult to assess. What is to be cons idered governmental functions or activities for
governmental purposes is to a large degree dependent on the organisation of the State, and the extent
to which its political leadership has decided that certain functions or services are to be provided by the
government, directly or indirectly. There are gr eat divergences between the Members of the WTO in
this respect. The statutes of the body, its funding, and whether the government has guaranteed that
the body cannot go into liquidation, are all elements that may indicate that the body in question is a
“public body”.

14. It should also be noted that “export credit guarantee or insurance programmes” are explicitly
covered in the “illustrative list of export subsidies” in Annex I to the SCM Agreement . This is an
indication that when government-controlled bodies provi de such guarantees or insurance, this will
normally be considered to be covered by the subsidy definition.

15. Norway submits that the following elements provide convincing evidence to the Panel in its
assessment that KEXIM must be considered a “public body” within the meaning of Article 1.1.(a)(1)
of the Agreement on Safeguards:

• According to Article 1 of the KEXIM Act
 KEXIM’s task is “to promote the sound
development of national economy and economic co-operation with a foreign country”.

• In the KEXIM 2002 Annual Report, KEXIM is described as “an official export credit agency
providing comprehensive export credit and project finance to support Korean exporters and
investors” and facilitating “the developmen t of the national economy and enhanc[ing]
economic co-operation with foreign companies as a financial catalyst”.2

• Since December 2002 KEXIM has been owned by the Government of Korea, the Bank of
Korea and Korea Development.3 The two latter bodies are government agencies.

• A number of other articles in the KEXIM Act confirm that KEXIM is a “public body” within
the meaning of SCM Agreement Article 1.1.1(a)(1), see in par ticular Article 37 of the Act?,
“any net loss incurred by the Export-Import bank during any fiscal year shall be covered by
its reserves. If the reserves are insufficient to cover the net loss, the Government shall
provide funds to cover such net loss”.4

• See also KEXIM Act Articles 36(2), 11, 21, 32 and 33, which clearly underline that KEXIM
is a “public body” within the meaning of Article 1.1(a) of the SCM Agreement.

2 See Exhibit EC-14
3 See KEXIM 2002 Annual Report, p.34 (Exhibit EC-14)
4 See KEXIM Act (Exhibit EC-10)

(c) A benefit is thereby conferred

16. Further, Article 1.1(b) of the SCM Agreement requires that a “benefit” has to be conferred.
The term has not been defined in the SCM Agreement, but has been interpreted in WTO jurisprudence

in a number of cases. In The Panel Report Canada – Aircraft the term was defined as:

[A] financial contribution will only confer a "benefit", i.e., an advantage, if it is
provided on terms that are more advantageous
than those that would have been
available to the recipient in the market.5 (our underlining)
17. The Appellate Body up held this interpretation.6

18. Article 26 of the Kexim Act clearly states that “ Except where inevitable for maintaining the
international competitiveness to facilitate the export ,… the interest rates, discount rates and fee rates
applicable to loans, and guarantees extended under pa ragraphs (1) and (2) of Article 18 shall be so set
as to cover the operating expenses…”

19. In Norway’s view, the wording of Article 26 implies that the Government of Korea
(hereinafter GOK) de facto instructs Kexim, to offer lower inter est rates on pre-shipment loans and
premiums on APRGs than the market rate, if su ch practice is necessary in order to secure export
contracts for Korean companies. Thus, the Kexim Act allows for financing “on terms that are more
advantageous than those that would have been availabl e to the recipient in the market” and may
thereby confer a “benefit” within the meaning of Article 1.1 (b) of the SCM Agreement.

20. Norway will not discuss in detail whethe r the terms on which KEXIM programmes, in
question, are granted are more advantageous than those that would have been available to the
recipients in the market. This is for the parties to the dispute to argue. Norway wishes to point out,
however, that if this is the case, it may thus constitute a prima facie case of “benefit”.

(d) Conclusion

21. Based on the above, Norway subm its that we are faced with a “ financial contribution” by a
“public body” that may confer a “ benefit” and thereby constitute a “subsidy” within the meaning of
the SCM Agreement Article 1.

B. PROHIBITED SUBSIDIES

3. The APRG and the Pre-shipment Loans constitute a subsidy which is “specific” within
the meaning of Article 2.3

22. According to Article 2.3. of the SCM Agre ement any subsidy falling under the provisions of
Article 3 is to be deemed to be specific.

4. The APRG and the Pre-shipment Loans cons titute a subsidy which is “contingent on
export performance” within the meaning of Article 3.1(a)

23. According to Article 3.1, for a subsidy to be prohibited it must be con tingent on either export
performance (a) or the use of domestic goods over im ported goods (b). The APRG is in our opinion
contingent on export performance.

5 Panel Report, Canada - Aircraft, para. 9.112., but also Brazil – Aircraft, para 7.24 and US – Lead and
Bismuth II, para 6.66
6 AB Report Canada – Aircraft, paras 154, 157.

24. The wording of the KEXIM Act clearly shows that the purpose of the KEXIM programmes is
to facilitate export. For example, Article 18 of the Act states that the loans are given “for the
promotion of the export of goods”. The wording of the Act leaves no doubt that the programmes
represent a subsidy whose goal is to promote the ex port of Korean goods. The subsidy is contingent
on export performance and is therefore a prohibited subsidy within the meaning of Article 3.1(a)

5. Conclusion on prohibited subsidies

25. According to the facts presented by the EC regarding the specific grants (paras 166-182) ,
these grants are provided on terms that are more advantageous
than those that would have been
available to the recipient in the market . Based on these findings, Norway is of the opinion that the
Panel should find that the specific grants provided under the APRG and the Pre-shipment Loan
Programmes are inconsistent with Article 3.1(a) of the SCM Agreement.

C. ACTIONABLE SUBSIDIES

26. In its first written submission, part IV D, th e EC demonstrates that Korea granted subsidies,
as defined by Part I of the SCM Agreement, to Daewoo-SME/Daewoo-HI, Samho-HI/Halla-HI and
STX/Daedong, and that those subsidies were specif ic. The EC further argues that the subsidies
provided by Korea are actionable subsidies within th e meaning of Articles 5(c) and 6.3(c) of the SCM
Agreement.

27. Norway will in this respect only address ce rtain issues of interpretation arising from
Article 6.3(c) of the SCM Agreement.

28. Article 6.3(c) states that:

“the effect of the subsidy is significant price undercutting by the subsidised 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 ”
(our emphasis).
29. The EC is only claiming the existence of “price suppression” and “price depression”, not
“price undercutting”. The question of interpretation thus only arises as regards the second alternative
in Article 6.3(c), i.e. “or significant price suppr ession, price depression or lost sales in the same
market.”

30. Norway therefore presents the following argumen ts as regards the interpretation of the legal
definition of (1) the “same market ” as used in Article 6.3(c) in the context of the shipbuilding
industry, and (2) how price depression or price su ppression is related to a “like product” or other
comparison between products.

1. Same market

31. A geographical market, in the ordinary meaning of the word, can refer to a market of any size,
with national, regional or even global dimensions . Unlike Article 6.3(a) and 6.3(b), which impose
geographical limitations on the term “market” (i.e. national markets), Article 6.3(c) includes no such
limitation. If the negotiators had intended to limit th e term market in 6.3(c) to national markets, they
could have done so by using wording similar to that in 6.3(a) and 6.3(b).

32. The term “same market” has not been defined in jurisprudence. Norway submits that the term
“same market” in Article 6.3(c) should not be interpreted narrowly as a Member’s national market,
but that due regard must be given to the special characteristics of the shipbuilding industry.

33. In the case of commercial vessels, it is widely recognised that the market is global. In its
comments to the OECD regarding possible measur es used to regulate low-price “dumping” by
shipbuilders, the Korean Shipbuilders’ Association noted that: “[t]here is only a single fully integrated
global market in this sector, wherein shipbuilders co mpete with each other without any restriction on
market access, purchasers, or movement of vessels. No meaningful distinction of national markets
exists in the world shipbuilding industry.”
7

34. The fact that the market for commercial vessel s is global needs no clarification; ships can sail
anywhere, be owned by anyone, and be registered anywhere in the world regardless of the nationality
of the shipowner and his place of business. This has been the trend for a large number of years, in
particular since the 1970s, when there was a rise in the number of “international ship registers”.
Shipowners themselves do not operate within geogr aphical boundaries when they order new vessels.
The only “boundaries” in the shipbuilding world, wh ere there are highly sophisticated shipbuilding
companies everywhere, is in reality the price. Subsidies in any form, in this highly competitive
industry, can have a major impact and steer the market towards a particular country.

35. Based on the above Norway submits that th e only meaningful interpretation of the “same
market” in this particular context is a global market without any national boundaries.

2. “Like product” or other product comparison

36. Article 6.3(c) makes reference to a “like pr oduct” in respect of “price undercutting”, but does
not make a direct reference to a “like product” in respect of price suppression, price depression or lost
sales in the same market.

37. It is clear, however, that price suppression, price depression and lost sales can only occur
when the products are competing for the same c ontracts. “Like product” must therefore be
understood to refer not only to “price undercutting” in th e first alternative in Article 6.3(c) but also to
price suppression, price depression and lost sales in th e second alternative. Furthermore, in respect of
ships, due regard must be given to the many sub-categories of ships (e.g. Aframax, Panamax,
Suezmax) that do not compete with each other.

D. CONCLUDING REMARKS

38. Norway respectfully requests that the Pa nel take the arguments presented above into
consideration when making its findings and recommendations in this case.

7 OECD Council Working Party on Shipbuilding, Industry Hearing on Establishing Normal
Competitive Conditions in World Shipbuilding, Subm ission by the Korean Shipbuilders’ Association,
C/WP6(2002)3/ADD1/REV2.

ANNEX C-7

ORAL STATEMENT OF NORWAY

(9 March 2004)

Mr. Chairman,
Distinguished Members of the Panel,
Ladies and gentlemen,

Introduction

1. First of all, I would like to thank you for th is opportunity to present the Norwegian view on
certain aspects of the present case without any refere nce to BCI. In its third-party submission,
Norway addressed certain issues of legal interpretati on which we consider to be of crucial importance
for the settlement of the case. I will not repeat all these arguments here, but concentrate on certain
legal aspects of the KEXIM pre-shipment loans.

2. I will start by commenting on whether the lo ans in question can benefit from a safe haven
based on item (k) of Annex I to the SCM Agreement. I will continue with the discussion of whether
these loans can be considered prohibited subsidies within the meaning of Article 3.1 (a) read in
conjunction with Article 1 of the Agreement, and in this regard I will limit myself to discussing the
requirement that a benefit must be conferred.

3. I will also comment on the discussion of whether the loans are actionable subsidies
 according
to Article 5(c) read in conjuncti on with Article 6.3 (c). In this respect I will limit myself to some
remarks on the interpretation of the term “same market” with regard to commercial vessels.

The understanding of Annex I item (k)

4. In its first written submission Korea states that its pre-shipment loans are excluded from the
ambit of Article 3 of the SCM Agreement as they ar e covered by the exception in item (k) of Annex I
to the SCM Agreement.
1

5. According to the second paragraph of item (k) the application of an export credit practice
should not be considered a prohibited export subsidy if 1) the Member applying the practice is a party
to an international undertaking on official export cr edits to which at least twelve Members are parties
and 2) the practice is in conformity with the provisions of the relevant undertaking.

6. Korea together with more than 12 other Members 2 is party to an international undertaking
under the auspices of the OECD, the “Consensus Agreement” 3, thus fulfilling the first criterion. The

1 See Korea’s first written submission paras. 269-277
2 The OECD Export Credit Arrang ement currently has 23 participants (counting the EU Member
States), all of which are WTO Members.
3 Arrangement on Officially Supported Export Credits of 11 February 2004 TD/PG(2003)24

question remains therefore whether the contested lo ans are covered by and “in conformity” with the
provisions of that Agreement.

7. Article 5 of the Consensus Agreement concerni ng the scope of the Agreement clearly states
that “the Arrangement shall apply to all official s upport provided by or on behalf of a government for
export of goods and/or services … wh ich have a repayment term of two years or more”.

8. In para. 277 (ii) of its first written submission, Korea states th at the pre-shipment loans are
provided with the usual maturity of 90 -180 days. T hus the loans have a shorter repayment term than
required and consequently fall outside the scope of the Consensus Agreement.

9. In conclusion, Korea cannot claim a safe have n under the exception in Annex I item (k) for its
KEXIM pre-shipment loans, which means that the loans must be assessed under the general rule in
Article 3 of the SCM Agreement on prohibited subsidies.

Article 1.1 (b) – what constitutes a “benefit”

10. As I have already mentioned, Article 3 refers to Article 1, which defines the term “subsidy”
for the purpose of the SCM Agreement. I would now like to discuss what constitutes a “benefit”
according to Article 1.1 (b). The term “benefit” is not defined in the SCM Agreement, but has been
interpreted by panels and the Appellate Body in a number of cases. According to Canada-Aircraft
4
“a benefit is conferred if a financial contribution is provided on terms that are more advantageous than
those that would have been available to the recipient in the market”.

11. Article 26 of the Kexim Act states that “Except where inevitable for maintaining the
international competitiveness to facilitate the export,… the interest rates, discount rates and fee rates
applicable to loans and guarantees extended under para graphs (1) and (2) of Article 18 shall be so set
as to cover the operating expenses…”

12. In Norway’s view, the wording of Article 26 of the KEXIM Act implies that the Government
of Korea de facto instructs KEXIM to offer lower inte rest rates on pre-shipment loans
 if such a
practice is necessary in order to secure export contracts for Korean companies.

13. I will not assess whether the interest rates provided by KEXIM place the Korean exporters in
a more advantageous position than if they were to obtain such financing on market terms. However, if
the Korean exporters enjoy such an adva ntageous position, we are faced with a prima facie case of
“benefit”.

The concept of “same market” in Article 6.3(c)

14. I will now turn to the interpretation of the concept “same market” in Article 6.3(c), which
have a bearing on whether the loans are “actionable s ubsidies” within the meaning of Article 5 (c) of
the SCM Agreement.

15. In Norway’s opinion Article 6.3(c) provi des two alternative ways to establish serious
prejudice in the sense of Article 5(c): 1) the effect of the subsidy is a significant price undercutting
by
the subsidised product, as compared with the price of a like product of another member in the same
market or 2) the effect is either a significant price suppression, price depression or lost sales in the
same market.

4 Panel Report , Canada-Aircraft, para. 9.112 and AB Report Canad-Aircraft, paras. 154,157.

16. It is Norway's understanding that the EC, in the present case, claims that the effect is a
significant price suppression or depression. However, to decide whether this is the case, both the
geographical market and the product market concerned must be considered.

Geographical market

17. First some comments as regards the geographical market: In the ordinary meaning of the
phrase, geographical market can refer to a market of any size, with national, regional or even global
dimensions. Unlike Article 6.3(a) and 6.3(b), wh ich impose geographical limitations on the term
“market” (i.e. national markets), Ar ticle 6.3(c) contains no such limita tion. If the negotiators of the
SCM Agreement had intended to limit the term “marke t” in 6.3(c) to national markets, they could
easily have done so by using wording similar to that in 6.3(a) and 6.3(b).

18. The term “same market” has not been defined by jurisprudence. No rway believes that the
extent of the geographical market will vary depe nding on the characteristics of the products in
question.

19. In the case of commercial vessels, it is widely recognised that the market is global. In its
comments to the OECD regarding possible measur es used to regulate low-price “dumping” by
shipbuilders, the Korean Shipbuilders’ Association noted that: “[t]here is only a single fully integrated
global market in this sector, wherein shipbuilders co mpete with each other without any restriction on
market access, purchasers, or movement of vessels. No meaningful distinction of national markets
exists in the world shipbuilding industry.”

20. This was confirmed last week by the OECD Special Negotiation Group for shipbuilding. The
participants, including the delegation from Korea, agr eed that there is only one single fully integrated
market for commercial vessels – that is the global market.

21. In this respect, there are several examples of the fact that Norwegian yards compete with
shipbuilders all over the world, including Korean yards, i.a. regarding contracts on product and
chemical tankers. This supports the idea that, in the field of commercial vessels, there is only one
meaningful interpretation of the term “same market” in Article 6.3 (c) and that is a global market.

The product market

22. Finally some remarks on the determination of the “product market”: This must be defined on
a case-by-case basis. Norway is of the opinion that one must look to the specifics of the particular
sector in question – that is the building of commercial vessels. In this sector there is a great potential
for substitution between products as many yards all over the world are able to build different types of
ships.

With this, Norway would like to thank the pa nel for this opportunity to comment on certain
issues of the case at hand and hopes that they may be helpful.

Thank you for your attention.

ANNEX C-8

RESPONSES OF NORWAY TO QUESTIONS FROM
THE EUROPEAN COMMUNITIES AND KOREA

(22 April 2004)

Questions from the European Communities

Q1: In Norway's view, are the APRGs and PSLs supplied by KEXIM provided on terms more
favourable than is otherwise available on the market?

Reply

 As a third party, Norway has not undertaken any assessment of whether the actual interest
rates provided by KEXIM place Korean exporters in a more advantageous position than if they were
to obtain such financing in the market. If however this is the case, as stated by the European
Communities, a ”benefit” is conferred.

 Further, as explained both in our written submissi on and our oral statement, Norway is of the
view that the wording of Article 26 of the KE XIM Act implies that the Government of Korea de facto
instructs KEXIM to offer lower interest rates on pre- shipment loans than what is otherwise available
in the market –provided that such practice is necessary in order to secure export contracts for Korean
shipbuilders.

Q2: In Norway's view, do price suppression or depression claims under Arti cle 6.3(c) of the
SCM require the complainant to perform a "like product" analysis?

Reply

 As a third party Norway has not undertaken any concrete assessment of the question raised.

Q3: In Norway's view, in the context of pr ice suppression or depression claims in
Article 6.3(c), what is the geographic scope of the phrase "in the same market"? Please
describe the geographic scope of the market for LNGs, product and chemical tankers, and
containerships.

Reply

 Concerning the geographical scope of ”the same market” in Article 6.3(c), the Norwegian
view is that the wording of this provision – unlik e the wording in Article 6.3 (a) and 6.3 (b) which
imposes geographical limitations on the term ”market”- has no such limitations in it. We believe that
the negotiators of the Agreement – left the ge ographical scope to be defined depending on the
characteristics of the market and product in questi on. In other words, the scope may vary and be
national, regional or even global depending on the product concerned.

 The geographic scope of the market for LNGs , product and chemical tankers and container
ships are global as many yards all over the world ar e able to build these types of ships which operate
internationally. This means that a buyer of the commercial vessels concerned may by and large
address yards all over the world and choose the one ab le to provide the ship according to the required
specifications at the best price.

Questions from Korea

Q8: In the assessment to determine whether a “public body” exists, Norway proposes to take
into account whether the body co ncerned must carry out governmental functions or activities
for governmental purposes. What does Norway consider to be governmental functions or
activities for governmental purposes?

Reply

 As a third party Norway, as stated in its written submission, limits itself to pointing out that it
is difficult to undertake a general assessment of what constitut es governmental functions or activities
for governmental purposes as such functions or ac tivities to a large degree are dependent on the
organization of the state, and the extent to whic h its political leadership has decided that certain
functions are to be provided by the government, dir ectly or indirectly. This could vary from one
Member country to another as there are great di vergences between the Members of the WTO in this
respect.

Q9: Does Norway consider that the US market is open, i.e. that all shipbuilders whatever
their origin can participate in bidding or sa les processes for the comm ercial vessels concerned?
Does Norway consider that the fact that a national market is open or closed is relevant for the
assessment on adverse trade effects and on the definition of geographic market?

Reply

 Norway as a third party, fails to see the need for – and will refrain from commenting upon
any specific national market restrictions that may exist. However, any such restrictions that may exist
cannot alter the fact that the overall market for co mmercial vessels in intern ational trade is a global
and integrated market as explained by Norway in its submission and oral statement.

ANNEX C-9

EXECUTIVE SUMMARY OF THE WRITTEN
SUBMISSION OF THE UNITED STATES

(12 February 2004)

I. INTRODUCTION

1. Although this dispute raises a host of issues that are of systemic importance to the operation
of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), properly
identifying the "like product(s)" is one of the fundamental prerequisites for a prima facie case of
serious prejudice under Article 6.3. If the Panel were to agree with Korea that the EC has failed to
properly identify the like product(s), it would be appr opriate for the Panel to deny the EC’s actionable
subsidy claims on that basis and to refrain from making findings with respect to the other issues raised
in this dispute.

II. GENERAL ISSUES

2. The United States questions the accuracy of the EC’s characterization of the report in Japan -
Apples, given that the Appellate Body stated in para graph 157 "that the party that asserts a fact is
responsible for providing proof thereof". In additio n, if the EC is asserting that Annex V somehow
removes the burden of proof from the complainant, then the EC would be in error. Nothing in
Annex V in particular or the SCM Agreement in general supports such an assertion.

3. If the EC is asserting that a Panel is limite d to the consideration of information gathered
through the Annex V process, then the EC is in erro r. Under Article 6.8 of the SCM Agreement, the
"record" includes, but is not limited to, info rmation developed through the Annex V process.
1 I n
addition, a complainant cannot invoke Annex V to support a prohibited subsidy claim under Part II,
because Annex V does not apply to Part II.

4. The EC erroneously argues that legisla tion that authorizes, but does not mandate, the
provision of export subsidies is inconsistent "as such" with the SCM Agreement. It is well established
under past GATT and WTO dispute settlement practice that legislation of a Member is generally
inconsistent with that Member’s WT O obligations only if the legislation mandates action that is
inconsistent with those obligations or precludes acti on that is consistent with those obligations. The
EC reliance on the panel report in the US - Section 301 dispute is misplaced. Even assuming for
purposes of argument that the analysis of the panel in that dispute was correct, the EC has failed to
explain how Article 3 of the SCM Agreement equat es with Article 23 of the DSU – the provision at
issue in US - Section 301.

5. Contrary to the EC’s assertions, the applicati on of the mandatory/discretionary distinction to
Article 3.2 does not render the word "maintain" meaningless. Also, the EC’s brief discussion of the

1 The United States is unsure what the EC means when it refers to "the record". There is no formal
"record" for purposes of these dispute settlement proceedi ngs. Presumably the EC means to refer to all the
evidence and information provided to, or obtained by, the Panel.

Appellate Body report in the Japan Sunset dispute is misleading, because the Appellate Body
distinguished the question of whether an instru ment is a measure from the separate question of
whether the instrument, if it is a measure, ma ndates a breach of any WTO obligation under the
mandatory/discretionary distinction.2

III. ISSUES CONCERNING THE IDENTIFICATION AND VALUATION OF SUBSIDIES

6. The United States does not take issue with the EC’s conclusion that KEXIM and the other
five Korean financial institutions analyzed by the EC are "public bodies". However, the criteria
considered by the EC should not be regarded as constituting the exclusive standard for determining
whether an institution is a "public body" for purpos es of Article 1.1(a)(1). The United States urges
the Panel to limits any findings on this issue to the facts of this dispute. With respect to Korea’s
arguments concerning the concept of "public bod y," the text of the SCM Agreement provides no
support for the notion that a public body ceases to be a public body if it carries out a function that is
also carried out by private bodies.

7. With respect to the EC’s allegation that th e Korean Government directed private financial
institutions to provide subsidies to the shipyards, the United States is in general agreement with the
EC’s analysis of the phrase "entrusts or directs". Korea asserts that the EC must document an explicit
and affirmative governmental action delegating res ponsibility for subsidy actions to each of these
institutions. Korea has not cited to any language in the SCM Agreement to support its assertion, and
there is no such language.
3

8. Regarding the existence of a "benefit," there is no basis for a general presumption that a facile
sorting of banks into "foreign" or "domestic" cate gories is sufficient in every case to establish which
institutions provide an appropriate "market" benchmark. This is n ecessarily a fact-specific exercise,
particularly in a case such as this where there is an allegation that the government entrusted or
directed private banks to provide subsidies.

9. Korea incorrectly asserts that once a creditor bank becomes an owner of a company, the bank
is no longer capable of making a financial cont ribution to that company, such as through a
debt-to-equity swap or debt forgiveness. If the drafters of the SCM Agreement had contemplated
having ownership of a company operate as an exem ption from subsidies disciplines, they would not
have listed equity infusions as an example of a form of financial contribution in Article 1.1(a)(1)(i).

10. With respect to Korea’s assertions concer ning the IMF and World Bank, there is nothing in
the SCM Agreement stating that a prohibited or actionable subsidy ceases to be prohibited or
actionable if it has some sort of blessing by th e IMF or the World Bank. In addition, Korea
incorrectly asserts that the activities of KEXIM do not constitute a "government practice" within the
meaning of Article 1.1(a)(1)(i). Export prom otion through financial support is a very common
government function, and pre-shipment loans and APRG’s are precisely the types of transactions
whereby a government may provide a subsidy to exporters.

11. Korea incorrectly asserts that because DS ME performed successfully after its spin-off,
Daewoo’s creditors necessarily made the correct decisi on and acted in a market-oriented fashion. In
evaluating whether a financial contribution conf ers a benefit, one should focus on the economic
indicators and other information that would have been available to the provider of a financial

2 The United States also requests that if, in the course of this proceeding, the EC should pursue its
claim under Article 5(a) of the SCM Agreement, the United States and other third parties be given the
opportunity to comment on the arguments of the parties concerning Article 5(a).
3 The United States also disagrees with Korea’ s assertions that "unofficial" commentary and
circumstantial evidence may not be used to demonstrate government "entrustment" or "direction".

contribution at the time the decision to provide the financial contribution was made. Korea also
incorrectly asserts at various places in its submission that the fact that the companies in question went
through established insolvency pro cedures automatically means that no subsidies could have been
provided.

IV. ISSUES CONCERNING SERIOUS PREJUDICE

12. The United States disagrees with Korea’s asser tion that export subsidies cannot be included in
a serious prejudice case. Nothing in the text of the SCM Agreement supports this proposition, and
Article 13(c)(ii) of the Agreement on Agriculture makes clear that prohibited subsidies can be the
subject of a serious prejudice case. To the extent that Korea is arguing that an export subsidy cannot
be simultaneously the subject of both a prohibited subsidy claim and a serious prejudice claim, the
United States also disagrees. Here, too, Korea do es not cite to anything in the text of the SCM
Agreement to support this proposition. Instead, it si mply asserts that action under both Articles 4 and
7 of the SCM Agreement somehow results in some sort of unfair "double-counting". The presence of
both prohibited and actionable subsidy claims with respect to the same subsidy, however, may have
an impact on the findings made by the Panel. B ecause the Panel is charged with making findings to
promote the prompt settlement of disputes, the Panel might want to consider making separate findings
with respect to the claims of serious prejudice; i.e., one set of findings that applies to all of the
subsidies found by the Panel to be specific – including the subsidies found by the Panel to be
prohibited – and another set of findings that appli es only to the subsidies that the Panel finds are
specific, but not prohibited.

13. The United States agrees with Korea that " serious prejudice" is a separate requirement that
must be satisfied. Thus, a finding that one of the conditions described in subparagraphs (a)-(d) of
Article 6.3 exists does not necessarily mean that "ser ious prejudice" exists. This conclusion follows
from the use of the phrase "may arise in any case wher e one or several of the following apply" in the
chapeau to Article 6.3. The United States does not ag ree with Korea’s assertion that the standard of
proof for "serious prejudice" is much greater than the standard for "material injury". The standards
are different, but it cannot be said that one is necess arily higher than the other, because "prejudice to
the interests of another Member" and "injury to a domestic industry" are not the same thing. The
United States also disagrees with Korea’s assertion that in order to demonstrat e serious prejudice, the
EC must demonstrate the elements set forth in Ar ticles 11 through 15 of the SCM Agreement. To the
contrary, the elements that the EC must establish are set forth in Articles 5 and 6.

14. The EC incorrectly argues that the phrase "in the same market" in Article 6.3(c) of the SCM
Agreement can refer to the "world ma rket". In subparagraphs (a)-(c) of Article 6.3, the drafters likely
intended "market" to mean national market, and the limiting language in subparagraphs (a) and (b)
was not intended to distinguish between national markets and a "world market," but instead was
intended to distinguish between particular nationa l markets. Interpreting "market," as used in
Article 6.3(c), to include the world market would render the word "same" in the phrase "the same
market" ineffective, because the subsidized and non- subsidized products always could be deemed to
be in the same "world market". Finally, the EC never explains its assertion that if the phrase "in the
same market" does not encompass a "world market," Members would be precluded "from challenging
subsidies on the many products that are traded in world markets such as aircraft and ships".

15. Referring to the term "meaningf ully affected" that the panel in Indonesia - Autos employed,
the EC asserts that the price depression/suppression it alleges is "significant" because EC yards have
had to close or have lost market share as a result of Korean subsidies. In particular, the EC argues
that over-capacity in the shipbuilding industry has resulted in excessive price competition to obtain
orders. Korea takes issue with the EC’s approach. Although the United States does not agree with all
of the conclusions drawn by Korea, it does agree that the EC ’s approach is incorrect.

16. Article 6.3(c) requires that "the effect of the subsidy" is "significant price suppression," but
"significant" is not defined. The EC argues that the Panel should follow the standard employed in
Indonesia - Autos. In that report, the panel wrote that the word "significant" was included in the text
on price undercutting "presumably" to ensure that th e text did not capture "margins of undercutting so
small that they could not meaningfully affect supp liers of the imported product". It is difficult to
ascribe much weight to that panel’s finding, howe ver, given that (1) the panel did not conduct a
textual analysis of the provision, and (2) the pa nel itself explained that it was making an assumption
about the provision’s meaning. The panel went on to find, essentially, that a price that is 33.77 per
cent lower represents "significant" price undercutting under anyone’s definition.

17. A textual analysis of Article 6.3(c) would, as always, begin with its ordinary meaning. The
ordinary meaning of "significant" is "important, not able; consequential," which suggests that the price
suppression must reach a level at which it is import ant, notable, and consequential in order to be
inconsistent with Article 6.3(c). The United States further notes that the term "significant" modifies
"price suppression or depression"; therefore, it is the effect on prices that must be "significant" and
not the direct effect on producers , as the EC argues. By shifting the analysis to the effect on
producers, the EC is improperly collapsing the separate requirements of "significant" price
suppression or depression and "serious prejudice".

18. The United States has two concerns regarding the arguments made by both the EC and Korea
with respect to the issue of causation and price depression or suppression.

19. With respect to the EC’s arguments, the EC appears to assume that the phrase "effect of the
subsidy" – the phrase used consistently in Article 6.3 – is the same as the term "effects of the
subsidized imports" – the term used consis tently through Part V of the SCM Agreement.
4 While the
United States does not necessarily disagree with the EC ’s ultimate conclusion that subsidies need not
be shown to be the exclusive cause of the effects id entified in Article 6.3, this conclusion cannot be
based on a supposed similarity in language between Article 6.3 and the provisions contained in Part V
of the SCM Agreement. In this regard, the United States notes that, under Part V of the SCM
Agreement, an investigating authority is expected to assess "the effects" or "the impact of the
subsidized imports " on domestic prices and th e domestic industry, not the "effect of the subsidy ,"
which is what Article 6 of the SCM Agreement refers to.5

4 See, e.g., SCM Agreement, Articles 15.1 and 15.2.
5 Compare Article 15.1, 15.2, 15.3 and 15.4 of the SCM Agreement with Article 6.3 of the SCM
Agreement. Indeed, Article 15 only refers to the "effect s of the subsidies" – as opposed to the "effects of the
subsidized imports" – on one occasion, the first sentence of Article 15.5. However, even there, the Agreement’s
negotiators added a footnote specifically indicating that the investigating authority was to assess the "effects of
the subsidies" as set forth in Article 15.5 by performi ng the analysis described in Articles 15.2 and 15.4.
Article 15.5, fn. 47. Articles 15.2 and 15.4 both clearly indicate that a material injury analysis must focus on the
"effects" or "impact" of the "subsidized imports" on the industry and its prices, not on the "effects of the
subsidy" itself. Id.

V. CONCLUSION

20. The United States thanks the Panel for providi ng an opportunity to comment on the issues
involved in this proceeding, and hopes that its comments will prove to be useful.

ANNEX C-10

ORAL STATEMENT OF THE UNITED STATES

(9 March 2004)

Introduction

1. Mr. Chairman, members of the Panel, it is my privilege to appear before you to present the
views of the United States in this dispute. Toda y, I intend to discuss certain issues that were not
addressed in the US written submission. These issues are KEXIM financing, and changes in
ownership of companies.

KEXIM Financing

2. Turning first to KEXIM financing, the Un ited States disagrees with Korea’s assertion that
KEXIM’s Advance Payment Refund Guarantees (APR G) and pre-shipment loans are protected by
items (j) and (k), respectively, of Annex I to the SCM Agreement.
1

APRG

3. With respect to the APRG, item (j) of A nnex I covers insurance or guarantee programmes
pertaining to the following: (1) export credits; (2) increases in the cost of exported products; and (3)
exchange risks. The APRG does not fall within any of these three categories of programmes.

4. The APRG does not involve the guarantee of an export credit. Export credit guarantee
programmes typically consist of a contingent obliga tion by an export credit agency to pay a private
lender in the event of a default by the foreign buye r. By contrast, the APRG does not refer to the
extension of credit. Instead, the APRG consists of a guarantee of the obligation of the exporter to
refund the foreign buyer’s cash down payment in the event that the sales transaction is terminated.
The cash down payment is the element of an export sales transaction that does not represent the
extension of credit.

5. In addition, the APRG does not address incr eases in the price of the exported product or
foreign exchange risk. Instead, the APRG addresses only the obligation on the part of the exporter to
refund the down payment in the event that the sales transaction is terminated. However, there is no
suggestion that the guarantee applies only to export sales contracts that were terminated because of
the increased cost of the exported product or because of exchange rate fluctuations.

Pre-Shipment Loans

6. Turning to the KEXIM pre-shipment loans, th e EC asserts that they are available to Korean
exporters, manufacturers and raw materials providers.2 However, they do not appear to fall within the

1 Korea Submission, Sections V. 5 and V.6.
2 EC Submission, para. 155.

scope of item (k), because they are neither "export credits" nor "the payment . . . of all or part of the
costs incurred by exporters or financial institutions in obtaining credits."

7. First, these loans do not come within the d escription of "export credits" on the OECD website
cited by Korea, which provides that "an export cr edit arises whenever a foreign buyer of exported
goods and services is allowed to defer payment. "
3 The OECD description mentions two types of
export credits: "supplier credits" and "buyer credits." "Supplier credits" are extended by an exporter
directly to an overseas buyer. "Buyer credits" are ex tended by an exporter’s bank or another financial
institution as loans to the buyer (or the buyer’s bank). Both types of credits are extended to the buyer
or its bank. By contrast, the KEXIM pre-shipment loans are extended not to the buyer, but to the
exporter. While such credits may be export-contin gent, in that they would not be made by KEXIM
but for the contemplated export, they are not expor t credits in that they do not finance the actual
export.

8. Second, the pre-shipment loans do not appear to involve "the payment . . . of all or part of the
costs incurred by exporters or financial institutions in obtaining credits." While the loans are made to
exporters, there is no indication that they are at all related to "costs incurred . . . in obtaining credits."

Existence of a "Benefit"

9. Before leaving the topic of KEXIM financing, the United States would like to comment on
one point made by Norway in its third-party submission. As the United States understands it, Norway
argues that Article 26 of the KEXIM Act allows KEXIM to sometimes lend below its cost where
concerns of "international competitiveness" make it necessary to do so. According to Norway, this
proves that KEXIM financing allows for the conferral of a benefit on a de facto basis.
4 T h e
implication in this statement, however, is that KEXIM financing does not confer a benefit in the
non-exceptional situation where Article 26 requires KEXIM to cover its operating expenses.

10. Assuming we have understood Norway’s ar gument correctly, then the United States must
disagree with the standard that Norway suggests. The Appellate Body has in dicated previously that
"the marketplace provides an appropriate basis for comparison in determining whether a ‘benefit’ has
been conferred ... ."
5 Actors in the marketplace seek to earn a profit and not merely cover their costs.
Therefore, even in non-exceptional situations, KE XIM financing confers a benefit because, as a
general requirement, Article 26 requires KEXIM to lend at cost.

Changes in Ownership

11. We now turn briefly to the second topic that we wish to discuss in this afternoon’s statement.
At various places in its first submission, Korea argue s that the EC has failed to take into account the
effects of changes in ownership on the existence and amount of subsidization.
6 With respect to this
argument, the United States simply notes that th e Appellate Body has found that under certain
circumstances, the privatization of a government-o wned or -controlled company may have an effect
on certain types of subsidy benefits that the company had received prior to its privatization. 7
According to the Appellate Body, the precise effe ct depends upon the nature of the privatization
transaction, and may include the complete extinguishment of prior subsidies. However, an analysis of

4 Norway Third-Party Submission, paras. 18-19.
5 Canada - Measures Affecting the Export of Civilian Aircraft , WT/DS70/AB/R, Report of the
6 See Korea Submission, paras. 27-30 (Introduction), 374-375, 441 and 449.
7 See United States - Countervailing Measures Concerning Certain Products from the European
Communities, WT/DS212/AB/R, Report of the Appellate Body adopted 8 January 2003.

the facts and circumstances of the privatization tr ansaction is critical in determining whether certain
subsidy benefits have, in fact, been extinguished.

Conclusion

12. Mr. Chairman, that concludes the third-party statement of the United States. Thank you for
your attention.

ANNEX C-11

RESPONSES OF THE UNITED STATES TO QUESTIONS
FROM THE PARTIES (FIRST MEETING)

(22 March 2004)

QUESTIONS FROM KOREA

5. Korea has introduced the IMF’s views as an element of evidence to be weighted by the
Panel. Does the US consider the IMF’s views lega lly or factually irrelevant? If so, on what
basis?

1. As a general proposition, the views of the IMF might be relevant to the question of whether a
"financial contribution" exists. The IMF would be particularly well-placed to assess the extent of the
Korean Government’s involvement in the bail-out of troubled Korean firms.

6. Regarding the last sentence in Paragraph 10 of its Oral Statement, is the US now
arguing that "benefit" is determined by cost to government?

2. No, the United States is not arguing in favor of a cost-to-government standard for determining
the existence of a "benefit." To the contrary, as paragraphs 9-10 of the US Oral Statement make clear,
the United States was contesting the apparent s uggestion by Norway that a cost-to-government
standard should be applied in analyzing subsidies provided by KEXIM. Indeed, in the last sentence of
paragraph 10, the United States noted that there would be a benefit even in the non-exceptional
situations where KEXIM was required to lend at cost . Such an assertion is hardly consistent with a
cost-to-government standard.

3. In order to avoid any confusion on this poi nt, the United States would add that commercial
lenders do not routinely lend at cost, because they must seek to earn a profit. For that reason,
financing at-cost by KEXIM in "non-exceptional" situations almost certainly would result in the
conferral of a benefit under a "benefit-to-recipient" approach. The benefit would be even greater in
those "exceptional" situations where KEXIM lends below its cost.

 If the determination of "benefit" is based on a market benchmark, of what legal
relevance is cost?

4. If a market benchmark is used to determine the existence of a benefit, then what should be
relevant is what a commercial lender charges a borrower for financing, not the lender’s costs. A focus
on what the lender charges (or wh at the borrower pays) is the essence of the benefit-to-recipient
approach.

 Does the US statement in paragraph 10 go to the issue of "benefit" or "public body"?

5. The US statement goes to th e issue of "benefit." It cannot be seriously maintained that
KEXIM is not a "public body" within the meaning of Article 1.1(a)(1) of the SCM Agreement.

7. In either case, if the actual evidence shows that KEXIM operated at a profit, would this
change the US view expressed in paragraph 10?

6. No. As noted above in connection with Ques tion 6, the benefit-to-recipient approach must be
applied to KEXIM financing. That approach, in turn, requires a comparison of KEXIM financing to a
market-based benchmark; i.e., comparable comme rcial financing. Evidence that KEXIM earned a
profit would be irrelevant to this exercise, be cause it would not prove that KEXIM was charging
market rates.

7. For example, assume that: (a) 5 per cent is a rate that covers KEXIM’s costs and allows
KEXIM to earn a profit; (b) 7 per cent is the rate KEXIM charges; and (c) 10 per cent is the market
rate. In this scenario, KEXIM would be earni ng a profit, but still would be providing a benefit
because it would be lending at below-market rates.

QUESTIONS FROM THE EC

1. Does the US believe that a "public body" in the context of Article l.l(a)(l) should only be
considered a public body when, as Korea contends, it is "acting in an official capacity on behalf
of the people as a whole"?

8. No.

2. Does the US believe that in order for a "p rivate body" to be entrusted or directed in the
context of Article l.1(a)(iv), such a body must receive explicit and affirmative direction from the
government?

9. The phrase "explicit and affirmative direction" appears to be based upon dicta contained in
the panel report in United States - Measures Treating Export Restraints as Subsidies , WT/DS194/R,
Report of the Panel adopted 23 August 2001. Th e phrase cannot be found in the SCM Agreement
itself. The United States has never been certa in as to what the panel meant by "explicit and
affirmative," but to the extent that the phrase is c onsidered to require a direction in the form of a
written command from the government to a private body, the United States disagrees.

3. Does the US believe, as Korea asserts, that it is impossible to distribute a subsidy
through a creditor that owns a share of the enterprise that is receiving the benefit?

10. No.

4. Does the US believe that governmental actions undertaken with IMF or World Bank
approval are exempt from the disciplines of the SCM Agreement?

11. No.

5. According to the US, when a panel decid es whether a creditor acted according to market
incentives in the context of a bankruptcy proceedin g, should the panel consider the subsequent
performance of the enterprise or should it consider only the information that was available
at the time of the bankruptcy proceeding?

12. A panel considering a dispute under Part III of the SCM Agreement (or an investigating
authority in a countervailing duty proceeding under Part V) must put itself in the shoes of the creditor

at the time of the investment decision. Because such a creditor would not have knowledge of the
firm’s future performance, the panel/investigating authority should not consider such information.

6. Could the US elaborate on their own ex perience regarding the GOK direction of credit
to Korean companies and in particular their views on KEXIM so called market oriented
behaviour?

13. With respect to this question, the Unite d States refers the EC to the countervailing
determinations of the US Department of Commerc e in cases involving products from Korea. More
specifically, the Department’s treatment of partic ular Korean subsidy programmes can be found at
<www.ia.ita.doc.gov/esel/eselframes.html>.

ANNEX C-12

RESPONSES OF THE UNITED STATES TO QUESTIONS
FROM THE PANEL (SECOND MEETING)

(2 July 2004)

Q: The parties disagree on whether or not APRGs and PSLs constitute export credit
guarantees and export credits respectively. Th e EC submits that they do not, whereas Korea
asserts that they do. Would your export credit agency treat APRGs as export credit guarantees,
and PSLs as export credits? Please explain and provide relevant documentation.

1. The United States thanks the Panel for the opp ortunity to reply to this question. As
background for its reply, the United States notes that the Export - Import Bank of the United States
(Ex-Im) is the principal US export credit agency.

Advance Payment Refund Guarantees (APRGs)

2. It is the understanding of the United States that under the APRG programme, the Korean
Export-Import Bank (KEXIM) issues guarantees to foreign buyers that Korean exporters will refund
any cash down payments made by the buyers in the ev ent that the sales transaction is terminated prior
to export. As explained in paragraph 4 of the Oral Statement of the United States (9 March 2004),
while the APRG is a guarantee issued in conn ection with a proposed export (and which may,
therefore, be export-contingent for purposes of Article 3.1(a) of the Agreement on Subsidies and
Countervailing Measures), it is not a guarantee of an export credit. An export credit typically consists
of a loan to the foreign buyer. If the loan is extended by the seller or by a private bank, the export
credit agency may guarantee the le nder against a default by the buyer regarding repayment. Such a
transaction would be an export credit guarantee.

3. Section 9 b) of the OECD Arrangement on Officially Supported Export Credits (the
Arrangement) provides that “Official support for ... down payments shall only take the form of
insurance or guarantee against the usual pre-credit risks.”
1 Ex-Im does not consider the APRG to fall
within this definition. Ex-Im’s practice with respect to pre-credit risks is to provide cover to the
insured party (US exporter or lender acting on behalf of the US exporter) against the risks of contract
cancellation by the foreign buyer, not for the foreign buyer. Moreover, Ex-Im is unaware of any other
export credit agency that offers the type of cover to the foreign buyer that Korea provides under the
APRG programme.

Pre-Shipment Loans (PSLs)

4. It is the understanding of the United States that under the PSL programme, KEXIM provides
pre-shipment loans to Korean e xporters. Pre-shipment loans are not export credits. Export credits
typically are loans to foreign buyers. Although the OECD Arrangement does not define “export
credits”, Section 5 (Scope of Application) of the Arrangement states that:

1 Arrangement on Officially Supported Export Credits, TD/PG(2004)12, 11 June 2004.

The Arrangement shall apply to all official support provided by or on behalf of a
government for export of goods and/or servi ces, including financial leases, which
have a repayment term of two years or more.
 (a) Official support may be provided in different forms:

 (1) Export credit guarantee or insurance (pure cover),

 (2) Official financing support:

 - direct credit/financing or refinancing, or

 - interest rate support.

 (3) Any combination of the above.

5. The Arrangement definition of “official support” is li mited to support provided “for export”
of goods and/or services. This definition would preclude pre-export financing to the exporter, such as
the PSL programme. This interpretation is reinfo rced by language on the OECD’s website, “Export
credits, about”, which states as follows:

Governments provide official export cred its through Export Credit Agencies (ECAs)
in support of national exporters competing for overseas sales. EC As provide credits
to foreign buyers either directly or via private financial institutions benefiting from
their insurance or guarantee cover. ECAs can be government institutions or private
companies operating on behalf of the government.
2
While the PSL programme involves the extension of cr edits to Korean exporters that may be export
contingent for purposes of the Agreement on Subsidies and Countervailing Measures, these credits are
not export credits within the meaning of the OECD Arrangement.

6. US Ex-Im Bank has a Working Capital Guar antee Programme, under which Ex-Im offers a
guarantee to the commercial lender providing export-re lated working capital to the US exporter. If
the US exporter defaults on its commercial bank loan, Ex-Im makes payment on the guarantee, and
seeks collection against the US exporter. Because the Ex-Im guarantee covers the risk of the US
exporter, rather than the foreign buyer, Ex-Im does not consider this programme to be an export credit
within the meaning of the OECD Arrangement.

2 http://www.oecd.org/about/0,2337,en_2649_34169_1_1_1_1_37431,00.html. Visited 30 June 2004
(emphasis added).