OF THE PARTIES - SECOND MEETING
Document: Contents Page Annex F-1 Oral Statement of the European Communities F-2 Annex F-2 Oral Statement of Korea F-12
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 F

EXECUTIVE SUMMARIES OF THE ORAL STATEMENTS
OF THE PARTIES - SECOND MEETING

Contents Page
Annex F-1 Oral Statement of the European Communities F-2
Annex F-2 Oral Statement of Korea F-12

1. Korea makes increasingly reference to the “f inancial and economic turmoil” the “assistance
of the IMF in resolving the financial crisis or th e fact that other Members also subsidised their
shipyards as an excuse for granting subsidies to its shipyards. Why does Korea invoke these
circumstances although the SCM Agreement does not provide for justification on these issues?

I. PROHIBITED SUBSIDIES

A. MANDATORY/DISCRETIONARY ISSUES

2. Contrary to the suggestions of Korea, the European Communities attaches great importance to
its claims against the KEXIM legal framework and its subsidy programmes “as such”.

3. The European Communities does not accept th at measures can be brought outside the scope
of the WTO Agreement (or dispute settlement) simply by introducing an element of discretion.

4. Whether a measure is inconsistent with a WTO obligation must depend on the characteristics
of the measure and the terms of the WTO obligation in question. A discretionary measure must surely
be inconsistent with a provision that prohibits su ch discretion. For example, a discretion to impose
antidumping duties at a level of treble the dumping margin is inconsistent with the obligation in
Article 9.3 of the Antidumping Agreement that “the amount of the anti-dumping duty shall not exceed
the margin of dumping” especially when interpreted in the light of the obligation in Article 18.1 that
“no specific action against dumping of exports from another Member can be taken except in
accordance with the provisions of GATT 1994, as in terpreted by this Agreement.” On the other
hand, a power for a government body to grant subsidies, without more, does not violate the SCM
Agreement because there is no prohibition on granting subsidies.

5. The so-called mandatory/discretionary doct rine cannot overrule the conclusion reached from
an interpretation of the text in accordance with the principles of the Vienna Convention. The
Appellate Body has already warned against the mech anistic application of this doctrine and expressly
left open the possibility that “discretionary” measure s may violate WTO obligations. It has also held
that an assessment of the compatibility of a me asure cannot end with the conclusion that it is
discretionary but must continue with an examination of the effects of the measure.

6. It is true that there exists a presumption of good faith in international law and the so-called
mandatory/discretionary doctrine may be a manifest ation of it. However, there is by no means a
presumption of bad faith when it is assumed that a government or public body will act in accordance
with the directions addressed to it in its governing law. It does not matter that it has some discretion
not to do so always or systematically, since this discretion must be exercised in accordance with the
law

7. If one wants to try to establish a principl e about what measures are subject to dispute
settlement and which not, the relevant characteristi c is, in the view of the European Communities,
whether the measure is normative in relation to the behaviour covered by the WTO obligation in
question. That is, does the measure set out the principles that govern or influence how the WTO
Member will act in some situation? If the ac tion of the WTO Member is determined according to
principles that are inconsistent with those th at it has agreed to follow in concluding the WTO
Agreement, so that the action will at least in some cases be inconsistent with that agreement, then that
measures will be inconsistent “as such” with the WTO Agreement.

8. The consistency of a programme with Article 3 of the SCM Agreement depends on the rules
governing the programme and indeed the purpose that it is designed to achieve. It is not necessary
that the programme should lead to an export subsidy in every single case (or even a “representative”
number of cases), although the fact that there are some such cases is an important confirmatory
element.

9. Whether or not every APRG and every pre-sh ipment loan will be an export subsidy is not
determinative (although the European Communities has demonstrated many such cases). What is
determinative is that the rules according to whic h the scheme operates may provide exporters with a
benefit – indeed they are designed to do so. These schemes are only open to exporters and provide
important advantages that are not available on th e same terms on the market. They both provide
exporters with important financing facilities for export contracts in the critical period before (properly
so-called) export credits and export credit guarantees become available. Even if exporters do not
always use these facilities (when a lternative finance is more conveni ently available), the availability
of these programmes provides assuran ce that if market conditions were to change, finance from
KEXIM would still be available at the pre-established conditions. In this respect, it is important to
note that Article 3.2 of the SCM Agreement prohibits the maintenance of export subsidy programmes,
even where they do not result in grants of export subsidies.

10. Turning now to the other “as such” claim – th at against the legal framework of KEXIM – let
me first say that the European Communities recognises the far-reaching nature of its claim but
considers that it is justified in the circumstance s. KEXIM is in reality a funding mechanism for
directing state resources into the promotion of exports on better terms than commercial banks would
offer. It is directed to do so on the basis of its interest rate guidelines rather than at market rates and at
below cost rates when “inevitable for maintain ing the international competitiveness to facilitate
export”.

B. BENEFIT

1. KEXIM as such

11. KEXIM as such is a benefit because exporters are provided with a bank that enjoys huge
amounts of government money and unlimited state gua rantee with a mandate to promote exports and
the requirement to disregard market principles where necessary to support the export competitiveness
of key Korean industries. The existence of such a body the work of which is not explicitly limited to
either market principles or to OECD standards is a very significant advantage for exporters, in
particular shipbuilding which is in Korea an export oriented industry.

2. APRG and PSL Programmes as such

12. The possibility of obtaining a preshipment loan involves a tremendous advantage for
shipyards because they can then o ffer tail-heavy payment terms with the majority of the payment
delayed until delivery. Contrary to what Korea a nd Drewry want to make the Panel believe, tail-end
schemes have become common in recent years on the shipbuilding market. Tail-heavy payment
implies that the payments to the shipyard are not sufficient to fund the cash flow during production
and financing will therefore be required. Pre-ship ment loans (in the form of credit-lines) enable
Korean shipyards to accept tail-heavy payment term s. The provision of this “financial product”
provided by KEXIM that is not offered by other comme rcial banks confers a very significant benefit.
The existence of the APRG and pre-shipment loan programmes provide financial and thereby
economic stability to shipyards.

3. Individual Grants

13. The European Communities noted that it had adequately rebutted Korea’s argument in the
second written submission, but wishes to draw the Pane l’s attention to a pattern that runs through
them: Korea’s non-cooperation in providing the necessary information to adjust the market
benchmark in terms of duration and collateral. Th e European Communities asked about collaterals as
early as the Annex V procedure. Korea did not respond. The Panel gave Korea a further opportunity
to submit “internal documentation” concerning KEXI M’s review/authorisation of a few transactions,

including worksheets and other documentation showi ng calculations of the interest rate and other
terms, including consideration of collateral”. Korea contented itself with providing the minutes of the
Board of Director’s meeting and noting that “ it is not KEXIM’s policy to keep and maintain
worksheets and similar documents.”

Another tactic of Korea to obstruct the European Communities’ prima facie case on benefit
regarding individual transactions is the frequent “clar ification” of facts once it realised that it had
mistakenly failed to withhold information that coul d be valuable to the European Communities’ case.
The European Communities considers th at it has done more than making a prima facie case and fully
rebutting Korea’s defence on the issue of benefit by taking full account of any differences in duration
and collateral. Korea has not rebutted the EC prima faci e case in a substantiated manner, e.g., by
selecting some transactions and by providing indepe ndent expertise and supporting documents, e.g.,
on the value of the collateral - but as Korea admits, KEXIM does not keep such materials.

C. SAFE HAVEN

14. Korea does not respond to the EC argument th at APRGs and preshipment loans are not export
credit instruments envisaged by items (j) and (k).

15. In making APRGs and preshipment loans, KEXIM assumes a risk that relates to the
creditworthiness of the domestic exporters. Expor t credit financing referred in items (j) and (k)
however is different in a fundamental respect – it c oncerns foreign risk. The underlying rationale of
these provisions is that domestic banks typically do not have the means of assessing overseas risks of
a potential buyer of an export product (or of rec overing money abroad). In order to ensure the
functioning of a free world market it is essential that overseas buyers have access to financing.

16. The approach taken by the OECD (and WTO) was to harmonise the specific instruments for
export financing (guarantees and credits) and to allow the activities of stat e agencies in this few
particular market segment. Korea itself acknowledged that export financing within the meaning of the
OECD Arrangement forms only a minor part KE XIM’s financial services provided to promote
exports.

17. Items (j) and (k) of Annex I to the SCM Agreement cannot justify the provision of export
subsidies to the producer through additional financing instruments that cover the domestic risk of the
producer as provided by KEXIM.

II. ACTIONABLE SUBSIDIES

18. The European Communities has presented prima facie evidence demonstrating that Korea has
provided actionable subsidies to its shipbuilding indu stry, and has rebutted Korea’s contentions to the
contrary. In particular, the European Communiti es has demonstrated that public bodies and entrusted
or directed private bodies have made financial contri butions to three Korean shipyards that provide a
benefit, and that these subsidies were specific within the meaning of the SCM Agreement and caused
serious prejudice to the European Communities’ interests.

A. FINANCIAL CONTRIBUTION

19. The European Communities has demonstrat ed that that KEXIM, KAMCO, KDB, IBK,
KDIC, and BOK were public bodies that acted pursuant to government policy when participating in
the corporate restructurings. We have explained that these bodies are subject to government control
beyond ownership, pursue public policy objectives set by the Korean Government, and are entitled to
unlimited governmental guarantees of losses. We have also shown that entrusted or directed private
bodies involved in the restructuring provided financial contributions to the three Korean shipyards.

20. The European Communities has provided evidence that the financial institutions involved in
restructuring of the shipyards were unable to act independently, including the following:

¾ letters from the Korean Government to th e IMF indicating that public funds would be
withheld from banks that did not participate in corporate restructuring;

¾ acknowledgement by a Korean bank that th e Government’s influence would cause it
to make loans that it otherwise would not;

¾ a signed commitment by banks to participate in restructurings;

¾ Government decrees requiring bank par ticipation in financial stabilisation;

¾ an explicit Government policy of s upporting failing companies through debt for
equity swaps; and

¾ statutory limits on the discretion of banks to make decisions relevant to the
restructuring.

21. The EC has demonstrated that the Korean Government leveraged its multiple roles as
decision-maker, legislator, executive, regulator, shar eholder, capital injector, guarantor, and lender to
ensure that credit was provided and debt was forgiven for the failing shipyards.

B. BENEFIT

22. The European Communities has presented r easonable market benchmarks to measure the
benefit of these financial contributions to the Ko rean shipyards. This benchmark is based on the
conduct of investors outside the reach of the Korean Government’s tremendous influence. It showed
that the Korean shipyards received a benefit because they paid less to be relieved of their debts to
domestic creditors than they would have under fair market terms.

23. With respect to Daewoo, the European Commun ities logically compared the value of the debt
with the value of the equity, which was based on the opening price of the Daewoo-SME stock on the
first day of trading. This comparison, which is the closest market benchmark available, shows that
creditors swapped debt for equity and did not receive market retu rn. The European Communities has
also provided additional evidence to reinforce the benchmark based on an Australian company’s offer
to purchase the company.

24. Daewoo’s creditors (public bodies and entrus ted or directed private bodies) conferred a
benefit on Daewoo by paying too much for their equity . The change of ownership, therefore, was the
subsidy. The creditors of Samho-HI/Halla-HI, on the other hand, once they became equity holders in
the shipyard, conferred a benefit by accepting too little for their equity when they sold to Hyundai-HI.
In addition to conferring a benefit, this transaction did not extinguish the benefits from the subsidies.

25. Korea erroneously asserts that the Eur opean Communities failed to account for debt
repayments by the shipyards when calculating the net value of the benefit. With respect to Samho-
HI/Halla-HI, for example, there was no debt repa yment until the corporate reorganisation concluded
in September 2000. As for Daewoo, the plan provi ded a grace period until the end of 2002. Indeed,
because the benefit is composed primarily of the debt-for-equity swap and the negative net asset value
of the remaining company, there was no reason to take into account the amount of debt repaid.

26. Korea erroneously argues that the actions of KAMCO, in purchasing non-performing loans of
foreign creditors at higher prices than those of domestic creditors, are irrelevant to the benefit
analysis. This disparate treatment shows that do mestic creditors demanded less for loans than the

foreign banks because domestic banks were influenc ed by the Government. Moreover, the purchase
and anticipated purchase of these loans from Daewoo’s creditors, for example, cleansed the creditors’
balance sheets in a manner that would not have been possible absent KAMCO’s actions.

27. In addition, Korea has failed to rebut th e EC’s evidence that Daewoo benefited from a
specifically targeted tax exemption valued at KRW 236 billion.

C. SERIOUS PREJUDICE

28. The European Communities has shown that the subsidies to the Korean shipyards have caused
serious prejudice to the European Communities’ interests by causing significant price suppression and
price depression in the same markets. In response, Korea submitted a report by its consultant, Drewry
Shipping Consultants (“Drewry report”), which attempts to prove that:

¾ Korean and EC yards do not compete;

¾ commercial ships are so different from each other that a meaningful economic
comparison between products is not possible;

¾ price suppression and depression do not exis t in the relevant product markets;

¾ past price developments are not re lated to Korean subsidisation; and

¾ Korean yards are more competitive than EC (and other) yards.

29. Careful scrutiny of the Drewry report, however, reveals that it:

¾ provides a large quantity of i rrelevant information and data;

¾ represents the European Communities’ pos itions in a subjective and biased manner;

¾ bases the like product analysis entirely on the end use of vessels, despite the fact that
this end use frequently changes over the lifetime of a ship, and its like product
analysis fails to appreciate the necessity for a supply side perspective;

¾ uses multiple contradictory analytical methodologies;

¾ basically denies that an analysis of real shipbuilding costs is possible; and

¾ contradicts itself and Drewry's own prior analysis of the shipbuilding market.

1. Same geographical and product market

30. The European Communities has demonstrated th at the reference to “the same market” in
Article 6.3(c) of the SCM Agreement refers to both the same geographi c market (i.e. the world market
in the case of shipbuilding), and the same product markets.

31. As for the geographic market, even Korea’ s own expert report acknowledges that ships are
built “in a world market under open market competition.”

32. With respect to product markets, the Eu ropean Communities has presented evidence showing
that (a) LNGs, (b) container ships, and (c) produc t/chemical tankers (not including pure chemical
tankers) are three discrete product markets. Kor ea has failed to rebut the relevance of these

categories, but continues to argue that the existe nce of different sizes of ships necessitates a further
subdivision of the product market.

33. As with the product definitions in the cont ext of an anti-dumping or CVD investigation,
claimants under Article 6.3(c) of the SCM Agreement must be accorded a certain degree of flexibility.
As long as the complainant identifies markets or pro ducts that are reasonable and coherent, the Panel
should accept that definition. The Panel should reject the complainant’s proposed definition only if it
would make a market analysis impossible. Far from impossible, the European Communities’ product
market definition is used by a number of market analysts, including Drewry itself.

34. Moreover, unlike lost sales claims, there is no need to demonstrate head-to-head competition
in price depression or suppression claims. This is especially true in the shipbuilding industry, where
the price is set at the time that a ship is ordered, rather than after a product has already been produced.
As long as a company is capable of offering to produce a ship, it does not matter whether it has
produced that ship in the past.

35. Korea’s narrow product market definitions cont radict reports from the leading experts in the
commercial shipbuilding industry. It is obvious that ships, as made-to-order products, will show
variations in size and specifications. But shipbu ilders can easily accommodate these variations in the
course of their normal business. From a technical point of view, all commercial vessels share the
same key product characteristics. They have a weld ed steel hull and superstructure, they are powered
by similar types of engines; they have to fulfil the same navigational and regulatory requirements; and
they are subject to the same principal construction rules put forward by the classification societies.

36. Although it is not necessary to demonstrate the existence of head-to-head competition, the
European Communities has shown, as do Korea’s own tables, that EC and Korean shipyards often do
sell ships in the same product markets.

37. Without justification, Korea has requested adverse inferences based on the European
Communities’ alleged failure to produce detailed information about the many EC shipyards that
produce vessels within the scope of the dispute. The European Communities did in fact provide
sufficient evidence to the panel, but, aside fro m this, the request for adverse inferences is
inappropriate, because the claims do not require proof of head-to-head competition, but only that
prices have been suppressed or depressed at the stage of bidding.

38. Drewry’s attempt to support Korea's position that EC yards are concentrating on different
vessels is undermined by the realities of the industr y and by Korea’s own arguments in this case.
Indeed, the orderbooks of Korean yards show that th ey, like the major EC yards, are universal yards.
Drewry’s own tables and statistics thus reveal that Korean and EC shipyards build vessels in the same
markets.

39. In addition, Drewry argues that the product market is highly segmented by exaggerating
differences on the demand side of the market (i.e . end uses and ship specifications) and ignoring
similarities on the supply side (i.e. the capability of modern shipyards to produce a wide variety of
vessels). This argument, however, is contradict ed elsewhere in the report where it speaks of
standardised ship types with regard to containe r ships and LNG carriers, and ships built on market
speculation or "commodity vessels". Ships cannot be commodities on the one hand and too
specialised to compare on the other.

2. Price Depression/Suppression and Causation

40. The European Communities has already demonstr ated that the Korean subsidies have caused
significant price depression and suppression of LNGs, and significant price suppression of container
ships and product/chemical tankers . Based on this evidence, the European Communities has shown

that, but for the massive subsidies, the tremendous overcapacity maintained by the Korean shipyards
would have been significantly reduced. Such a reduc tion in capacity, given the large market share of
the restructured Korean shipyards, would have ha d a significant effect on prices in the three product
markets at issue.

41. Korea fails to acknowledge the common sense approach to finding adverse effects of
subsidies, which is reflected in Articles 6.1 and 6.2 of the SCM Agreement. It is, for example, a basic
principle of economics that the maintenance of capac ity will lead to lower prices (all other variables
being constant), or that direct forgiveness of larg e debts will affect prices by reducing the producer’s
costs. The SCM Agreement does not require the Panel to perform complex calculations that will yield
obvious results.

(a) Korean shipyards have influenced world market prices

42. In order to conceal the true market share of the three Korean shipyards in question, Korea and
Drewry assess market share according to the numbe r of ships ordered and produced rather than the
combination of physical size and work content (expressed in compensated gross tonnes (CGT)) of
ships ordered and produced, which is the standard industry method. Because Korean yards tend to
produce ships at the upper ends of the relevant si ze ranges, Korea’s method understates their market
share. The European Communities’ use of CGT to measure market share follows the practice of the
OECD, as well as the Korean Shipbuilders’ Association and Drewry, themselves.

43. Measured according to size and work content, th e three shipyards primarily at issue in this
dispute together account for about one-third of th e orderbook in Korea and twelve percent of the
global orderbook. By way of comparison, the volume of orders in the three Korean shipyards alone is
equivalent to ninety percent of the orderbook of a ll the Chinese shipyards and seventy-five percent of
the orderbook of all EC shipyards. With this level of market share, there is little doubt that the three
Korean yards exercise considerable influence over world prices.

44. The influence of the three Korean yards on wo rld prices is even greater when viewed in the
context of the specific product mark ets, which have a small number of suppliers. For example,
Daewoo-HI/Daewoo-SME alone accounts for 32 per cent of the global orderbook for LNGs. Daewoo-
HI/Daewoo-SME, Samho-HI/Halla-HI, and Daedong/STX are three of the five Korean shipyards that
collectively control nearly two-thirds of the mark et for LNGs. Samho-HI/Halla-HI accounts for 7 per
cent of the global orderbook for container ships, a nd, together with its parent, the Hyundai group,
accounts for 33 per cent of the orderbook. Dae dong/STX and Samho-HI/Halla-HI are two of four
Korean shipyards that control 60 per cent of the ma rket for product/chemical tankers. These statistics
and other evidence provided by the European Co mmunities demonstrate that the three Korean
shipyards have a large enough market share to exer cise significant influence over the world price of
tankers, containership, and LNGs.

(b) Temporal link

45. Korea’s arguments about the absence of a tem poral link between the subsidies and the price
effects ignore the fact that pressures on price in th e shipbuilding industry are first felt when price
offers are presented, and well before a contract is actually secured. This bidding usually takes place
several months or even more than a year before the contract is signed. Moreover, there is generally a
lag of some years between taking an order and buildin g the ship. Many of the orders taken by Korean
shipbuilding in 2003, for example, are for delivery in 2007 or 2008.

(c) Specific effects of the restructuring subsidies on prices

46. Simply stated, the subsidies enabled the sh ipyards to remain in operation and gave them
economic stability in a particularly cyclical and unstable business. Drewry itself stated in a 1999

report that Korean yards were almost solely respon sible for increases in capacity and that investments
in these yards were viable only as long as the compan ies did not face the true cost of borrowing (the
banks did instead).

47. Korea also confirms through Drewry’s report that shipyards with overcapacity tend to offer
low prices, a factor that lies at the base of the European Communities’ assessment of the problems in
the world shipbuilding market.

(d) Assessment of shipbuilding prices and costs

48. The European Communities has presented accura te and comprehensive information regarding
the various factors that influence shipbuilding prices and costs. Korea, by contrast, fails to take
account of overhead costs, or the depreciation a nd interest charges. The European Communities’
evidence of the rising costs of ship production for th e three Korean yards is based on consideration of
all relevant costs, and accounts for the cost-adva ntages enjoyed by those yards. The European
Communities and FMI stand by the results of their cost modelling and market and price analyses; all
efforts by Korea to disprove these results have failed.

49. With respect to prices, Drewry fails to re fute directly the price indices offered by the
European Communities for each of the three product markets. In stead, Drewry argues that it is
impossible to derive meaningful price indices fo r these product markets, even though Drewry uses
these very same indices in chapter 8 of its re port and in its own non-commissioned works. The
European Communities has shown that a convergen ce of the following three factors should have
caused shipbuilding prices to rise (in the case of product/chemical tankers, container ships, and
LNGs) or not to fall (in the case of LNGs): increasing volume, increasing producer costs and high
customer earnings.

(e) Valuation of subsidies

50. Although the SCM Agreement does not require a complainant to calculate the precise value of
subsidies for purposes of demonstrating serious prejudice, the European Communities nonetheless has
done so. Korea disputes the calculation of the bene fit from the restructuring subsidies to Daewoo,
arguing that it improperly looks beyond the liabilities of the core business of shipbuilding. The
European Communities’ point, however, is that th e restructuring would not have occurred if the
creditors had acted pursuant to market consider ations, and the company would have retained all of its
liabilities, whether or not related to its “core” operations.

51. With respect to the calculation of benefit to Samho-HI/Halla-HI, Korea disputes the European
Communities’ stock valuations. In fact, this valuation must be considered correct unless Korea
admits that Rothschild made an incorrect valu ation of Samho. The European Communities has
already explained why Korea’s proposed valuation b ased on net asset value is inadequate and further
notes that no consultant has ever used this methodology to value shipyards.

52. Korea’s reference to the long-term benefit of investments in facilities is a red herring, because
Korean shipbuilders made no such investments after 1996. Based on investments in tools, machinery,
and equipment for ships, it is reasonable to assume that the subsidies granted after 1997 had a useful
life of about 10 years.

53. Korea fails to rebut the European Communities’ argument that KEXIM
 pre-shipment loans
and APRGs contribute to over-capacity, and therefore price suppression and depression. Korea states
that KEXIM pre-shipment loans were granted for only “a limited number of shipbuilding projects”
even though it supplied a list of hundreds of pre-shipment loan transactions in the Annex V process.

54. With respect to Korea’s attack of the Europ ean Communities’ attempt to quantify the value of
a KEXIM pre-shipment loans and APRGs, the Euro pean Communities has already explained that it
made reasonable estimates based on the limited evidence provided by Korea. Even on the basis of the
new information on disbursement dates the quantified value remains high.

ANNEX F-2

ORAL STATEMENT OF KOREA

(28 June 2004)

I. INTRODUCTION AND EVIDENTIARY MATTERS

1. Korea is presented at this Second Meeting with a difficult task brought on by the litigation
tactics of the EC claiming that it was not required to demonstrate the necessary facts to establish a
prima facie case. The EC claims that a prima facie case can be based on simple assertions of facts that
do not need to be proven if undisputed by the res pondent. Hence, all a complainant would have to do
is to make allegations which would shift the burden to the respondent to rebut them. Only then would
the complainant need to adduce any evidence to support its claims. The EC further argued at the First
Meeting that it need not demonstrate elements of its case that it considered “obvious”, but then
refused to identify just which elements those were.

2. The EC’s position could not be more contrary to the jurisprudence of the WTO. This is
summarized by the Appellate Body statement in US – Wool Shirts and Blouses to the effect that
“[W]e find it difficult, indeed, to see how any system of judicial settlement could work if it
incorporated the proposition that the mere assertion of a claim might amount to proof.”

3. Following from its legal proposition regard ing the burden of proof, the EC provided a
virtually fact-free First Submission and oral presentation at the First Meeting. This forced Korea,
arguing in the alternative and in response to Pane l questions, to provide a considerable amount of
argumentation and facts. Only then, did the EC submit a large number of new arguments and
supporting “facts” in its Second Submission. This left Korea with the task of presenting rebuttal data
at the Second Meeting in response to EC material that should have been provided at earlier stages of
the dispute to support establishment of the EC’s prima facie case in accordance with WTO rules and
jurisprudence. Korea has responded as thoroughly as possible with arguments in the alternative,
while reserving all of its rights regarding the bur den of proof, due process and the Panel’s Working
Procedures. Korea specifically recalls the Appellate Body findings in Japan – Agricultural Products
II and Chile – Price Bands to the effect that the Panel is not to use its investigatory powers to make
the complainant’s case for it nor to answer affirma tively claims that have not been effectively
advanced by the complainant. Particularly in light of the difficulty of benchmarking during the period
of the financial crisis, Korea also recalled the reasoning of the panel in the US – Section 301 dispute
to the effect that, if faced with a situation where th e arguments of two parties left it in uncertainty or
equipoise then, logically, the proper allocation of the burden of proof would mean that the benefit of
the doubt would go to the respondent.

4. It is useful to step back and look at what is really going on in the shipbuilding markets --
recognizing, of course, that it plays out somewhat differently for each product. If there is indeed a
problem with subsidies, it is with the EC that has splurged hundreds of millions of euros of subsidies
of all forms. The EC Commission acknowledges in its periodic shipbuilding reports that EC subsidies
have actually caused significant overall harm to th e EC industries. In contrast, Korea has built a
vibrant set of shipbuilding industries that compete fiercely but fairly based on efficient, flexible labour
and a vastly lower cost structure. All of th e trend lines the EC refers to concerning the
competitiveness of the Korean industries are in exis tence from the late 1980’s and early 1990’s.
There is nothing new and different about the period 1997-2001 except that the whole Korean
economy went through a terrible financial crisis that spread out of Southeast Asia and nearly brought

the whole country to its knees. In this financial cr isis, the EC has seen an opportunity to extract a
competitive advantage that it could not through competition in the marketplace.

5. Regarding the issue of “public bodies”, Ko rea agrees with the EC that the question of
government ownership can be a good starting point. However, the EC has developed a non-treaty
based test that is little more than variations on the theme of government ownership. In order to
properly define the term, the obvious place to start is the treaty text itself. It sets up three categories
of entities. At one end of the spectrum are the organs of government themselves. This would be
something such as the Finance Ministry, for example. At the other end would be unarguably private
entities. In between these poles ex ists something else referred to as a “public body” and the question
becomes how to evaluate this term. The first poi nt is that public bodies and the government are
grouped together. Indeed, they are collectively re ferred to as “the government” in Articles after
Article 1.1. As Korea has noted, the obvious implicati on of this is that it refers to actions that are
essentially “governmental” in nature. Moreover, it al so clearly implies that there are some actions
that such entities can take which are not governmental action. That does not leave any gaps in the
overall treaty scheme, despite what the EC alleges, for even if an entity is not considered a public
body for purposes of the measure at issue, there is still the possibility of demonstrating that the
government entrusted or directed the actions in qu estion. Thus, while ther e is no gap in coverage,
there is a distinction in the manner of proof. And th is is where the EC ran into trouble for it has no
evidence at all of entrustment or direction by the government.

6. For purposes of providing interpretative guidance, Korea refers the panel to Articles 4, 5 and
8 of the International Law Commission’s Articles on State Responsibility that were commended in a
December 2001 Resolution by the UN General Assembly to the membership for consideration. These
three Articles provide a close parallel to the langu age of Article 1.1 of the SCM Agreement. In
particular, Article 5 refers to entities empowered by a State’s laws to exercise governmental authority;
it further notes that a measure at issue will be considered state action only to the extent it was taken
pursuant to such authority. The Commentaries to the Articles note that this was meant to cover para-
statal entities that act in place of the organs of stat e. Thus, the Articles outline a two stage test that
corresponds closely with the logic of the treaty langua ge. Korea also noted again that this approach
was consistent with the definitions provided in the GATS Annex on Financial Services. Korea also
pointed out that the EC had presented its argum ents against KEXIM and then applied them mutatis
mutandis to the other government-owned banks, thereby improperly lumping everything together; this
clearly did not satisfy the EC’s burden of proof.

7. Regarding “private bodies” acting on entrustmen t or direction of the government, Korea noted
that the EC continued to make a straw man argum ent regarding the admissibility of circumstantial
evidence. Korea agrees that circumstantial evidence is admissible, but specifically noted that the legal
probity of such evidence was suspec t the further it got away from direct evidence. The real issue was
whether the evidence of whatever type demonstr ated conclusively that there was explicit and
affirmative entrustment or direc tion by the government to the private entity in question to take the
measure at issue. This is the logic of the findings by the panel in US – Export Restraints. Korea noted
that the EC expressly rejected this idea and proposed a test based on what it referred to as “general
direction.” Korea further noted that even under this test, the EC’s “evidence” was mere inference and
stereotyping.

8. With respect to the issue of timing of allege d subsidization, Korea noted that the EC was once
again setting up a straw man to knock down rather th an addressing the real issues at hand. Korea was
not arguing that older data was not admissible or that there was some sort of legal bar to discussing it.
Rather, the issue was one of evaluatin g the evidence. In this regard, it was clear that the period of the
financial crisis was sui generis. Korea’s concern is that the EC was attempting to take advantage of
the financial turmoil during this period to extract a competitive advantage that it could not in the
marketplace. Specifically, the EC was comparing f actors from outside that period with factors from
that period. This was illogical and impermissi ble. Moreover, the EC was attempting to take

advantage of the difficulty of establishing benc hmarks during such a period to argue that any
governmental activity during the period was a subsidy. Korea recalled that the burden was on the EC
as complainant to establish and demonstrate appropriate market benchmarks.

II. ALLEGATIONS OF PROHIBITED SUBSIDIZATION

9. The EC’s arguments that the KEXIM Act and the two programmes are per se illegal would
overturn decades of GATT and WTO jurisprudence re garding the distinction between mandatory and
discretionary measures. There is no indication that the Appellate Body intended such a conclusion in
the US – Sunset Review dispute cited by the EC. Korea again went through the various provisions of
the KEXIM Act and described how they did not result in a mandatory requirement of export
subsidization by KEXIM. Korea also reviewed the empirical evidence demonstrating how KEXIM
always covered its operating costs (which is, in any event, an issue of cost to government and is not
relevant at this juncture) and that KEXIM was in competition with other lenders throughout the period
of the inquiry. Korea also reviewed KEXIM’s me thods for setting its rate s and demonstrated how
they could not be interpreted as requiring subsidies; indeed, they resulted in market-based rates.

10. With respect to the APRG programme, Korea noted that there was a general lack of APRG
activity during the period of the financial crisis , and that, as detailed in Response 47 to the Panel
Questions, while the APRG rates in Korea prior to the Asian financial crisis ranged from 0.1 per cent
to 0.2 per cent, KEXIM doubled or more its overall rate to around 0.4 per cent during the crisis, which
is composed of the base rate and the spreads. This increase in rates shows that KEXIM adjusted
appropriately to reflect the changed circumstances. In contrast, the EC has cited a couple of isolated
instances of APRGs from foreign banks that were not representative. There are two ways that APRGs
are procured. The first is selection by the shipya rd. In such cases, shipyards select the issuer
considering, inter alia, the competitiveness of the premium rates proffered and the past transaction
experiences with the issuer. In some other isol ated cases, the buyer designates the provider of
APRGs. Buyers designated a couple of foreign banks right after the onset of the 1997 financial crisis
but this practice rapidly subsided as the Korean fi nancial industry regained creditworthiness. These
buyer-designated providers generally were not as familiar with the practice and charged higher rates
reflecting their ignorance of the companies and the mark ets. They also followed the standard lending
practice of charging country risk premiums which were relatively high during the financial crisis.
There also was generally lesser collateral both qua ntitatively and qualitatively for the foreign banks.
The EC admitted that it did not have adequate evid ence to support its claims and asked for adverse
inferences under the authority of Annex V which is exclusively limited to the issue of serious
prejudice. Indeed, this request demonstrated again the abusive nature of the EC’s demands during the
Annex V process, a matter Korea still requested the Panel to address. In the meantime, the EC’s
request provided an admission against interest regarding the lack of a prima facie case.

11. Regarding the pre-shipment loan programme, Korea noted that the EC had introduced a large
amount of new “evidence” regarding its proposed benchmarks. This evidence was not in rebuttal, but
was part of the EC’s initial prima facie case. Therefore, the requirements of due process, WTO
precedent and the Panel’s working procedures required th at it be dismissed. Nonetheless, arguing in
the alternative, Korea rebutted the EC’s evidence which was based on bond indices. Korea noted that
the bond indices were distinct in a number of ways.

• Despite the fact that the KSDA data for 6 mont h corporate bond yield rates are available, the
EC has intentionally taken 1 year corporate bond yield rates and made distorted adjustments
to make them allegedly comparable to the 6 month corporate bond yield rates;

• The EC misapplied the value of Yangdo Dambo collateral;

• The EC misapplied the credit rating for DHI/DSME;

• The EC failed to adjust Samho Heavy Industri es’ pre-shipment loan rates for the 100 per cent
physical collateral provided; and

• The EC failed to consider the fair value of th e other relevant factors that have substantial
security value and mitigate the risk for KEXIM’s pre-shipment loans.

12. Korea noted, moreover, that as the financial cr isis ebbed, the instruments the EC offered and
the pre-shipment loan rates conve rged as the underlying economic issues meant that they were more
closely comparable.

13. Regarding the issue of safe havens, in Ko rea’s view it was quite clear from the Appellate
Body’s statements in Brazil – Aircraft (Recourse to Article 21.5) that such safe havens existed.
Unlike the EC, Korea does not consider it appropri ate to disregard the Appellate Body’s clear
language. The EC has rejected the Appellate Body’s argument with respect to item (k) first paragraph
on the basis that Annex I is an Illustrative List and therefore a non-exhaustive list cannot provide a
safe harbour. However, the EC then seems to forg et this and argues that item (j) does provide a safe
harbour. Purportedly, this is because item (j) cont ains a “proviso”, but that distinction remained
unexplained. The EC also contended that item (k) was exclusively in reference to the OECD. Aside
from the fact that the OECD is not mentioned, its relevance was limited to the exception of the second
paragraph of item (k) and could not be read as defini ng the broader rule of the first paragraph. In
Korea’s view, there is either an a contrario reading of footnote 5 that leads to safe harbours in both
item (j) and item (k), first paragraph, or there is not an a contrario reading. There is no logical or
treaty-based, linguistic way of splitting the interpretation between the two.

14. Korea also noted that there was no basis in logic for distinguishing between the legality based
on who receives the benefit. While the EC has claimed that this was a settled matter in the OECD,
that was not the case. Other OECD members had rai sed concerns about not being so formalistic as to
create loopholes. Moreover, Korea noted that th e EC was explicitly separating item (j) from the
OECD. Furthermore, as noted above, there was no legitimate basis for reading OECD requirements
into the first paragraph of item (k). Korea ha d presented ample evidence to demonstrate, as an
argument in the alternative, that the APRG an d pre-shipment loan programmes satisfied the
requirements of item (j) and (k) in such manner as to qualify for the safe havens.

III. ALLEGATIONS OF ACTIONABLE SUBSIDIES

A. GENERAL MATTERS AND RESTRUCTURINGS

15. One of the issues of continued disagreement between Korea and the EC is whether or not a
panel can make simultaneous findings that one set of measures are both prohibited and actionable
subsidies. In Korea’s view, the unique nature of actionable subsidies claims where actual adverse
effects must be demonstrated requires a negativ e answer because otherwise there will be double-
counting of subsidies. Korea notes that the EC asks the Panel to ignore Article 7 as the issue of
remedies is not before the Panel. However, Article 7 is part of the context of Articles 5 and 6 and
indicates the unique nature of Part III of the SCM Ag reement. Article 7.8 states that the remedy can
be either removal of the adverse effects or withdraw al of the subsidy. This possibility of removal of
the adverse effects is unique in the sense that everywhere else the requirement is bringing the measure
into conformity with WTO obligations.

16. In light of this, it is important to look at what happens when there is determination of
prohibited subsidization. In such situations, if an export subsidy is found to exist under the terms of
Part II of the SCM Agreement, then the only remedy , according to Article 4.7, is withdrawal without
delay. Therefore, such subsidy would already be required to be removed by operation of law. If a

panel were, nonetheless, to consider the effects of such a subsidy under Part III, it raises the
possibility of an affirmative finding with respect to the other subsidies which might not be, on their
own, causing adverse effects. In effect, the reme dy under Article 7.8 would already exist. So, this
becomes an empty exercise and one that is contrary to the very nature of Part III where there is not to
be an affirmative finding unless the subsidies at issue are causing adverse effects.

17. Regarding the restructurings themselves, Korea demonstrated the following:

• The EC has failed to show that the banks are public bodies for purposes of the subsidy
analysis

• The EC has created a new standard for directi on and entrustment and – by any standard – has
failed to show how the Government of Korea dir ected or entrusted the banks to subsidize the
shipyards.

• The EC has failed to show how a financial c ontribution was provided to the shipyards when
debt was switched for equity.

• The EC has failed to show how a benefit is provided to a company through a bankruptcy or
corporate restructuring proceeding.

• If there was a benefit, the EC has failed to show how this benefit carried through to the new
owners of the companies.

• Finally, the EC has failed to show how the bankruptcy or corporate reorganization
proceedings were specific to the three yards.

18. Regarding the issue of benefit in light of changes of ownership, Korea notes that there was
nothing in the theory of changes in ownership th at the Appellate Body and panels relied upon that
limited the decisions in the previous cases to priv atizations. Indeed, the Appellate Body was quite
clear that privatization was only one example of the theory and, in fact, the one instance where change
of ownership was least likely to result in extinguishm ent of the benefit. In the present case, the net
debt was owned by the previous ow ners who were all wiped out, or virtually so. At that point, the
creditors have control of the company. They have effectively written off that net debt and the loans
are re-valued accordingly. This is why Korea has spoken about the change in form rather than a
change in value. As a result, there can be no financial contribution when the instrument does not
represent any change in value. Furthermore, even if this were considered a financial contribution,
there is no benefit, because the creditors (i.e., the new owners) received nothing of greater value than
what they had before. The EC’s response here is to focus on the alleged benefit to the productive
assets themselves, not the persons holding such assets. For example, the EC states that the assets
would not have continued in existence but for the allege d subsidy. Of course, this is directly contrary
to the findings of the Appellate Body in US- Lead Bars and US -- Countervailing Measures where the
Appellate Body rejected this “but for” argument wh en it was presented by the United States in those
cases.

19. Moreover, the EC in general has offered th e Panel its own example of how to do workouts
and insolvencies. The EC claims that they must be accompanied by permanent capacity reductions.
This does not seem to be the case with the East German shipyards or those of the acceding EC
countries. There have been no permanent facility shut downs in those yards. Furthermore, there is no
indication whatever of capacity or production constr aints in the recent case of the Alstom bankruptcy.
Indeed, all that is evident on the record is the continued generous subsidi zation of all of the EC
shipyards.

20. Regarding DSME, the EC has alleged that the Korean government “controlled” the process.
However, even if the panel were to agree that mere government ownership of several Korean banks
made them public bodies, these entities did not cont rol enough of the outstanding credit to control the
process under the prevailing arrangements. The EC al so refers to the alleged “control” that the
Government of Korea had over all of the banks during the financial crisis. However, despite the EC’s
repeated attempts to get the IMF to support the EC’s point, the evidence is conclusive that the
restructuring of the financial sector pursuant to the agreement with the IMF was done on market
principles and banks restructured their bad loans to maximize value. Thus, any influence of the
government had exactly the opposite effect that the EC alleges. The sole piece of “evidence” the EC
proposed regarding alleged improper influence was revealed by Korea’s provision of the full
quotation by a single Korean bank to be a reference to the real estate sector and even that was
specifically noted by the bank’s lawyer not to refer to even the general point the EC was alleging.

21. Regarding the issue of benefit in the DSME restructuring, the EC offered a report by its
consultant, Price Waterhouse Coopers (PwC) critiqui ng the workout report done by Anjin, the former
Korean affiliate of Arthur Andersen. A response by the authors of the Anjin Report as well as an
independent retired senior British banker, Mr. Willia m Lawes, confirmed that the Anjin Report was
objective and fair; it was commissioned for the pur pose of determining the best commercial, value-
maximizing solution to the insolv ency of DHI resulting from the credit crunch brought on by the
Asian financial crisis. Anjin was required by the te rms of its contract to act in an objective manner
and there is absolutely no evidence of any sort that it did not do so. Anjin was not directed to come
up with any particular answer, but provided an in dependent opinion as to the relative values of the
available options. Mr. Lawes found that the Anjin Report was appropriately done, took into
consideration all of the appropriate facts and was ove rall consistent with just the sort of evaluation
that would be expected on the part of banks utilizing the “London Approach” to maximize value in
situations of corporate insolvency. Mr. Lawes also confirmed the logical point that the foreign-owned
banks were in a fundamentally different circumst ance and had every incentive to take a better short
term deal but with less long-term potential. Such a decision led to negotiations to sell their debt for as
high an immediate payout as possible to those domest ic banks, who had more at stake and more time
and inclination to follow the workout route which coul d lead to a greater potential recovery over time.
Again, the bargain for a residual amount of warrants demonstrates that the foreign banks recognized
this trade-off.

22. The EC continued to argue that the debt-e quity somehow “cleansed” the balance sheet of
DSME despite the fact that the new owners were the old creditors making it impossible to see what
exactly was cleansed. Any further debt could not ha ve resulted in any changes in the debt equity
swap as the players and the value were both the same under either scenario offered by the EC. The
EC also pointed to the purchase of debt by KAMCO as cleansing the balance sheet. However, it was
irrelevant to the balance sheet of DSME for it only resulted in a change of creditors, not a reduction of
debt.

23. The EC also challenged the valuation done by Anjin given the allegedly low price offered for
the stock of DSME by an objective foreign bidder. The EC referred to newspaper reports of a bid by
an Australian company, Newcastle Heavy Industries. Korea rebutted this allegation by showing that
NHI actually offered a substantial premium over what the EC alleged.

24. Regarding specificity, the EC’s argument was little more than an allegation that the size of the
Daewoo group meant that the restructuring was sp ecific. However, the workout approach was
broadly available and Korea had earlier submitted ev idence demonstrating that a great number of
companies availed themselves of the approach. Size alone does not render a procedure specific.

25. Regarding the alleged tax subsidies in the case of the DHI spin-off, there was no valuation
gain or profit because the DHI assets were simply allocated at “book value” to the two spun-off
companies and the remaining DHI. Therefore, becau se the assets were simply moved from one entity

to another there was no taxable event and no forgoi ng of any government revenue that was otherwise
due. Therefore, Article 45-2 did not confer a benefit. Korea noted that the numbers the EC presented
were taken exclusively from a news paper report and that was not suffi cient evidence. Moreover, the
number the EC alleged was with respect to all of DHI and did not reflect any allocation between the
divisions. Korea further demonstrated that the ta x laws in question were not specific to the DSME
transaction. If they had been, there would have b een no reason to extend them for a further two years
after the DHI spin-offs. As noted above, Article 46 of the Corporate Tax Act mandates specific tax
treatment with respect to “gain” or “profit” realized to the spun-off company as a result of the
“valuation” of assets conducted in the course of spin-off.

26. Regarding the Samho restructuring, Korea noted that the EC seemed to drop any reference
at all to the role of the judges in the transaction. The reorganization proceeding cannot start unless the
court determines that the going concern value of th e subject company is greater than its liquidation
value. If such is the case, the court has the power to order a receiver to submit a reorganization plan
based on the continuation of business activities of the company concerned. If the plan submitted does
not conform the provisions of the Corporate Reorgani zation Act or is unfair, unequal or not feasible,
the court may decide not to refer the plan to the me eting of the interested parties for resolution. The
court also has the authority to approve or reject the pl an adopted by the interested parties. In sum, it is
the court that decides whether to permit the subject company to continue its business operations. In
order to establish that the court receivership, and an y transaction done within the context of the court
receivership, was not done at arm’s length or conferred a benefit, the EC needs to show that the judge
in this instance did not do his job, that he failed in his legal and fiduciary responsibility to maximize
the return on the debt to the creditors. The EC has presented no such evidence. None exists.

27. The EC contradicted its approach to the DS ME workout where the EC alleged that the new
owners overpaid, by now arguing that the new owne rs of Samho underpaid. Of course, once again,
the real answer is that facts do not support the EC’s allegations regardl ess of which of their
contradictory approaches they choose. In the case of Halla/Samho (as with Daedong/STX discussed
later), the court determined that the going concer n value was greater than the liquidation value and
decided to proceed with the corporate reorganizati on. This court decision was based on the valuation
by Rothschild, a financial advisor, and on Rothsch ild’s corporate reorganization proposal which was
drafted to maximize the debt repayment to the cred itors. Moreover, among the many factual errors in
the EC allegations was the basic point that the EC neglected to include the assumption of debt in the
purchase price of Samho.

28. Regarding the issue of specificity, the EC argue d that if Article 1.1(a) is satisfied because
there was a financial contribution pursuant to governme nt action and that Article 1.1(b) was satisfied
in that a benefit has been demonstrated, then Articles 1.2 and 2 regarding specificity are automatically
satisfied. That is, the EC reads Articles 1.2 and 2 completely out of the SCM Agreement. Obviously,
the Panel cannot adopt an interpretation of the treaty that reads whole provisions as nullities.

29. Regarding STX , the EC argued that the sale of the company by the bankruptcy court was
improper because it was sold to a Korean company. In an unfortunate instance of stereotyping, the
EC claimed an “inherent defect” on the part of an y Korean company. Korea demonstrated that the
sale pursuant to a Recommendation Report by KPMG went to the highest bidder out of five. Of the
five, two and perhaps three were non-Korean comp anies. The EC then reverted back to its
unsupportable argument that any result from insolvency other than termination of the company and
selling it for scrap was a benefit. Regarding specifi city, the EC made the same incorrect arguments
that it did with respect to Samho whereby the st ep of determining specificity was automatically
satisfied by a finding of government involvement and benefit.

B. SERIOUS PREJUDICE

30. There is a basic disagreement between Korea and the EC on the issue of whether there is a
need for the complainant to demonstrate serious prej udice. According to the EC the treaty contains a
very mechanistic test. If any one of the elements of Articles 6.3 (a), (b) or (c) is shown, then the
serious prejudice element of the case automatically is satisfied. The complainant need show nothing
more. Essentially, the case is over. Of course, th is approach requires reading out of the treaty some
very important words. The chapeau of Article 6.3 provides that serious prejudice may exist when one
or several of those elements are demonstrated. The EC reads the word “may” to mean “shall”.
Indeed, the EC really is replacing it with somethi ng more; it is really saying “shall be deemed to
exist” because once again the EC is trying to creat e presumptions as substitutes for proof. It is worth
noting that the EC interprets the term “may” in mu ch the same way as it interprets the term “shall”
from the now-expired presumption-creating provisions of Article 6.1. Next, the EC reads the “or
several” out of the text. If any one element were enough to lead to an automatic and necessary
conclusion of serious prejudice, why would there ev er be a purpose in demonstrating others? Of
course, there would not be. The words “or several” would be totally superfluous.

31. The EC attempts to eliminate the word “seri ous” from the treaty text. The EC’s only attempt
to respond to Korea’s reference to the extensive ju risprudence that confirms that “serious” indeed
connotes a higher standard than “material” is to jumble up Articles 5(a) and 6.3( c). Similarly, the EC
attempts to read out of the treaty the term “pre judice”. As Korea has noted there is no basis for
reading the term prejudice as somehow lower than the term injury. In Korea’s view, the term
“interests” refers not only to the state of the complaining party’s industry, but also to something more.
The term “interests” is a broader term. Simply put, a complaining Member should not be permitted to
potentially adversely affect the terms of sale in third country markets of other Members in this fashion
unless it can show that its broader interests are seriously negatively affected.

32. Even more surprisingly, the EC maintain s that it does not have to establish like product
categories. Korea considers it fundamental to th e treaty structure and plain logic that like product
categories must be established by the complainant. Unless the complainant does so, there is simply
no coherent manner of discussing the elements of th e case. The EC argues that Korea’s reference to
like product in Article 15.2 of the SCM Agreement and Article 3.2 of the Antidumping Agreement is
misplaced because those provisions refer to like products in imported markets. This argument seems
to have been pulled from the air, for it is quite illogi cal and has no basis in the treaty. The EC fails to
explain Articles 6.3(a), (b) and (c), as well as 6.4 an d 6.5 which all refer to like products and none of
which involve importation into the complaining Member’s market.

33. The EC has built its whole case on an argument of price suppression or depression due to
capacity issues. However, how can one discuss either capacity or price suppression or depression
without rigorously defining markets? Capacity in what products causing price suppression or
depression of what products? The EC only provides a bunch of charts of shifting product groups (for
instance, at various times the EC has endorsed the Japanese suggestion that there is only one like
product category) and even tried to sell the Pane l on causation due to a “kink” in a price chart
including apparently all commercial ships. Is the reason the EC suddenly decided in the middle of the
case to exclude pure chemical tankers from the disput e because of the effect on their pricing charts of
inclusion of this product? The EC claims that within the product types that it has distinguished
(container ships, product and chemi cal tankers and LNGs) there is no need to further distinguish by
size because vessels of all sizes can be substitutable in many instances on all routes. It thus not only
contradicts the size differentiations that are comm only made in shipbuilding and shipping trade but
also the statement of its own expert that substituti on is rarely possible on a size basis because of the
economics of trade and that one seventy thousand dwt ship, for example, is not operationally or
economically equivalent to two thirty-five thou sand dwt ships. The EC’s reliance on supply
substitutability -- claiming that vessels are merely an assembly of steel and that a shipyard can build
any type of vessel -- is hardly understandable an d is certainly contradictory with the EC’s own

exclusion of all sorts of products from cruise ships to Ro-ro ferries to pure chemical tankers. First,
what is a like product must be determined pr imarily from the demand side based on technical
characteristics and their value added for the use of the products as perceived by the user. Second, no
single yard in the world claims that it can build all vessels. In reality, EC yards intentionally - well
before the corporate restructuring in Korea - c oncentrated on the smaller like products as well as on
high value added niche vessels including cruise ships, ferries or roll-on roll-off vessels. It is equally
an arbitrary and broad brush conclusion by the EC to refer to “Korea” in general when the
participation of the restructured and non-restructur ed yards in different like product vessel markets is
widely different. This is true all the more in th at those like product vessels where there still is some
competition between EC and Korean vessels, most, if not all of these Korean vessels were built by
non-restructured yards that did not benefit from the alleged corporate restructuring subsidies.

34. Of course, the EC insists on calling it an over-capacity issue. This addition of “over” is
nothing but an emotive term that the EC hopes will af fect the way the Panel views the market. As the
EC has itself acknowledged, there is not an agreed upon way of defining capacity in shipbuilding. In
fact, there is general agreement the other way, i. e., that there is no universally applicable or
unambiguous way of defining capacity. Any existence of capacity will affect the market whether it is
from Estonia or Korea. And, of course, the larger the country’s industry, the larger the impact of
production from that country. Obviously, the EC is trying to direct the case away from the issue of the
effect of the subsidies and get the Panel to focus on the effect of the products. If it can do that, then
under the EC’s approach, the sheer size of the Korean industry today (as should the size of the
Japanese industry today or the Chinese industry to morrow) will result in an affirmative decision
without regard to the treaty requirement of linking significant price suppression to the effects of the
alleged subsidy.

35. Regarding the EC’s allegation of pricing matt ers, as Korea has pointed out and the EC cannot
deny, Korean shipyards enjoy a significant cost adva ntage over the EC. This has been the case for a
long time. This advantage has been accentuated in th e past couple of years generally by a still weak
Won and particularly by the relative strengthening of the Euro compared to the Won. In spite of this,
the EC offered a speculative cost model based on unexplained and unproven assertions.
Notwithstanding these estimations and assumptions, the EC is trying to make an inference of
subsidization based on these speculative projected co st calculations. This would not be acceptable on
the part of a domestic authority doing a constructed valu e determination in an antidumping case; it
would be bizarre if used in a countervailing duty in vestigation and it is who lly unexplained why this
Panel in a serious prejudice case should engage in such speculation based on cost modelling and
inflation projections that it has not even seen.

36. The EC tries to reassert the abandoned cl aims of price undercutting. The “evidence”
submitted by the EC is factually false. This is illustrated by the Hamburg Sud case where it is shown
that the European yard Odense was the price leader. Moreover, it is impermissible for the EC to try to
reintroduce previously abandoned claims at this stage. The EC tried to justify this by saying it is not
claiming price undercutting as such, but only to support its price suppression arguments. This is mere
sophistry. Normally cases are built on interlocking elements of evidence including “one or several” of
the factors listed in Article 6.3. The EC rejected that approach and cannot change it, no matter how
much it now regrets its earlier decision. Viewing the EC efforts of trying to establish this serious
prejudice case on the narrow basis of price depress ion or suppression due to capacity issues to the
exclusion of every other element of proof is like watching an elephant trying to balance on a pin.

37. Even considering that, if the EC’s speculativ e cost modelling projects a uniform effect across
the whole of Korean industry, it necessarily follows that the price effects are not from the alleged
subsidies, but are instead from the pricing practic es of the majority of shipyards that were not
restructured. It is illustrative that the EC conti nues to claim price leadership by non-restructured yard
Hyundai Mipo based on the allegation that H yundai Mipo has benefited from the APRGs or PSLs.
However, Hyundai Mipo had only a very limited number of PSLs and APRGs and the amounts of

benefits (if any) were minimal and certainly by far insufficient to explain the price difference of
15 per cent which the EC alleges with the competing Lindenau offer. (Korea also notes that the EC ad
valorem subsidization across its shipyards is much hi gher and would need to be considered in any
proper causation analysis.) That is, the EC’s own approach of lumping ever ything together based on
generic cost/price modelling actually leads to the opposite conclusion of what the EC wishes. Any
price effect is not that of the alleged subsidies.

38. One of the many problems here is that the EC is collapsing distinct steps. The treaty text in
each of the subparagraphs of Article 6.3 is that th e “effect of the subsidy” is to cause one of the
possible elements that can be a constituent of serious prejudice. That is, the causation within 6.3(c) is
not of serious prejudice, but of the possible supporti ng factors. The treaty clearly states that the EC
must demonstrate that the effect of the alleged subsidies is to cause significant price depression or
suppression. There is no dancing around these words. Those specific identified subsidies must be
actually having an effect themselves of significant price depression or suppression. Other factors may
be at play and they may also have price depressive or suppressive effects, but such effects cannot be
attributed to the alleged subsidies. Korea mu st point this out once again because the EC does not
even get to the point of separating out the effect of the subsidies and, instead, tries to rely on the effect
of the products. Only then after that element is establishe d as an effect of the alleged subsidy can the
complainant move on to show that that one elemen t listed in 6.3 alone or along with others of the
several identified elements may be causing serious prejudice. It is axiomatic that other factors
causing the prejudice cannot be attributed to the allege d subsidies. This is not only required by the
jurisprudence relating to all injury-type inquiries, but it is also mandated by the full contextual
analysis of Part III which provides in Article 7.8 that one available remedy is to remove the injury. If
there has not been a reliable anal ysis tracing through from the alleged subsidy having the effect of
significant price suppression which, in turn causes seri ous prejudice, then this analysis is rendered
literally impossible.

39. In conclusion, it is clear that the EC has fa iled to carry its burden of proof, indeed, has
misconstrued that burden as a matter of law. Moreove r, arguing in the alternative and at the request
of the Panel, Korea has adduced substantial eviden ce on each legal point demonstrating that there is
no basis for the EC’s claims. Accordingly, Korea requests that the Panel reject the EC’s claims under
Parts II and III of the SCM Agreement.