Document: WT/DS273/R Page E-1 ANNEX E EXECUTIVE SUMMARIES OF THE SECOND WRITTEN SUBMISSIONS OF THE PARTIES Contents Page Annex E-1 Second Written Submission of the European Communities E-2
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 E

EXECUTIVE SUMMARIES OF THE SECOND WRITTEN
SUBMISSIONS OF THE PARTIES

Contents Page
Annex E-1 Second Written Submission of the European Communities E-2
Annex E-2 Second Written Submission of Korea E-9

I. INTRODUCTION

1. The Second Written Submission by the European Communities rebuts legal and factual
assertions that have been made by Korea in its Fi rst Written Submission and at the First Substantive
Meeting.

II. FACTUAL BACKGROUND

2. The European Communities discusses a number of inaccurate factual statements that Korea
made in its First Written Submission, and shows th at Korea attempted to mislead the Panel with
respect to the nature of the commercial shipbuilding industry, the Korean economy, and the views of
the International Monetary Fund (IMF).

III. BURDEN OF PROOF AND ADVERSE INFERENCES

3. Rather than respond to the EC’s evidence, Korea hides behind unsubstantiated assertions that
the European Communities has not established a prima facie claim. Korea has even argued that the
European Communities does not understand the diffe rence between the role of complainant and
respondent, and is asking the Panel to make “the co mplainant’s case for it.” As discussed in the EC’s
Oral Statement, Korea misunderstands what is necessary to make a prima facie case. If complainants
were obliged to set out a case in the excruciati ng detail demanded by Korea, any dispute settlement
proceeding would become unworkable.

4. A prima facie case can be based on simple assertions of facts that do not need to be further
proven if undisputed by the respondent. The compla inant would then be obliged to provide further
proof only if the defending party disputes such a ssertions in a substantiated way. Moreover, a prima
facie case may be supported by certain presumptions from the WTO Agreements, or by adverse
inferences.

5. In this way, during the course of dispute settlement proceedings, the burden of persuasion
shifts between the complainant and the respondent. Once the complainant makes a prima facie case,
the burden shifts to the respondent to rebut those cl aims. Once rebutted, the burden then shifts back
to the complainant, and so on. In this way, WT O dispute settlement is an iterative process in which
both the complainant and the respondent have a re sponsibility to assert and substantiate claims to
support their respective positions.

6. In cases involving subsidies and in particular serious prejudice arising from subsidies, panels
are asked to be particularly active in seeking information ( e.g., Article 6.8 of the SCM Agreement).
This Panel has already used its power under Article 13 of the DSU and Article 6.8 of the SCM
Agreement to request specific evidence from Korea. As Korea has not produced this evidence in its
entirety, the Panel must draw adverse inferences. The European Communities recalls the authority
vested in the Panel to request further information from the parties, where necessary.

IV. KOREA’S INTERPRETATIONS OF “PUBLIC BODY” AND ENTRUSTED AND
DIRECTED “PRIVATE BODY” ARE CONTRARY TO THE TEXT, AND OBJECT
AND PURPOSE OF THE SCM AGREEMENT

7. The European Communities demonstrates that Korea’s narrow definition of “public body”
and “private body” entrusted or directed by the government is not compatible with Article 1.1(a)(1) of
the SCM Agreement. Article 1.1(a)(1) refers to financial contributions by a “government,” a “public
body,” or a “private body” entrusted or directed by the government. Without the reference to “public
body” and “private body,” Members could entirely circumvent the disciplines of the SCM Agreement
by using non-governmental entities to dispense subsidies.

8. To determine whether an entity is a public bod y or a private body entrusted or directed by the
government, a Panel must consider all evidence, including circumstantial evidence. Korea wrongly
interprets the terms “public body ” and “government” as being synon ymous and provides irrelevant
context for the interpretation of “public body” from the Agreement on Agriculture and the GATS
Annex on Financial Services.

9. There is no requirement in the SCM Agreement that the direction be “explicit and
affirmative.” Instead, the SCM Agreement refers only to instances in which a government “entrusts or
directs a private body” without any such limiting qualifiers. Korea cannot rely on US – Export
Restraints because the entrustment and direction in that case related to a general legislative measure,
while in the present case it relates to specific measures taken to influence the policies and practices of
private banks.

10. Just as Korea wrongly interpreted “governme nt practice” in Article 1.1(a)(1)(i) of the SCM
Agreement, Korea also wrongly interprets “functions . . . which would normally be vested in the
government” or “practices normally followed by governments” in Article 1.1(a)(1)(iv). Korea
erroneously argues these references are limited to functions and practices such as taxation and
expenditure of revenue. This erro r arises again because Korea ignor es the fact that “government” has
been defined to include both “government” and “p ublic body.” The practices performed by public
bodies are not limited in the same way as those of actual governments – i.e. regulatory function is not
a necessary characteristic of “functions . . . which would normally be vested in the government” or
“practices normally followed by governments.”

11. The European Communities therefore re peats and amplifies its arguments that:

¾ KEXIM, KAMCO, KDB, IBK, KDIC, and BOK are public bodies, or, in the alternative,
private bodies entrusted or directed by the Government of Korea; and

¾ The private creditors involved in the corporat e restructuring of the Korean shipyards are
private bodies entrusted or directed by the Government of Korea.

V. THE SCM AGREEMENT APPLIES TO PAST AS WELL AS PRESENT SUBSIDIES

12. Articles 3 and 5 of the SCM Agreement clearly prohibit certain behaviour – i.e . subsidisation
contingent on export (or the use of domestic ove r imported goods), and subsidisation that causes
adverse effects to the interests of other Members. As discussed in the EC’s Oral Statement, there is
no WTO rule that allows a violation to be forgiv en once it is in the past . When Korea argues that
subsidies granted in the past cannot be challenged under the SCM Agreement, it confuses the issue of
whether a subsidy has been granted with counterv ailing duty principles, which only allow current
benefits to be offset. It also confuses the issues before this Panel—whether a violation has occurred—
with the appropriate remedy for viol ations. In this case, the Panel has not been asked to specify how
Korea may bring itself into conformity with its WTO obligations.

13. The European Communities is entitled to a panel finding for all subsidies granted or
maintained after the entry into force of the Uruguay Round. The Panel in Indonesia – Autos
confirmed that past subsidies are subject to review . The Panel found that to exclude past (and future)
subsidies from the scope of review would make it difficult for any complainant to demonstrate serious
prejudice.

14. The same reasoning applies, a fortiori, to prohibited subsidies claims. It would be illogical
for the scope of review of prohibited subsidies, which are illegal per se, to be narrower than the scope
of review for subsidies that may be illegal depending on their trade effects.

15. While not required to demonstrate the current effects of subsidies, the European Communities
has nevertheless done so in its Responses to the Pa nel’s Questions with respect to the actionable
subsidies granted to the shipyards through the corporate reorganisation and restructuring proceedings.

VI. PROHIBITED SUBSIDIES

16. The European Communities responds to numerous arguments raised by Korea claiming that
(i) the KEXIM Act, KEXIM Decree, and KEXIM Inte rest Rate Guidelines as such, (ii) the KEXIM
APRG and pre-shipment loan programmes as such, and (iii) specific grants of APRGs and pre-
shipment loans do not constitute prohibited export subsidies under Article 3 of the SCM Agreement.

17. First, the European Communities demonstrates th at that the mandatory/discretionary doctrine
can not be used to shield the KEXIM Act, KEXI M Decree, KEXIM Interest Rate Guidelines, or
APRG/pre-shipment loan programmes from the obligations of the SCM Agreement. In particular, the
Appellate Body has confirmed that analysis of WTO consistency of a measure does not end with a
finding that it is discretionary. Moreover, it is clear from the SCM Agreement that subsidy regimes
like those of KEXIM are subject to prospective challenge.

18. The European Communities further explains that Korea has not rebutted the EC’s evidence
that the KEXIM Act, KEXIM Decree, and KEXIM In terest Rate Guidelines specifically envisage the
provision of prohibited export subsidies. The European Communities reiterates its understanding that
various provisions of the KEXIM Act, Decree, and Interest Rate Guidelines, including Articles 18, 19,
24, 36(2), and 37 of the KEXIM Act, and Articles 17( 2) and 25(6) of the Interest Rate Guidelines,
specifically envisage the grant of subs idies that violate Article 3 of the SCM Agreement . Korea’s
responses, including a request that the Panel virtually ignore Article 24 of the KEXIM Act based on
an explanation that it should have been repealed, lack merit.

19. The European Communities next addresses Kor ea’s counter-arguments regarding the specific
grants of APRGs and pre-shipment loans, and confir ms that these specific grants provide benefits to
Korean shipyards. In particular, the European Communities demonstrates that transactions by foreign
creditors provide a relevant market benchmark, a nd makes use of additional information provided by
Korea to again demonstrate the benefit provide d by KEXIM APRGs and pre-shipment loans.
Additionally, the European Communities demonstrat es that the alternative benchmarks proposed by
Korea are not relevant benchmarks.

20. Finally, the European Communities reiterat es that Korean APRGs and pre-shipment loans
cannot be considered to fall within “safe havens” under the SCM Agreement . APRGs are neither
export credit guarantees nor guarantee programmes ag ainst increases in costs under item (j) of the
Illustrative List. Moreover, pre-shipment loans are not “export credits” within the meaning of
item (k) of the Illustrative List.

VII. ACTIONABLE SUBSIDIES

A. RESTRUCTURING SUBSIDIES

21. Korea implies throughout its First Written Subm ission and Oral Statement that the European
Communities believes that all bankruptcies and reorganisation proceedings constitute actionable
subsidies within the meaning of the SCM Agreement . Moreover, Korea characterises the EC’s
arguments as indicating that a restructuring scheme requiring banks to act on market principles and to
maximise returns results in the granting of an actiona ble subsidy. This is pl ainly an incorrect reading
of the EC’s submission. Indeed, as detailed prev iously, the European Communities fully accepts that
bankruptcy law is a necessary part of a market economy, and that a bankruptcy proceeding does not
generally give rise to a subsidy within the meaning of the SCM Agreement.

22. However, where the outcome of a bankruptcy proceeding or a corporate restructuring is
determined by the Government, public bodies, or private bodies acting under the direction of the
Government, and leads to a more beneficial outcome for the enterprise than would have arisen if the
creditors had acted according to market principles, all of the components of a subsidy are present.

23. While the European Communities has al ready presented evidence demonstrating a prima
facie case that the financial contributions granted pur suant to the restructuring/reorganisation of the
three Korean shipyards have resulted in a bene fit, and that these grants were specific, the
European Communities responds to Korea’s various arguments by explaining that:

¾ Daewoo-HI/Daewoo-SME, Samho-HI/Halla-H I, and Daedong/STX received financial
contributions from public bodies and private bodies entrusted or directed by the
Government of Korea that provided benefit to these shipyards, and are specific within the
meaning of the SCM Agreement; and

¾ Korea failed to respond adequately to the clai m relating to the tax concession, in particular
45-2 of the Corporate Tax Act, which wa s enacted on 21 Octobe r 2000 and extended tax
incentives provided under Article 46 to spin-offs carried out under a workout program
approved on or before 31 December 2000. This specifically tailored tax exemption
provided a benefit to Daewoo-HI/Daewoo-SME of KRW 236 billion.

24. The European Communities details the manne r in which private bodies were entrusted and
directed by the Government of Korea and public bo dies to participate in the corporate restructuring
process. For example, the Government of Korea expl ained, in its Letter of Intent to the IMF, that
public funds would be made available when a “b ank is making adequate progress on implementation
of sound corporate debt restructuring”, at a time when Korean financial institutions depended on
public funds for their own survival. The European Communities also details the instrumental role of
KAMCO, a public body, in influencing the restructurings.

25. With respect to each of the three shipya rds, the European Communities reiterates the
appropriate market benchmark for analysing the cor porate restructuring, and demonstrates the benefit
accorded to the restructured ship yards. With specific respect to Daewoo-HI/Daewoo-SME, the
European Communities demonstrates that th e Arthur Andersen report does not rebut a prima facie
case of benefit.

26. The European Communities details again the ma nner in which the restructuring subsidies are
specific within the meaning of Article 2 of the SCM Agreement. They were all provided within the
context of a specific restructuring of a single enterprise. Daewoo-HI/Daewoo-SME, in particular, was
restructured under the specifically created framewo rk of the Corporate Restructuring Agreement;
Daewoo affiliates accounted for over half of the workout procedures under this framework in 1999,
and two-thirds in 2000. The European Communities has also provided evidence that certain financial
institutions were re-capitalised specifically fo r the purpose of ensuring payment of Daewoo
bondholders.

27. With respect to Samho-HI/Halla-HI, and Daedong/STX, the European Communities reiterates
its evidence that public bodies, including KEXIM an d KDB, and entrusted/directed private creditors
specifically selected these shipyards as recipients of restructuring on better-than-market terms. Korea
can not prevail by arguing that any restructuri ng that takes place pursuant to an existing legal
framework precludes a finding of specificity, as this would exempt all corporate reorganisations from
the scope of the SCM Agreement.

B. KOREA’S SUBSIDIES HAVE CAUSED SERIOUS PREJUDICE TO THE INTERESTS
OF THE EUROPEAN COMMUNITIES, WITHIN THE MEANING OF ARTICLES 5(C)
AND 6.3(C) OF THE SCM AGREEMENT

28. The European Communities responds to Kor ea’s various arguments, and reiterates that
Korea’s subsidies to its shipyards have caused se rious prejudice to the interests of the European
Communities within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement, as they resulted
in significant price suppression and depression in th e same market. Specifically, the European
Communities demonstrates in the Second Written Submission that:

¾ Serious prejudice is not a separate legal element, and the European Communities has met
its burden under Articles 5(c) and 6.3(c) by demonstrating that price depression or
suppression in the same market was caused by the Korean subsidies;

¾ Korean and EC shipyards compete in the same geographic market ( i.e., the world market)
and the same product markets ( i.e., liquid natural gas tankers (LNGs), container ships, and
product/chemical tankers);

¾ Korean subsidies have caused significant price suppression and depression in these
markets; and

¾ Korea fails to rebut the prima facie case of causation presented by the European
Communities.

1. Significant Price Suppression or Depression

29. The European Communities responds to Ko rea’s various arguments regarding price
suppression and depression and demonstrates that:

¾ The assessment by the Europ ean Communities of prices of commercial vessels, and the
dynamics affecting these prices, is well-supported by factual evidence;

¾ The European Communities has properly identified the general relationship between
subsidies and prices of commercial vessels;

¾ KEXIM APRGs and pre-shipment loans have contributed to the price depression and
suppression; and

¾ The Korean subsidies have caused price de pression and suppression of LNGs, and price
suppression of container ships and product/chemical tankers.

2. Causation

30. The European Communities replies to Korea’s erroneous legal and factual assertions
regarding causation of price depression and suppression by explaining as follows:

¾ Korea’s proposed approach, including the vas tly overcomplicated multi-step procedure to
assess the effects of subsidies, h as no basis in the text of the SCM Agreement and in WTO
jurisprudence, which requires a ‘but for’ test;

¾ The evidence provided by the European Comm unities shows a clear coincidence in time
between the subsidies and the price effects;

¾ The European Communities has presented prima facie evidence of causation, through use
of relevant statistics and examples, includi ng numerous facts and calculations showing the
level of the subsidisation and the level of price depression and suppression;

¾ Korean subsidies allowed for maintenance of over-capacity, that significantly affected
prices;

¾ The ability of subsidised Korean shipyards to affect the prices of LNGs, container ships,
and product/chemical tankers is further s upported by accurate market share data and
information regarding individual transactions; and

¾ Korea’s reference to additional factors does not cast doubt on the prima facie case of
causation set forth by the European Communities.

VIII. CONCLUSION

31. The European Communities has shown that Korea has failed to rebut the prima facie case put
forth by the European Communities demonstrating th at the Government of Korea, public bodies, and
private bodies entrusted or directed by the Government of Korea have provided enormous subsidies to
Korean shipyards from 1 January 1997 to the present.

ANNEX E-2

SECOND WRITTEN SUBMISSION OF KOREA

(13 April 2004)

I. INTRODUCTION

1. In Korea’s Second Written Submission, Korea rebuts the factual and legal allegations made
by the EC in its Oral Statement of 9 March 2004 and in the responses submitted by the EC to the
questions raised by the Panel and Korea on 22 Marc h 2004. Korea addresses the core issues raised by
the EC in terms of the subsidy allegations and set s forth the factual and legal grounds on which Korea
relies to conclude that no prohibited or actionable subsidies were granted by Korea.

2. Korea notes from the outset that the EC’s con tinued references to a centralized role of the
Korean Government in the Korean economy are outda ted and inappropriate. Ironically, to the extent
that there was guidance from the Korean Government during the relevant period, it was to ensure that
market principles and commercial considerations were paramount in the course of restructurings and
more generally throughout the fi nancial sector – a fact repeatedly confirmed by the IMF despite the
EC’s pressure on the IMF to say otherwise.

II. EVIDENTIARY ISSUES

3. The EC has utterly failed to ca rry its burden of establishing a prima facie case for each of its
claims based on proven facts. The EC as comp lainant has the burden to establish every point
necessary to demonstrate each claim. Failure on one point means failure on the claim as a whole.
The EC has failed or refused to even argue critical issues underlying its claims.

4. Regarding prohibited subsidies, the EC does not have sufficient evidence and has been forced
to demand that adverse inferences on APRGs be ma de against Korea based on law exclusively related
to serious prejudice cases (i.e. Annex V), resulting in an abuse of the Annex V process.

5. With respect to pre-shipment loans, the EC relies on a totally unrelated benchmark (corporate
bonds) that differs in terms, collate ral and very nature from the measure at issue. Korea also showed
that the corporate bond rates were inaccurate. Mo reover, the EC did not make any adjustments for
any of the differences in the critical factors such as terms of credit, collateral, etc. The EC’s response
that it was now up to Korea to prove the negative of the EC example must be rejected. The EC has
failed to carry its burden of proof on this cr itical point. The EC cannot dodge its burden of
establishing its own prima facie case. It cannot shift its burden to Korea nor to the Panel. The
Appellate Body in Japan – Apples makes clear that the burden of establishing a prima facie case rests
entirely with the complainant.

6. The EC demands from Korea further informati on at this late stage in the panel proceeding
purportedly for the Panel to figure out how to use su ch information in calculating benefit. As Korea
has pointed out a number of times, the Appellate Body in Japan – Agricultural Products II made it
quite clear that panels are not to make the complainant’s case for it. The EC’s approach betrays that it
has not presented sufficient evidence to satisfy its burden of proof.

7. The EC’s arguments that the KEXIM Act, the APRG and pre-shipme nt loan programmes are
inconsistent “as such” must be rejected. The EC is asking the Panel to reject an enormous amount of

GATT and WTO jurisprudence regarding the mandato ry/discretionary distinction in evaluating
legislation.

8. Regarding the EC’s claim of serious prejudice, not a single element of the prima facie case
has been proven. The EC did not establish that th e banks identified were “public bodies”. The EC
cites to the fact that there is governmental ownership and public policies stated in the charter but these
certainly do not suffice to be a ‘public body’. A public policy or sectoral focus is also found in many
privately owned companies. Further, Korea has iden tified the key issue in identifying a ‘public body’
as looking to the governmental function. With respect to “private bodies directed or entrusted by
government” the EC has utterly failed to provide any explicit evidence at all.

9. The EC has for the first time actually identifie d the alleged beneficiaries. But its answers are
mutually contradictory. On the one hand, the EC argues that the beneficiary of the Daewoo
restructuring is Daewoo. Does the EC mean the old bankrupt Daewoo? If so, the EC has admitted
that the new entity is not subsidized for the owne rs of the new entity want market returns on their
assets and that motivation is completely detached from any earlier events under prior ownership. It
may be that the EC actually means to refer to the new entity, DSME. But this would be similar to the
losing arguments of the United States in the priva tization cases. Moreover the EC argues that the
subsidy occurs because the DHI creditors paid too much for the DSME stock they received in the
restructuring. The contradictory nature of the EC ’s arguments is revealed when it turns to Hyundai
and argues that the basis for the subsidy is that Hyundai paid too little for Samho.

10. Remarkably, the EC argues that “deb t and equity do not have the same value”.
1 This is not
true. Debt and equity are different forms that may or may not have the same value at any given
moment depending on the facts. The EC further claims that debt and equity swaps per se confer a
benefit2 and thereby proposes a sweeping rule that woul d render large swathes of Member countries’
bankruptcy and insolvency codes as per se subsidies. Debt-for-equity exchanges are the base line
manner of resolving insolvency. The EC is arguing that anything other than termination and winding
up of insolvent companies is a per se subsidy. There is simply no basis for such a sweeping rule.
Indeed, it would be inimical to the operation of any market economy including those of the EC .

11. Furthermore, in response to Question 20, the EC now wants to argue that the purchase of debt
by KAMCO constituted a grant or equity infusion i gnoring the inconsistency of this claim with its
earlier statement that debt and equity cannot as a matt er of law have the same value. This amounts to
a new claim which was neither in the consultation re quest, request for Panel establishment, nor in any
argument made so far and must be rejected at this stage.

12. Also, regarding the alleged restructuring subsid ies, the EC has failed to carry its burden with
respect to specificity, relying instead on repetitions of the benefit claims.

13. In response to Question 22, the EC again argues for a per se rule as a substitute for presenting
the necessary evidence. The EC is reduced to arguing that unless every company in every country
that ever went bankrupt has precisely the same circ umstances or obtains different results from their
debt workouts or restructurings, there is a per se subsidy.
3 Obviously, there cannot be any such per se
rule regarding insolvency procedures.

14. With respect to serious prejudice the EC h as not shown how the alleged subsidies affect the
broader interests of the EC, much less seriously prejudice them.

1 Refer to para. 62 of the EC’s response to the Panel’s Question 17, at page 16 of the EC’s responses.
2 Refer to para. 75 of the EC’s response to the Panel’s Question 18, at page 19 of the EC’s responses.
3 Refer to paras 91 and 93 of the EC’s response to the Panel’s Question 22, at pages 24-25 of the EC’s
responses.

15. Like product has been left undefined. Ther e is no information regarding how the products are
physically similar or distinct in meaningful ways. More than that, the EC explicitly rejects that the
notion is relevant and instead relies on some extra-treaty term of “market segmentation” but even then
products seem to sail in and out of each pliabl e category depending on which passage of the EC’s
submissions one refers to. The EC continues to refuse to provide this essential evidence. 4 It is too
late to do so now.

16. In question 30, the Panel asked for the EC to provide th e capabilities and experience of each
shipyard that produces vessels within the scope of th e dispute. The EC refused to do so because the
number of relevant shipyards is “too many”. This is outrageous. The EC submitted about
600 questions to Korea in the short Annex V process and demanded that Korea translate thousands of
resulting pages for the convenience of the EC. Th e EC then simultaneously shrank the size of its
case, meaning much of that effort was wasted and then tried to claim adverse inferences liberally.
Yet, when asked by the Panel for a relevant pi ece of information the EC refuses to answer the
question because it allegedly is too hard. Korea re quests that the Panel make adverse inferences
against the EC in this regard.

17. With respect to causation, the EC rejects an y need to quantify the alleged subsidy and rejects
any need to link that subsidy to the alleged pr ice suppression or depression. The EC has abandoned
any attempt at identifying, much less explaining, th e market mechanism that transmits the effects of
the alleged subsidies, having abandoned every othe r element of proof contained in Article 6.3,
including price undercutting.

18. The EC has failed to carry its burden of proof and indeed explicitly rejected it on element
after element. Korea has been as forthcoming as it can be in supplying information; however, this
cannot serve as a substitute for the EC’s burden of establishing its own prima facie case on each
claim.

III. ABSENCE OF PROHIBITED SUBSIDIES

19. KEXIM is not a public body. Korea has ar ticulated a standard based on the one used in
Canada - Dairy specifically that an entity is a public bod y only when it acts in an official capacity.
5
Conversely, if an entity is acting in a commercial manner consistent with ma rket considerations and
not in an official capacity, it is not a public body. The EC, by contrast has not even articulated a
consistent theory on what constitutes a public body . KEXIM is required to operate on a commercial
basis and does not have the authority to regulate and is thus not a public body under the definition
espoused by Korea or under the definition used by th e EC in its TBR report or in initial statements in
its First Written Submission. Moreover, as explai ned in response to question 49 of the Panel’s
questions, KEXIM has minimal government borrowing a nd borrows nearly all its funds on the open
market and must maintain a sound credit rating. Any capital injections made by the Korean
Government were not for the purpose of coveri ng losses but were for improving KEXIM’s credit
rating. Finally, KEXIM has been consistently profitable.

4 Indeed, in response to a question to provide further evidence, the EC responds by repeatedly citing its
own Oral Statement. See paras 115-116 of the EC’s response to the Panel’s Question 27, at page 32 of the
EC’s responses that can hardly be considered convinci ng evidence. The EC also attempts to cite Korea’s
request for consultations. Refer to paras 118-121 of the EC’s response to the Panel’s Question 28, at page 33 of
the EC’s responses. Obviously, Korea does not present ri gorous evidence in its request for consultations and it
is odd that the EC would consider that to be the case since the EC has not done so in this dispute through the
point of its “Answers” to Questions, much less the request for consultations. Korea would also make the
observation that much of the contours of that case will depe nd on the Panel’s interpretations in this case, not the
other way around.
5 Korea’s First Written Submission at paras 146 and 147.

20. Not only do the individual APRG and PSL inst ances not confer a benefit but, in addition, the
KEXIM legal regime, the APRG and PSL schemes ca nnot be challenged as such. The individual
APRG and PSL transactions confer no benefit and the EC has failed to establish the appropriate
market benchmark. Moreover, individual instances of APRGs and PSLs that have long since expired
are not prohibited subsidies that are being ‘granted’ or ‘maintained’.
6 Measures which provide a mere
discretion to provide alleged subsidies are si mply not challengeable as such under the SCM
Agreement. The KEXIM Act, KEXIM Decree and Interest Rate Guidelines do not mandate the
provision of any alleged export or other subsidies and therefore cannot, as such, be found in violation
of the SCM Agreement. The EC argues that th e traditional mandatory/discretionary distinction
cannot be applied in the context of Article 3 subsidies under the SCM Agreement, but offers no
support for this radical conclusion. In fact the Panels in Brazil – Aircraft Article (21.5 II) and Canada
– Aircraft left no doubt that the distinction applie s in Article 3 SCM cases. Moreover, the EC
expressly admits that it is possible that measures taken by KEXIM would not be inconsistent with
Article 3 SCM thereby confirming that the KEXIM re gime cannot be said to mandate the provision of
prohibited export subsidies.

21. The KEXIM APRG and PSL schemes and th e individual instances in which APRGs and
PSLs were conferred to shipbuilders benefit from the safe haven in items (j) and (k) of Annex I to the
SCM Agreement. Footnote 5 of the SCM Agreement, read in the context of the language of items (j)
and (k), first paragraph, of Annex I, as well as othe r provisions of the Agreement, clearly provides for
so-called “safe harbours”. Footnote 5 provides that excepted measures under Annex I are not
“prohibited subsides”; it does not use the broader term “non-actionable subsidies” as is found in
Article 8.1. Therefore, such subsidies could still be considered under Part III or Part V.

22. Both items (j) and (k), first paragraph, have affirmative provisions that must be met in order
for them to identify prohibited export subsidies. L ogically, if those provisos are not met, then there
would not be an export subsidy. Otherwise, the provisions would have no meaning.

IV. ABSENCE OF ACTIONABLE SUBSIDIES

23. The EC has alleged that Daewoo Heavy Indus tries (DHI), Halla and Daedong were provided
subsidies by virtue of undergoing corporate rest ructuring (DHI) and court supervised corporate
reorganization (Halla and Daedong) . However, the EC has failed to prove that a financial
contribution was provided, articulated who the recipient of the financial contribution was, prove that a
benefit was provided or that the corporate restruct uring and corporate reorganization were specific to
these companies or the shipbuilding industry. Ther efore, the Panel should find that no subsidy was
provided or in the alternative, if a subsidy was provided, it was not specific to these companies.

24. The EC failed to prove that either KDB, IB K, KAMCO, or KEXIM is a public body, under its
definition or otherwise, and its analysis of what constitutes a public body is flawed. KDB and all of
the creditors acted on commercial terms while par ticipating in the corporate restructurings or
reorganizations. KDB has no regulatory or taxatio n powers at all. The EC failed to show how
government control goes beyond ownership. The KDB and all its creditors are not public bodies
under either Korea’s or even the EC’s own criteria.

25. With regard to IBK, IBK acted only as a co mmercial creditor in the corporate restructurings
and reorganizations and therefore did not meet Korea’s definition of a public body.

26. With regard to KAMCO, KAMCO purchases a nd disposes of non-performing assets based on
commercial considerations and does not have the au thority to regulate any sector of the economy and
its decisions are not enforceable in a court of la w. It does not, for example, have the regulatory

6 Korea’s First Written Submission at paras 201 to 204 , as challenged in para. 33 of the EC’s Oral
Statement.

authority of BOK. KAMCO just buys distressed loans on a commercial basis; it does not try to
determine culpability. Therefore, KAMCO is not a public body.

27. With regard to KEXIM, Korea refers to its arguments above explai ning why KEXIM is not a
public body. The EC offered only vague or irrelevant evidence to support its claim. Korea referenced
the test advocated by the Panel in US - Export Restraints that direction and entrustment requires three
elements (i) an explicit and affirmative action be it delegation or command; (ii) addressed to a
particular party; (iii) the object of which action is a particular task or duty. Something more than
vague circumstantial evidence is required and the acti ons have to be specific to the subsidy alleged.
Nothing suggests that the financial institutions were directed or entrusted to take specific actions in
the corporate restructuring of DHI or the corporat e reorganization or Halla or Daedong. Therefore,
the EC’s claims must fail.

28. With respect to the alleged corporate restruct uring subsidies, the EC has clearly stated in its
Oral Statement that if creditors behaved in a profit maximizing manner no benefit was conferred.
7
Korea believes in this regard that the information be fore the creditors at the time of the restructuring
can be used to determine whether they acted based on market considerations. The Appellate Body has
made clear that “the value of the ‘benefit’ under the SCM Agreement is to be assed using the
marketplace as the basis for comparison”.8 Korea demonstrates that in each of the restructuring cases
at issue, a market valuation was conducted and the companies were main tained as going concerns
based on the market valuation and each was subsequently sold pursuant to arm’s length transactions at
fair market value.

29. The EC has failed to specify the correct benefit benchmark. In the present case, the
appropriate benchmark is whether the creditors of an insolvent company in th e same situation as that
of the three Korean shipyards would have acted in the same way. Applying this benchmark, the
evidence on the record supports th e finding that the three proceedings were done on an arm’s length
basis and no benefit was provided.

30. The EC claims at paragraph 77 of its respon se to the Panel’s questions that the creditors of
Daewoo overpaid for the equity in the debt for eq uity swap on 14 December 2000 when compared to
the price of the stock when it was first publicly traded on 2 February 2001. Amazingly, the EC
proposes that the benefit amount be determined by comparing prices from December 2000 to prices
weeks later, while in blatant contradiction, the EC claimed in its Oral Statement that Korea cannot
invoke the fact that the share value of the restru ctured yards increased over time, because there is no
room for an ex post analysis. The EC cannot have it both ways, relying on ex post analysis where
convenient and rejecting it elsewhere. The EC’s su bsidy calculation for the debt to equity swap is
meaningless because the calculati on has to be done at the time of the transaction, based on
information available to the creditor at the time, and there is no room for ex post analysis.
Furthermore, the Appellate Body has clearly stated that if a sale of a company occurred in the context
of an arm’s length transaction, there was an irrebu ttable presumption that the purchaser paid for what
he got and thus did not get any advantage.
9 In each of the cases at issu e, the creditors or the court
decided that the companies were worth more as a going concern than in liquidation, based on the

7 EC Oral Statement at paragraph 77, page 19.
8 Appellate Body Report, US - Countervailing Measures, para. 102.
9 Appellate Body Report, US - Countervailing Measures , para. 127. Moreover, the Panel and
Appellate Body indicated that their concern, under the facts of that case, was whether there had been a less than
arm's length purchase price, whereas here the EC is arguing that the DHI creditors did not get enough for their
debt, i.e., that they overpaid. Ibid. at paras 103-104. It is difficult to see how an overpayment for the new
equity could result in above market returns leading to the possibility of a pass-through of the subsidy. In
Korea's view, the facts are clear in the present case that there was neither an overpayment nor an underpayment;
the DHI creditors got fair market value for their debt.

market-based analysis the creditors exchanged debt for equity. In each of the cases, the stock was
then sold on the open market for fair market value.

31. Remarkably, the EC claimed that the creditors paid too much for the stock in DSME but then
complained that Hyundai-HI paid too little for Samh o. These contradictions leave it unclear in which
scenario the EC is arguing a benefit is conferred. Nonetheless, Hyundai-HI is an independent party
that freely decided to purchase the stock in an arm’ s length transaction. Therefore, no benefit should
be found to exist. The EC has also erred in calcu lating the benefit in a piecemeal fashion by wrongly
considering the various portions of the debt restructuring in isolation.

32. For example, as explained at paragraph 411 of Korea’s First Written Submission, Halla
Heavy Industries filed for a corporate reorganizati on proceeding with the Court on 6 December 1997.
The Court then determined that the going concern value was greater and appointed a receiver. The
receiver submitted the first reorganization plan on 22 October 1998. The corporate reorganization
was not concluded until 6 September 2000. Therefor e, any payments made during the course of the
corporate reorganization process have to be taken into consideration in the calculation of the debt. If
the alleged subsidy is the corporate reorganizati on, then the entire process has to be taken into
consideration in determining whether a benefit was provided. Therefore, this would not be an ex post
analysis. Similarly for Daedong, if the EC is clai ming that a subsidy was provided during the course
of the corporate reorganization proceeding it must c onsider the entire proceeding. Consideration of
the entire bankruptcy process would not be an ex post analysis.

33. The EC failed to use the correct benchmark in determining the allege d benefit and failed to
rebut the evidence that the creditors acted in a commercial fashion.

34. The Arthur Andersen Report clearly shows that the creditors – based on reasonable
assumptions and information available at the time – acted to maximize their return. The EC itself
concedes that a primary criterion for keeping an in solvent company operating is “whether a market
creditor/investor in similar circumstances, given probable market developments and the position of
the undertaking would have acted in the same way.”
10 Korea provided the valuation reports used by
the creditors and the courts in each of the three restructuring cases as part of the Annex V process
showing the EC’s own criteria are met. Faced with the weakness of its case, th e EC instead resorts to
inventing an insurmountable and incorrect standard under which only companies whose going
concern value “significantly exceeds” the liquidatio n value and those whose business plans do not
have uncertainties would continue.

35. As confirmed by Anjin Deloitte LLC, th e going concern value of DHI exceeded the
liquidation value as reported in the original report.

36. The EC’s specificity analysis is flawed and lacking in evidence. Korea believes that evidence
of non-specificity and general availability is show n in two elements: First, assuming for the sake of
argument that each of the creditor financial institutio ns of the three restructured Korean shipbuilders
constitutes the “granting authority” as referred to in Articles 2.1(a) and (b) of the SCM Agreement,
the granting authority, or the legislation pursuant to which the granting authority operates (i.e., the
CRA and the Corporate Reorganization Act), did not explicitly limit access to an alleged subsidy to
shipbuilders but is generally applicable to all companies irrespective of their industrial sectors.
Second, the restructuring legislation or schem e established “objective criteria or conditions”
governing eligibility for the alleged subsidy, establishing non-specificity by virtue of Article 2.1(b).
The CRA and the Corporate Reorganization Act, aut horized the creditor financial institutions or the
Court to grant the restructuring measures to any corporation which was insolvent or suffering liquidity
problems but whose going concern value is greater than liquidation value.

10 Refer to para. 98 of the EC Response to Panel’s Question 23, page 27.

37. The EC is incorrectly advocating benefit fro m the perspective of the physical assets of the
company and not the legal entity. As discussed by Korea in response to Question 46 of the Panel’s
questions, the Appellate Body in US - Countervailing Measures , explained that “the focus of any
analysis of whether a “benefit” exists should be on the “legal or natural persons” instead of on the
productive operations,”11 and that “once a fair market price is paid for the equipment, its market
value is redeemed, regardless of the utility the firm may derive from the equipment. Accordingly, it is
the market value of the equipment that is the fo cal point of the analysis , and not the equipment’s
utility value to the privatized firm.” 12 This reasoning applies in the case of financial restructuring and
in the case of Daedong, Halla and DHI, the transaction occurred at arm’s length or market values.

38. Korea demonstrates in its submission why the purchase price paid by KAMCO for non-
performing loans is irrelevant to the benefit analysis.

39. With respect to the EC’s allegation of KEXIM measures as actionable subsidies, the EC failed
to even allege specificity in relationship to the PSLs and APRGs’ and without this element alone the
EC’s claim must fail.

40. The EC has failed to understand the value of debt and equity. The creditors in the case of
DSME were not faced with the choice of debt or eq uity. They were faced first with the choice of
liquidating the company or having it continue. Once the choice was made that it was more profitable
to continue DHI as an operating concern, the creditors then considered the debt restructuring required
that would allow them again to maximize their retu rn. This included transferring a certain amount of
debt into equity. Moreover, even assuming, arguendo, that the face value of the equity was worth less
than the credit paid for it, no benefit would have been provided to DSME because 1) the company had
been transferred to the creditors, 2) the creditors maximized their return which in turn means 3) the
restructuring package received by DSME was market determined.

41. The EC has failed to show that the alleged subsidies have caused serious prejudice. The EC’s
arguments are characterized by a number of serious flaws. Among others, the assessment under
Article 6.3(c) of the SCM Agreement cannot be made on the basis of the “world market,” contrary to
the EC’s claims that the term “same market” in Article 6.3(c) of the SCM Agreement has no
geographic qualification and that national boundaries have hardly any effect on the shipbuilding
business.
13 In this regard, the EC itself in several documents has confirmed that, among others, the
Japanese market is closed and the US cabotage provisi ons affect one third of the US’ orders. It cannot
be said that geographic or national boundaries are irre levant. Also, contrary to the EC’s assertion, the
GATT Panel in EC – Sugar does not apply in the present circumstances because that case was
concerned with export rather than actionable subsidies.

42. With respect to the like product issue, it is in law and in practice impossible to make an
accurate assessment on the existenc e of price depression or suppression pursuant to Article 6.3(c) of
the SCM Agreement without determining the “like product” first in accordance with the provisions of
footnote 46 of the SCM Agreement. The EC instead relies on a vague and shifting extra-treaty
concept of “market segmentation” which in any ev ent is too broad to meet the requirement of
footnote 46. Footnote 46 of the SCM Agreement focuses on identical products or products with
characteristics closely resembling each other. Thus, footnote 46 rests on a strong physical
identicallity test. The Panel in Indonesia – Automobiles was applying this in a manner that found that
physical characteristics could subsume some of th e other issues such as end-uses, tariff classification
and price relationships. It is clear – and the EC also admits – that vessels are highly differentiated. It
is ludicrous to then assert that all ships are like products. The like product definition must be
sufficiently narrow in order to allow an accurate assess ment of the price effects. The EC has failed to

11 Appellate Body Report, US- Countervailing Measures, para. 110.
12 Id. at paragraph 102.
13 EC’s Oral Statement, paras 93-95, pages 23-24.

provide any coherent product analysis to allow such an assessment and thus the EC cannot meet its
burden of establishing serious prejudice.

43. Price suppression and depression must be demonstrated for each like product separately with
separate supporting evidence. But the EC’s so-called evidence in support of price depression (i.e., the
decrease in newbuilding price index, the increase in order book volume, the alleged increase in freight
rates and increase in cost of production) is based on data for the whole range of commercial vessels
including vessels that are totally unrelated to the present dispute including cruise ships, bulk carriers,
RoRos or LPGs. No finding of serious prejudice can be made on the basis of such wholly defective
evidence.

44. The EC’s claim that price suppression or depression does not require head-to-head
competition but mere capability on the part of the EC shipyards to compete is legally unfounded and
must be rejected. Article 6.3(c) of the SCM Agreement requires head-to-head competition as a pre-
requirement to find price suppression or price depression.

45. The EC’s mechanism to establish price suppr ession or depression is fatally flawed. The EC
alleges that it is not required to show that the complainant’s prices are actually depressed or
suppressed. This is incorrect. Price depression or suppression must be established with regard to the
prices of the EC vessels and the prices of the complaining party’s products must therefore be shown to
have declined or to have been suppressed.

46. In addition, the causal link between the pr ice effects and the alleged subsidies must be
demonstrated and the causal link requires a quantifica tion of the alleged subsidies and their effect on
the prices of the Korean vessels. The EC clai ms, among others, that alleged overcapacity suppresses
or depresses prices, but the EC has nowhere established how this allegedly occurs. The EC has failed
to carry its burden of proof.

47. The use of the term “any subsidy” in the chapeau of Article 5 of the SCM Agreement and in
Article 7.8 confirmed by the multiple references to “the subsidy” in Article 6.3 confirms that the
effects of a subsidy must be reviewed for each subsidy separately. The existence of price depression
or suppression caused by the effects of the subsid ies as outlined above must be carried out for each
subsidy individually.

48. A finding of price depression or suppression caused by the alleged subsidies does not mean
that a serious prejudice finding is automatic. Rather, a finding of serious prejudice must be made
separately. This is clear, inter alia, from the use of the word “may” a nd the use of the words “one or
several” in the chapeau of Article 6.3. Any other interpretation would mean that the standard to find
serious prejudice under Article 5(c) is substantia lly lower than to find material injury under
Article 5(a) and footnote 11, whereas the Appellate Body in US – Lamb has concluded that the word
‘serious’ connotes a much higher standard of inju ry. Thus, something more must be proven to
establish serious prejudice. Article 5(c) of the SCM Agreement refers to serious prejudice to the
“interests” of a “Member”. There must have been a reason that the term “interests” (in plural) was
chosen rather than injury and it clearly implies something more than just the alleged damage to
specific industry(ies) for a Member’s “interests” are necessarily broader than just that.

49. Nonetheless, the alleged subsidies have not caused significant price depression or suppression
and the EC’s claims fall far short of demons trating serious prejudice. The EC provides in
Attachment 2 to its responses to the Panel’s questions a response to the Panel’s question with regard
to the existence of significant price depression or suppression caused by the alleged subsidies. But
there is, among others, no indication of the like pr oduct vessel and hence the data is fatally flawed
from the outset and cannot establish price depression or suppression for the like product vessels. Nor
is there any serious attempt to establish a causal li nk. Among many other flaws, the price allegations

are also inaccurate. In sum, the EC has failed to establish any semblance of a prima facie case that
would allow a finding of serious prejudice in this case, even assuming, arguendo, that alleged
subsidization could be shown.