Measures Affecting Trade in Commercial Vessels

Status: Concluded

Subject: Ships,

Respondent: Korea

Complainant(s): European Communities,

Third Parties: Mexico, United States, China, Chinese Taipei, Norway, Japan,

Dispute Number: DS273

Link to Dispute Site:

Complaint by the European Communities.

On 21 October 2002, the European Communities requested consultations with Korea on certain measures establishing subsidies to its shipbuilding industry which, according to the European Communities, are inconsistent with Korea's obligations under the SCM Agreement. These measures are as follows:

* Corporate restructuring subsidies in the form of debt forgiveness, debt and interest relief and debt-to-equity swaps, provided through government-owned and government-controlled banks;

* Special taxation on in-kind contribution and the special taxation on spin-off scheme provided in the Special Tax Treatment Control Law which establishes two tax programmes limited to companies under corporate restructuring and provided tax concessions to Daewoo;

* Pre-shipment loans and advance payment refund guarantees provided by the state-owned Export-Import Bank of Korea ("KEXIM") to all Korean shipyards.

The EC indicated that the subsidies in question were granted with respect to the production of commercial vessels for international commerce, including: bulk carriers, container ships, oil tankers, product and chemical tankers, LNG/LPG carriers, passenger and RoRo ferries and other non-cargo vessels (including offshore units).

The EC considered that the Korean measures are in breach of Korea's obligations under the provisions of the SCM Agreement, in particular, but not necessarily exclusively of: Articles 1, 2, 3.1, 5(a), 5(c), 6.3 and 6.5 of the SCM Agreement.

On 12 June 2003, the EC requested the establishment of a panel. At its meeting on 24 June 2003, the DSB deferred the establishment of a panel. Further to a second request by the EC, the DSB established a panel at its meeting on 21 July 2003. China, Japan, Mexico, Norway, Chinese Taipei and the United States reserved their third-party rights. The DSB also agreed, following the request by the EC, to initiate the Annex V procedures pursuant to paragraph 2 of Annex V of the SCM Agreement with respect to developing information concerning serious prejudice under Annex V of the SCM Agreement.

On 11 August 2003, the EC requested the Director-General to compose the panel. On 20 August 2003, the panel was composed.

Following the passing away on 11 April 2004 of Chairman of the Panel, and pursuant to a joint request of the parties on 6 May 2004, the Director-General on 11 May 2004 appointed a new Chairman to the Panel.

On 7 March 2005, the Panel report was circulated to Members. The Panel found that certain (but not all) KEXIM pre-shipment loans and advance payment refund guarantees are prohibited export subsidies, and thus that Korea is in violation of Articles 3.1(a) and 3.2 of the SCM Agreement. In accordance with Article 4.7 of the SCM Agreement, the Panel recommends that Korea withdraw the relevant subsidies without delay, i.e., within 90 days.

* With regard to the KEXIM legal regime, the Panel, finding the mandatory/discretionary distinction was still valid, found the KEXIM legal regime did not require the provision of export subsidies, and that therefore it did not violate Articles 3.1(a) and 3.2 of the SCM Agreement.

* With regard to individual APRGs and PSLs identified by the EC, all of these were found to be government financial contributions and contingent on export performance. In only certain instances, however, did the Panel find that the EC had established that the fees and interest rates charged were below the terms that the beneficiaries could have obtained on the market. The Panel found that those APRGs and PSLs provided at below-market terms were prohibited export subsidies, in violation of Articles 3.1(a) and 3.2 of the SCM Agreement.

* With regard to the corporate restructurings, the Panel found that while the transactions constituted "financial contributions" and the government-owned creditors were "public bodies" in the sense of SCM Article 1.1(a)(1), the EC had not established that the private sector creditors were "entrusted or directed" by the government to provide financial contributions. Looking at the terms of the restructurings, the Panel found that the EC had not established that the decisions to restructure rather than liquidate were inconsistent with commercial considerations, nor that the terms of the individual elements of the restructurings were inconsistent with commercial considerations. Thus, the Panel found that the EC had not demonstrated that the restructurings involved subsidization.

* With regard to serious prejudice, the Panel examined this claim only in respect of the individual instances of KEXIM financing that it had found to constitute prohibited export subsidies, and that involved financing of any of the three ship types covered by the claim (LNGs, container ships and product/chemical tankers). The Panel found that the EC had not established that these subsidized transactions had caused significant suppression or depression of world prices for any of the three ship types, because of the relatively small numbers of such transactions in relation to the total number of sales of these ships by the Korean industry and in the world market as a whole, and because the EC had not presented specific evidence linking these transactions to overall suppression/depression of world price levels for these ships, and indeed had not attempted to make this argument.

The DSB adopted the Panel report on 11 April 2005.

Implementation Status of Adopted Reports

At the DSB meeting of 11 April 2005, Korea stated that since all loans and guarantees had now been repaid or had already expired, Korea considered that it was in compliance with WTO rules and no further action was required to implement the DSB's recommendations. The European Communities disagreed with Korea that there was nothing to be done in this respect and noted that the Panel had recommended that Korea withdraw the individual APRG and PSL subsidies within 90 days, pursuant to the SCM Agreement.

Panel Proceedings
Brief Date Brief Description
07/02/2004 Answers from the United States to the Question from the Panel Posed to the Third Parties (pdf)
03/22/2004 Response of the United States to Questions from the Parties (pdf)
03/09/2004 Oral Statement of the United States at the Third Party Session (pdf)
02/09/2004 Third Party Submission of the United States (pdf)