DS Case 273: Korea – Commercial Vessel (Subsidy)

The conclusions of the Panel Report are very favorable to Peru. Peru's victory in the Panel has increased Peru's position in the WTO and set a good precedent for this country to participate in WTO disputes. Moreover, the costs of this dispute are not large and Peru believes that they will be offset by the increased trade revenue due to the victory. Peru also did not incur any political costs. During the dispute, there were no signs of political measures against Peru and officials did not feel any damage to bilateral relations. Peru's experience in this case and another similar case are extremely valuable lessons for developing countries in general, and Vietnam in particular, in resolving international disputes under the WTO mechanism.

2.4.4 DS Case 273: Korea – Commercial Vessel (Subsidy)

This dispute concerns a complaint by the European Community (EC) regarding subsidies provided by Korea to support its domestic shipbuilding industry under the provisions of Articles 1.1, 3.1, 5 and 6 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement).

Dispute content and resolution process;

The EC complained to Korea about the following issues:

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- Korea has been providing export subsidies to shipbuilders through the Act on Establishment of the Export-Import Bank of Korea (KEXIM), the implementing decrees of this Act and through the Pre-Shipment Loan (PSL) and Advance Repayment Guarantee (APRG) schemes. The EC considers that Korea has provided loans and guarantees to manufacturers (shipbuilders) at preferential interest rates, which seriously affects the interests of the EC by suppressing and reducing the price of commercial ships on the world market, in violation of Articles 1.1 and 3.1 of the SCM Agreement.

- Korea has provided domestic subsidies to the shipbuilding industry through KEXIM, including debt forgiveness, debt reduction, interest rate reduction, and debt restructuring.

through corporate restructuring measures. The corporate restructuring was carried out by a number of public and private entities and these subsidies have seriously affected the interests of the European Communities, in violation of Articles 5 and 6 of the SCM Agreement.

For export subsidy complaints:

Article 1.1(a) of the SCM Agreement provides that a subsidy exists if there is a financial contribution by the Government or any public body in the territory of a Member State that confers a benefit on the recipient. An export subsidy is a subsidy that is legally or in fact contingent on exports. According to the EC, Korean programmes that provide legal subsidies on the basis of laws, decrees and regulations establishing such programmes constitute export subsidies because Korean government officials may subsidize Korean exporters through these programmes, thereby violating its WTO obligations because these export subsidies are prohibited.

Korea argues that the above measures do not constitute financial contributions and therefore cannot be subsidies within the meaning of Article 1.1 of the SCM Agreement because these organizations are not public entities and they do not engage in any form of governmental activity.

The issue that needs to be clarified is what constitutes a public body, the ability to challenge “as proposed” measures and export subsidies.

Regarding “public entity”, the EC considers that KEXIM is a public entity because it is established and operates under a law that allows the Republic of Korea to exercise control over its decisions. It pursues public policy objectives and has access to state financial resources to cover its losses.

Korea believes that an agency must participate in state activities to be a public organization, state activities are activities such as tax collection and management. According to Korea, because KEXIM operates as a telecommunications bank,

system rather than with government functions, so it is not a public organization.

The Panel rejected Korea’s argument that a public entity is an entity controlled by a government (or other public entity). If an entity is controlled by a government (or other public entity), any action taken by the entity is a contribution to the government and is therefore covered by Article 1.1 of the SCM Agreement. The Panel found that KEXIM is a public entity because it is controlled by the Korean Government and therefore, KEXIM’s loans and guarantees constitute “financial contributions” within the scope of Article 1.1 of the SCM Agreement.

Regarding the “as-described” measures, the EC claimed that KEXIM’s legal regime was an “as-described” export subsidy because the documents establishing KEXIM’s legal regime took into account export subsidies. The Panel considered that the EC’s showing that Korean law took into account export subsidies was not sufficient to claim that the Korean measures were “as-described” forms of export subsidies. In order to show that the Korean programmes (KEXIM, PSLs and APRGs) were “as-described” forms of export subsidies, the EC had to demonstrate that they were “public entities” responsible for the export subsidies. The Panel found that the Korean programmes were administered through “public entities”. However, the Panel found that the EC had not demonstrated other factors that demonstrated that these programmes were required to subsidize exports. Similarly, the Panel rejected the EC’s claim that APRGs and PSLs constitute export subsidies “as intended”. Accordingly, the EC failed to demonstrate that Korean “public entities” were compelled to provide export subsidies. And having failed to meet its burden of proof, the Panel rejected the EC’s claim and determined that the Korean programmes did not constitute subsidies “as intended”.

On the issue of export subsidies, the EC argued that APRGs and PSLs through KEXIM are prohibited forms of export subsidies and violate Article 3.1(a) of the

SCM Agreement. The Panel found that KEXIM is a public entity and that the loans and guarantees provided through these programmes constitute financial assistance contributions. The Panel therefore had to determine whether the financial contributions conferred a benefit to the beneficiary and whether the subsidy arose on the basis of the performance of exports. After its examination, the Panel found that the specific transactions conferred a benefit on the basis of the APRGs and PSLs providing financing at below market rates. Since Korea did not object to the EC's claim that the financing provided through these programmes was a performance-based provision, the Panel determined that the financing provided through the APRGs and PSLs was a performance-based provision, which is covered by Article 3.1(a) of the SCM Agreement.

For domestic subsidy claims

The EC claimed that certain Korean subsidies were implementation subsidies under Articles 5 and 6 of the SCM Agreement. The EC also claimed that certain domestic implementation subsidies it found were also prohibited export subsidies. Korea argued that it was “unlikely in law and practice” for a measure to be both a prohibited and an implementation subsidy. This meant that the EC could challenge each measure only under one obligation under the SCM Agreement. The Panel concluded that there is nothing in the SCM Agreement that precludes challenges to a measure under both Parts 2 and 3 of the Agreement. This finding is consistent with the approach of other Panels and the Appellate Body. It is possible for a WTO member to adopt a measure that violates several WTO obligations. In such cases, WTO members have the right to challenge the disputed measure on the basis that the measure violates any or all of these obligations. The member challenging the measure is not required to limit its complaint if it can demonstrate that the disputed measure violates several WTO obligations.

In this regard, the EC claims that private creditors involved in corporate restructuring are parties “mandated” or “directed” by the Government to provide subsidies, and are therefore also providing subsidies. Accordingly, the parties’ arguments revolve around issues of the meaning of “mandated” and “directed” in Article

1.1(a) 1(iv) and the meaning of the words “financial contribution”, “benefit”, “serious effect” in Article 6.3(c) of the SCM Agreement.

On the issue of “entrustment” or “direction”, the EC asserted that the Korean Government had acted in an implied manner to “entrust” or “direct” the private entities and sought to demonstrate this through “circumstantial evidence”. The Panel considered that the assertion could be made on the basis of circumstantial evidence provided that the evidence was clear, convincing and demonstrated that each private lender had been entrusted or directed to engage in the restructuring. After examining the evidence submitted by the EC, the Panel determined that although the evidence demonstrated the Government’s involvement in the financial services market, it did not demonstrate an act of delegation or consideration with respect to the restructuring. The Panel therefore determined that the EC had failed to demonstrate that the private entities had been “instructed” or “directed” by the Korean Government within the meaning of Article 1.1(a) 1(iv) of the SCM Agreement.

With respect to “financial contributions”, the Panel rejected Korea’s argument that the restructuring did not result in a transfer of monetary benefits. The Panel noted that the debt-equity conversion, interest rate reduction, and deferred payments constituted financial contributions within the meaning of Article 1.1(a) 1(iv) of the SCM Agreement. Accordingly, the Panel determined that the restructuring activities did constitute a “financial contribution” to achieve the objective of the SCM Agreement. Since the public entities involved in the restructuring are defined as public entities for the purpose of the SCM Agreement, the Panel found that they made a “financial contribution” through their activities. Since the Panel determined that the private entities were not mandated or directed to provide subsidies, they did not make a financial contribution to the Korean shipyards.

Regarding “benefit”, a financial contribution is a subsidy if it benefits the recipient. Whether a financial contribution is beneficial must be determined by comparing it with an appropriate benchmark. The EC argued that the assessment of the commercial reasonableness of the restructuring should be based on the conduct of the foreign lender/investor, as they are outside the influence of the Korean government. Korea argued that it did not have an appropriate benchmark because the alleged subsidies were provided through Korean financial institutions. The Panel determined whether the EC demonstrated that the commercial restructuring was not commercially reasonable, taking into account all aspects of the commercial restructuring.

Regarding “serious effects”, Article 5 of the SCM Agreement provides that no member shall use any form of subsidy to prejudice the interests of any member. Article 5 lists adverse effects that may arise from subsidies, including “serious effects” (Article 5(c)). Article 6.3 of the SCM Agreement lists cases where serious effects may arise within the meaning of Article 5(c). Accordingly, serious effects may arise if “the effect of the subsidy is to significantly lower the price of the subsidized product in relation to the price of a like product of another member in the same market or to significantly depress prices, reduce prices or cause loss of sales in the same market”. The EC complained that it had been seriously affected by price restraints and price reductions on container ships, product/chemical tankers and liquefied natural gas (LNG) carriers. The EC argues that subsidies have helped Korean shipping lines reduce prices, or maintain them despite strong demand that would normally push them up, and that the price pressure from subsidies has left EC shipyards unable to bid or losing bids because they cannot meet the prices or suffer lost revenue and reduced profits from the bids they do win.

Before considering the EC's specific complaint, the Panel examined “serious effects” by discussing factors such as: price restraint and

rebates, the relevance of the “like product”, the scope of the geographical market, the meaning of the term “substantial”, the if-then test and other factors. The Panel then considered the evidence and arguments for each of the three categories of commercial vessels complained about by the EC. In each case, the Panel found that the EC had failed to demonstrate that there was significant price restraint, and therefore declined to consider the more specific arguments put forward by the parties regarding the definition of product, geographical market and time. The Panel found that some specific programmes did subsidise, but the specific transactions involved included not only the three categories of vessels complained about but also several other categories of vessels. Therefore, most of the programmes complained about by the EC as serious subsidies were not upheld by the Panel. The issue was that the EC had demonstrated that a relatively small number of APRG and PSL transactions significantly subsidized and depressed the prices of LNG carriers and significantly suppressed the prices of product/chemical tankers and container ships. The Panel noted that the EC had failed to distinguish the effects of the specific transactions subsidizing the three types of commercial vessels separately from the effects of these transactions on all other types of vessels, and had failed to show how subsidies to the other types of vessels might affect the prices of the three types of commercial vessels, so the Panel decided to limit its analysis to the specific transactions involving the three types of vessels identified by the EC. Using an if-then test, the Panel found that the subsidies could produce an equivalent price reduction for each specific transaction and, therefore, could “significantly depress” the prices of LNG carriers in general. However, the Panel determined that there was no evidence or argument to demonstrate that the overall effect of the subsidized trade was a significant price depression for LNG tankers. Similarly, for product/chemical tankers and container ships, the Panel determined that although the subsidies may have “significantly suppressed prices”, it considered that there was no evidence or argument to demonstrate that the overall effect of the subsidized trade was a significant price depression. Therefore,

The panel rejected the EC's claim that the Korean subsidies seriously prejudiced the EC's interests by causing significant price suppression and price undercutting.

2.4.5 DS Case 309: China - Integrated Circuits (ICs) (Tax)

This dispute concerns the application of preferential VAT rates by China to IC products manufactured or designed in the territory of China in connection with Articles I and III of the Agreement on Tariffs and Trade 1994 (GATT 1994), Article XVII of GATS (General Agreement on Trade in Services of the WTO). The United States is the complainant against China.

Dispute content and resolution process:

On March 18, 2004, the United States filed a petition with the WTO requesting a dialogue with China regarding China's application of preferential VAT rates on IC products manufactured or designed in Chinese territory.

Although China's VAT rate on ICs is 17%, the US side argues that IC manufacturing companies in China enjoy a lower tax rate because they are refunded a portion of the VAT they have paid. In the US's view, China is clearly imposing higher tariffs on imported ICs and thus unfairly treating foreign ICs.

In addition, the US side also argued that China allowed a partial VAT refund for ICs designed domestically but manufactured outside China due to technological limitations. In the US side's view, China clearly provided more preferential treatment for imports (ICs) from one WTO member country than for other countries, and thus discriminated against services and service providers from other member countries.

The US side believes that the above measures of China are inconsistent with the provisions for China under Articles I and III of the Agreement on Tariffs and Trade 1994 (GATT 1994), the Protocol on the Accession of the People's Republic of China to the WTO (WT/L/432) and Article XVII of GATS (WTO General Agreement on Trade in Services).

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