C THE CHALLENGED PRACTIES
The investigation was directed against subsidies allegedly granted by the Government of the Republic of Korea (the "GOK") to its shipbuilding industry that benefited production between 1997 and 2000 and will benefit future production. Alleged Korean subsidies have included advance payment guarantees and pre-shipment financing on non commercial terms.
In particular, the alleged Korean subsidies that were expressly the subject of the complaint included the following Export-Import Bank of Korea ("KEXIM") schemes:
-Advance Payment (Refund) Guarantees; and
The complaint alleged that the above-mentioned practices violated Article 3 of the WTO Agreement on Subsidies and Countervailing Measures (ASCM) and thus give rise to a right of action under the Trade Barriers Regulation. Article 2(1) of the Regulation defines an obstacle to trade as "any trade practice adopted or maintained by a third country in respect of which international trade rules establish a right of action."
In particular, it was claimed that the KEXIM advance payment guarantee and pre-shipment financing programmes constitute obstacles to trade because they are prohibited export subsidies under Article 3.1(a) of the ASCM, which states that "subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance" are prohibited.
Notwithstanding the alleged prohibited nature of the above export programmes the complaint alleged that even if not found to be prohibited, such subsidies were still actionable under Article 5 of the ASCM as they caused adverse effects.
As a general comment, KEXIM does not seem to apply the concept of "export credit" in its description of the schemes in the sense commonly understood by Member State export credit agencies or direct lenders, i.e. implying that export credit is in all cases credit to the buyer. For example, the pre-shipment loan scheme is referred to as the "pre-shipment export credit" scheme although it does not actually involve credit to the buyer. For the purposes, however, of this report an effort has been made - to the extent possible - to use terms as commonly understood by Member States; certain caution should nevertheless be exercised in referring to specific parts of the report as the names used by KEXIM for its schemes have in certain cases been unavoidably retained.
The Export-Import Bank of Korea (KEXIM)
The Export-Import Bank of Korea (hereinafier KEXIM) was established in 1976 pursuant to the Export-Import Bank of Korea Act. KEXIM aims to promote growth and development of the Korean economy and to facilitate trade with foreign countries. In order to achieve this goal, KEXIM provides a number of financial services such as loans, guarantees and trade-related financing. However, its primary function is to provide financing for the exportation of capital goods and services, overseas investnent and major resource developments.
Pursuant to Article 4 of the KEXIM Act, the capital of KEXIM shall be 4 trillion Won which is subscribed by the GOK (54.8%), the Bank of Korea (39%) and Korea Development Bank (6.2%). The latter 2 banks are government-owned financial institutions.
Following debt-to-equity swap with Halla (9.47%) KEXIM became a major shareholder of this shipyard.
The financing activities of KEXIM
In order to meet its objectives, KEXIM developed a number of financing tools which can be divided in 3 categories:
(a)Financing for domestic suppliers
This consists of the following schemes:
-export loans to domestic suppliers,
-technical service credits,
-overseas investment and project credits,
-major resources development credits,
-loans to SMEs, and,
-rediscount on trade bills.
All shipyards investigated used the "pre-shipment credit" scheme. In addition, Daewoo, Hyundai Mipo and Hymdai Heavy Industries also used the "export loan to domestic suppliers" scheme.
(b)Financing for foreign buyers
This consists of the following schemes:
-direct loans to foreign buyers,
-re-lending facility to foreign banks, and,
-overseas business credit.
It appears that this programme was not used in the IP.
This consists of the followhg schemes:
-financial guarantees, and,
-project related guarantees (including advance payment guarantees).
All shipyards investigated used the "advance payment guarantee" scheme.
Thus, as regards the shipbuilding industry, KEXIM provided during the period of investigation export loans to domestic suppliers, pre-shipment credits and advance payment guarantees.
I. Export Loans to Domestic Suppliers
KEXIM provides loans to Korean shipyards in connection with export contracts. In particular, a loan is provided in case a shipyard has agreed deferred payment terms with the buyer.
The eligibility for this programme is determined by a number of factors:
Export transactions must involve countries that are not classlfied as "High Risk Countries" by the KEXIM.
Korean exporters who export or produce the designated capital goods.
(C)Eligible export transaction
The deferred payment terms of the related export transaction should meet the OECD Guidelines requirements in terms of advance payment, minimum interest rate, and terms of repayment period. In the case of shipbuilding transactions, they should meet the guidelines of the Understanding.
In principle, the Korean shipyard's creditworthiness should be strong enough to pay off the relevant loan obligation.
New loans can not be provided to a company that has failed in the past to perform its loan obligations or used export loans for purposes other than those stated in the application. In addition, loans to the following companies are discouraged.
||that have recorded net losses consecutively for the past three fiscal years;
||whose outstanding debts exceed shareholders' equities as of the loan application
||whose credit rating is below the "cautious" category; or
||whose debt-equity ratios are more than double the average in the same industry.
In addition, KEXIM requires a letter of guarantee issued by the government or central bank of the importing country or a creditworthy international financial institution acceptable to KEXIM.
The above credit requirements are the only thresholds to qualify for a loan. Even though a certain borrower may meet the above requirements, KEXIM may decide not to extend a loan based on its own overall project analysis including profitability and financial strength considerations. Also, KEXIM may require that the Korean borrower receive s payment s from the buyer through a KEXIM designated bank account in order to closely monitor the payments as stipulated in the contract.
In terms of procedure, the applicant shipyard upon entering into the export contract, makes an application to KEXIM indicating the required terms and conditions of the credit. Then, the bank performs an overall evaluation based on the following factors:
||Creditworthiness of the shipyard and of the guarantor
||Legality of the contract
||Shipyard's production capability
||Valuation of collateral
After the more detailed analysis of the application, KEXIM will enter into a contract with the shipyard.
The ceiling amount for loans is up to 100% of the export contract amount minus the required cash payment which for the shipbuilding sector is 20% of the export contract amount. The maximurn period of repayment is 8.5 years.
KEXIM offers fixed interest rates denominated in foreign currency during the period in question. The interest rates are :
-Ships: 8% (pursuant to the Understanding)
-Plants and other capital goods: CIRR (pursuant to the Arrangernent)
According to the GOK, the interest rate cannot be less than 8%. KEXIM stated that the interest rate is determined by the contract amount, the collateral provided, the repayment period and the credit risk assessment.
Daewoo (twice during the IP), Hyundai Mipo (once during the IP) and Hyundai Heavy Industries used the export loan programme .
During the investigation, KEXIM and the co-operating shipyards considered that any information regarding the individual terms of KEXIM financing is confidential information and that any release of information regarding the terms and conditions of KEXIM financing would cause serious commercial damage. Consequently, only general information on the whole programme was given .
Under Article 1 of the ASCM a subsidy exists if (1) "there is a financial contribution by a government or any other public body ... [including] ... where a government
makes payments to a funding mechanism, or entrusts or directs a private body to
carry out [these] functions"; and (2) "a benefit is thereby conferred".
A subsidy is prohibited under Article 3 of the ASCM if it is "contingent, in law or, in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I" (the "Illustrative List of Export Subsidies). A subsidy contingent upon export performance is per se prohibited and therefore, there is no need to show adverse effects. Export credit programmes are expressly included within the scope of Annex I of the ASCM; thus, government programmes falling squarely within the provisions of Annex I are ipso facto prohibited subsidies in violation of Article 3.1(a).
The above elements are examined in turn.
Loans are a transfer of funds within the meaning of Article 1.1.(a)(1)(i). Therefore, KEXIM loans constitute financial contributions within the meaning of the above Article.
A benefit exists to the extent that shipyards have obtained loans at non market rates. In particular, in accordance with article 14(b) of the ASCM a loan by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving the loan pays on the government loan and the amount the firm would pay on a comparable commercial loan which the firm could actually obtain on the market. In this case the benefit shall be the difference between these two amounts.
GOK has stated that the rate applied on these loans was in accordance with the minimum interest rate provided for in the Understanding ie 8%. Furthermore, the GOK has provided information on the average interest rates applicable during the IP by banks and other commercial institutions. These were in all instances above 8% reaching such high levels as 17% in 1998.
In view of the above it is considered that the loan programme in question has conferred a benefit on the recipients of the loans.
The GOK has stated that the loan programme only applies to transactions involving the exportation of capital goods from Korea. Loans are legally contingent upon the existence of an export contract. It can therefore be concluded that the programme constitutes an export subsidy within the meaning of Atticle 3.1(a) of the ASCM.
Prohibited subsidy issue
Export subsidies are prohibited unless they fall within the terms of footnote 5 of the ASCM which provides that "Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement"
The GOK has claimed that the loans in question fall within the "safe haven" of the relevant provisions of Annex I of the ASCM and are therefore not prohibited export subsidies. In that respect, it has been claimed that the export credit practices in question fall within the "safe havens" of paragraph (k) of Annex I which provides as follows:
The grant by governments (or special institutions controlled by and/or acting under the authority of governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms.
Provided, however, that if a Member is a party to an international undertakingon official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement.
It has been accepted in Brazil-Export Financing Programme for Aircraft that the OECD Arrangement and its annexes, as far as the industrial sector at stake in a dispute is concerned, constitutes such an "international undertaking". There is no reason not to consider that the annexed Understanding can also constitute an "international undertaking" within the meaning of the above ASCM provision.
The description of the scheme made by KEXIM indicates that it falls within the scope of paragraph 3 of the Understanding i.e. it relates to credit granted with support by governments in the shipbuilder's country to the shipbuilder, to enable credit to be given to the shipowner. Thus, if the conditions of the Understanding are met, then the "export loan to domestic suppliers" scheme would not constitute a prohibited export subsidy.
During the investigation, both the GOK and KEXIM have stated that the relevant conditions are respected in full. However, the safe haven exception requires a government to affirmatively prove that the terms of its export credit practice are "in conformity with those provisions [of an international undertaking on export credit terms]," in order to successfully defend against a claim that the practice is a prohibited export subsidy. The above has been confirmed by the Appelate Body which has ruled in Brazil-Export Financing Programme for Aircraft (21 July 2000) that the provisions in question constitute affirmative defences so that the burden of proof lies with the WTO Member invoking the defence i.e. in this case Korea. The GOK has, however, failed to produce the relevant evidence during the investigation.
Notwithstanding the above, the information available cannot lead to a conclusion on whether KEXIM respects, or not, the provisions of the Understanding. In view, however, of the limited impact of the scheme as explained immediately below, it is not considered necessary to draw a conclusion on this issue.
Given that the programme in question was rarely used by Korean exporters it is not considered to have a major impact on the market and, therefore, on the adverse effects suffered by Community industry.