With regard to the Kexim pre-shipment loans CESA claimed they concern a transfer of funds (loans within the meaning of Article 1.1.(a)(1)(i)) by a state controlled bank to the beneficiary. In particular, that Kexim financing confers a "benefit" on their recipierts because it provides Korean shipbuilders with financial support (interest on loans) on more advantageous terms than they would otherwise be able to obtain in the Korean financial market. Furthermore, CESA claimed that the European Commission has already found this type of Kexim financing to constitute a countervailable export subsidy in two countervailing investigations into steel wire.¹²

　

CESA claimed that the KEXIM pre-shipment loans to domestic suppliers are "contingent in law ... upon export performance" under Article 3.1 of the ASCM because they are expressly made conditional upon export activity, by extending financing to Korean exporters, in order to provide them with the required funds to finance exports and that they therefore constitute prohibited export subsidies which are per se specific in accordance with Article 2.3 of the ASCM. Finally. CESA claimed that the above programme cannot fall within the "safe havens" of item (k) of the Illustrative List of Export Subsidies in Annex I to the ASCM¹³.

　

KEXIM provides loans under the so-called "Pre-shipment Credit" scheme to shipyards in connection with export contracts for the purposes of helping shipyards finance the construction of vessels. Notwithstanding its name, the pre-shipment loan scheme is neither dependent on the payment terms of the contract between the shipyard and the buyer nor is in any way connected to credit granted to the buyer by or through the shipyard. Thus, pre-shipment loans are available to shipyards for purely construction financing purposes and may cover contracts for which no deferred payment terms are agreed.

In the light of the above it would have been more appropriate to refer to the scheme as pre-shipment financing rather than "credit" which gives the impression it is somehow linked to credit granted to the buyer.

　

The eligibility requirements for the pre-shipment loan scheme are similar to those applied to the "export loans for domestic suppliers" one. Also, the credit requirement criteria for the "export loans for domestic suppliers" scheme are applied mutatis mutandis. However, the terms and conditions for extending pre-Shipment loans (e,g., minimum down-payment, maximum repayment period, etc.) are different from those for extending "export loans to domestic suppliers" as the Understanding is not applicable to the former. For example, pre-shipment loans have a maximum repayment term of 30 days afier delivery. Furthermore, apart from exporters, raw material providers are also eligible for pre-shipment loans.

　

The ceiling amount for pre-shipment loans may be up to 90% of the export contract amount minus the cash payment which the borrower has already received.

　

KEXIM offers floating interest rates for pre-shipment loans in foreign currency as well as in Korean Won. The floating interest rates in foreign currency and in Korean Won are determined as follows:

　

(1)Foreign currency floating interest rate

Foreign currency floating interest rates are determined by the aggregate of the base rate, minimum spread, and term and credit risk spreads:

　

　

(2)Korean Won floating interest rate

The Korean Won floating interest rates are determined by the aggregate of the prime

rate, credit risk spread, and special adjustment spreads:

　

　

In 1999, pre-shipment loans accounted for Won 4,077 billion or 43.1% of total KEXIM financing (amounting to Won 9,460 billion), decreasing in 2000 to Won 2,651 billion or 34.9% of total KEXIM financing (amounting to Won 7,596 billion).

　

All shipyards investigated used the pre-shipment loan scheme.

　

During the investiga tion, 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.

　

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 confening 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.

　

The information available strongly suggests that in providing pre-shipment loans, KEXIM did not act as a normal commercial financial institution. In the 1 999 annual accounts, KEXIM confirms that

　

Thus, the annual accounts imply that KEXIM has provided pre-shipment loans to Korean companies in cases where the private financial institutions were not willing to finance the projects. In other words, these companies were considered to be uncredit worthy.

This is illustrated by the loans granted to Daewoo. At the end of 1999, the total outstanding loans for Daewoo were US$1.4 billion of which USS$ 1 billion is classified as less than normal i.e. precautionary, substandard or doubtful. In the 2000 acounts the situation has clearly worsened: KEXIM's outstanding loans to Daewoo group companies under workout amounted to US$ 2.2 billion out of which US$ 1.9 billion is classified as precautionary, substandard or doubtfill.

　

In any event the granting of loans to virtually bankrupt companies such as Daewoo and Halla at rates which are comparable to those obtained by financially strong companies such as Huyndai demonstrates that the risk assesment was not made on a purely commercial basis (see table below; information from financial accounts). Furthermore, thc existence of loans bearing 0% or 1% rate cannot be justified commercially.

　

Short term borrowings

General term loans annual interest rate:

1999　10.75-11.5%

These include collateralised loans fom Kexim

　

Short term borrowings

General term loans annual interest rate:

1998　10-15.75%

1999　8.2-12%

2000　8.2-9.95%

　

Long term debt

　

Won currency loans - predelivery financing from Kexim:

1998　9%

1999　8.14-8.17%

2000　8.32%

　

Foreign currency loans-predelivery financing from Kexim:

1998　Libor+0.70-3.58%

1999　Libor+1.81-2.80%

2000　Libor+1.98-2.80%

　

Long term debt

Won currency loans from korean banks

1997　1.0-12.4%

1998　1.0-12.4%

1999　Premium-Premium-4.5%

2000　0%-11%

　

Foreign currency loans from Korean banks

1997　Libor+0.15%-2%

1998　Libor+0.50-2%

1999　Libor+2%-2.50%

2000　0%-Libor+2%

　

Furthermore, the Commission has established in a previous investigation that the KEXIM pre-shipment loans "...were granted at interest rates which were generally lower than comparable commercial loans, thereby conferring a benefit on the recipient of the loan". ¹⁴

　

In view of the above it is considered that the pre-shipment loan programme has conferred a benefit on the recipients of the loans.

　

The GOK has stated that the granting of pre-shipment loans is contingent upon the existence of an export contract. Furthermore, it is precisely the purpose of the programme as presented by KEXIM and explained by the shipyards to provide the necessary capital for the manufacture of goods for exportation from Korea. It can therefore be concluded that the programme constitutes an export subsidy within the meaning of Article 3.1(a) of the ASCM.

　

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 loans in question fall within the "safe havens" of the first sub-paragraph of paragraph (k) of Annex I which provides as follows:

　

　

The GOK has claimed that the loans (i) were made at rates above those which they actually had to pay for the funds and (ii) that they were not used to obtain a material advantage.

　

As a general comment the information above shows that the type of loans made to the Korean shipyards do not constitute export credits within the meaning of the above provision. In particular, these loans are made available to shipyards neither for the purpose of granting export credit to the buyers (such credit is covered by the export loan scheme above) nor do they cover a period going beyond delivery of the vessel. Thus, the fact that foreign currency loans were in all cases made above Libor rates is immaterial as the first sub-paragnph of paragnph (k) is not applicable.

　

This is further evidenced by the standard against which scheme s falling under the first sub-paragraph of paragraph (k) are to be measured with, namely securing "a material advantage in the field of export credit terms". Pre-shipment loans do not involve the granting of export credits so they cannot secure material or immaterial advantages in this field to exporters.

　

The above analysis shows that pre-shipment loans are merely production loans granted to manufacturers who engage in exporting certain capital goods from Korea. The purpose of the loans is to finance the production costs, such as raw material cost, labour and overheads needed until delivery of the ships. In that sense they constitute direct subsidies contingent upon export falling under paragnph (a) of Annex I of the ASCM.

　

The above-mentioned factors lead to the conclusion that pre-shipment loan scheme constitutes an export subsidy which is prohibited under Article 3.1 (a) ASCM.

　

The availability of pre-shipment loans is particularly injurious as it provides a direct competitive advantage to Korean shipbuilders in the form of cheap working capital. This is even more important with respect to contracts involving tail-heavy payment terms ie payment of 70% of the price of the ship at delivery. As explained above (see Chapter B.1) tail heavy terms are attractive to a buyer but normally entail higher expenses for the yard and, therefore, in theory would result in a higher price. The granting of pre-shipment loans, however, eliminates the need for the yard to charge higher prices while allowing it to offer attractive terms to the buyer.