[OUTLOOK]2 WTO cases Korea should lose

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[OUTLOOK]2 WTO cases Korea should lose

Less than five years ago, the newly-formed firm Hynix was on the brink of financial collapse. But then in 2000 and 2002, a group of Korean and international banks extended loans to Hynix, enabling the firm to survive. On behalf of the U.S. firm Micron and the German firm Infineon, the government of the United States and the Commission of the European Union launched investigations to determine if these loans were tantamount to subsidies actionable under laws and regulations implementing the World Trade Organization (WTO) Code on Subsidies and Countervailing Measures.
Both the United States and the EU concluded that the loans to Hynix had been directed by the Korean government and so did qualify as actionable subsidies. These findings then were formally disputed by the Korean government at the WTO.
The WTO established two dispute settlement panels, one each for the cases against the United States and the EU. In early 2005, both panels issued their preliminary findings.
The results are somewhat startling: Although in substance both cases involve almost exactly the same issue ― whether the loans to Hynix were governmentally-directed and thus actionable as WTO-inconsistent subsidies ― the panels reached opposite conclusions. The panel for the case against the United States ruled largely in favor of Korea. But, although their decision has not yet been published, it has been rumored that the panel for the case against the European Union ruled largely in favor of the European Union.
It is safe to say that at no time in the history of the WTO, or its predecessor GATT, have two dispute settlement panels arrived at decisions that have been so inconsistent.
If the rumors are correct, both cases will now likely go to the WTO Appellate Body. In principle, the Appellate Body’s mission is to determine whether the determinations are legally correct in terms of WTO law and not to second-guess whether the determinations are substantively correct. It is possible, on purely legal grounds, that the Appellate Body could uphold both determinations and so perpetuate the inconsistency.
But most analysts who have followed these cases believe that such an outcome would undermine the credibility of the WTO and that the Appellate Body must reverse one of the two determinations. If this is done, the Appellate Body would have to rule on substance, even if in the guise of a purely legal decision. The outcome will then be that Korea will either win or lose both cases.
My own opinion is that Korea should lose, for two reasons. The first is that while the facts brought before the WTO in both cases do not support that the Korean government directly ordered the banks to grant the questionable loans to Hynix, a mountain of circumstantial evidence suggests that enormous pressure was brought to bear on the banks to do so.
Moreover, the evidence supports that it is highly unlikely that banks would have made these loans for purely commercial reasons. The Korean government has claimed otherwise, but a close look at the financial position of Hynix in 2000 and 2001 reveals that the firm was not creditworthy. I would conclude that, on substance, the EU panel had it right in finding that the loans were, for all practical purposes, government-directed.
Indeed, the loans to Hynix strike me as a return to a type of policy prevalent during the Chun Doo Hwan era in Korea, a policy that ultimately served Korean poorly ― i.e., bailouts of unsound firms during this era arguably were a factor that ultimately led to the meltdown of 1997-98.
But the second reason is that it might not be in Korea’s long-run interest to win this case. Indeed, the historic record reveals a number of cases that some particular country has won at the WTO or at the earlier GATT but that the country since regrets winning. For example, the United States, in the 1950s, won a GATT decision that value-added taxes could be “border-adjusted” (i.e., refunded to exporters) but that corporate income taxes could not. The U.S. government later came to regret this decision; it figured importantly in the recent WTO case brought by the European Union against the United States on foreign sales corporations, a case that the U.S. government lost.
In Korea’s case, if it ultimately wins the two Hynix-related cases, it could regret it in the future. Imagine, for example, that a Korean in the future were to compete against a Chinese corporation that received massive loans from Chinese banks, allowing the Chinese corporation to set prices below cost so as to deprive the Korean firm of international market share. If the WTO does rule that the Hynix loans were not government subsidies, precedent would almost surely require that a future panel rule likewise with respect to Chinese loans. Hynix might then have been saved at the cost of a much bigger failure in the future.

* The writer is a senior fellow at the Institute for International Economics in Washington, D.C. (Full disclosure: The author has been an expert witness on behalf of the U.S. government in the Korea-U.S. semiconductor WTO case, but no longer serves in this capacity.)


by Edward M. Graham
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