Economics & Trade Relations

Washington File

14 February 2001

Transcript: Senators Criticize S. Korea's Bailout of Hyundai

(Resolution says bailout hurts U.S.-Korea relations) (2740)

A group of Republican senators, including Senate Majority Leader Trent
Lott (Republican of Mississippi), put forth a resolution February 13
that criticizes the South Korean government's financial support for
Hyundai Electronics and calls for the U.S. government to take steps to
stop what it calls a "bailout" of that Korean corporation.

Senator Larry Craig (Republican of Indiana) introduced Senate
Concurrent Resolution 10 (S. Con. Res. 10) with a harsh attack on the
bailout and accused Seoul of acting "in bad faith."

Seoul's actions in bailing out a major exporter to the United States
has significantly harmed relations between the two allies, the
resolution says.

S. Con. Res. 10 calls on the Secretary of the Treasury, the Secretary
of Commerce, and the United States Trade Representative to "take
immediately such action as is necessary to assure that the unlawful
bailout by the Republic of Korea is stopped, and its effects fully
offset or reversed."

The resolution also would have the U.S. Trade Representative and
Commerce Secretary "monitor and report to Congress on steps that have
been taken to end this bailout and reverse its effects."

"I am extremely disappointed in Korea's actions in regards to this
matter," Craig told fellow senators.

"It is clear that Korea is purposefully circumventing the will and
intent as well as the spirit and letter of the IMF agreement the World
Trade Organization Agreement on Subsidies and Countervailing Measures,
U.S. legislation to stop subsidies to the semiconductor industry in
Korea, and U.S. countervailing duty laws," the Indiana Republican
said.

S. Con. Res. 10 decries a long-term practice of the Korean government
to provide financing for Korean business conglomerates, called
chaebols. The practice, the resolution says, has "resulted in
trade-distorting spending and capacity expansion and resulted in
massive corporate debt."

The resolution's authors also pointed to the $58,000,000,000 financial
package Seoul received during the Asian financial crisis to prevent
"the Korean economy from declaring bankruptcy," and to Seoul's
promises "to put an end to corporate cronyism and to overhaul the
banking and financial sectors."

The resolution cites the Agreement on Subsidies and Countervailing
Measures -- to which the Korean government is a signatory -- which
"prohibits export subsidies, and makes actionable other subsidies
bestowed upon a specific enterprise that causes adverse effects."

Hyundai Electronics is a major exporter of semiconductor products to
the United States, the lawmakers noted, and the Seoul government has
"engaged in a massive $2,100,000,000 bailout" of Hyundai Electronics.

That financial aid, the resolution says, "contravenes the commitments
the Government of the Republic of Korea made to the International
Monetary Fund, the World Trade Organization and other agreements, and
the understandings and certifications made to Congress under the
Omnibus Consolidated and Emergency Supplemental Appropriations Act,
1999" that resulted in the financial aid package to a
then-economically troubled Korea.

Along with Senate Majority Leader Lott and Senator Craig, Indiana
lawmaker Mike Crapo and Senator Robert Bennett of Utah also signed on
as sponsors of S. Con. Res. 10.
 
The resolution was referred to the Senate Finance Committee.

Following is the text of Senate Concurrent Resolution 10 and a
transcript of Senator Larry Craig's introductory speech from the
February 13 Congressional Record:

(begin transcript)

SENATE CONCURRENT RESOLUTION 10
EXPRESSING THE SENSE OF THE SENATE
REGARDING THE REPUBLIC OF KOREA'S
UNLAWFUL BAILOUT OF HYUNDAI ELECTRONICS

Senate
February 13, 2001

Mr. CRAIG (for himself, Mr. LOTT, Mr. CRAPO, and Mr. BENNETT)
submitted the following concurrent resolution; which was referred to
the Committee on Finance.

S. Con. Res. 10

Whereas the Government of the Republic of Korea over many years has
supplied aid to the Korean semiconductor industry enabling that
industry to be the Republic of Korea's leading exporter;

Whereas this assistance has occurred through a coordinated series of
government programs and policies, consisting of preferential access to
credit, low-interest loans, government grants, preferential tax
programs, government inducement of private sector loans, tariff
reductions, and other measures;

Whereas government assistance to the semiconductor industry is part of
the preferences, privileges, and support given by the Korean
government to corporate conglomerates, known as chaebols, over several
decades;

Whereas the policy of providing assistance to chaebols has resulted in
trade-distorting spending and capacity expansion and resulted in
massive corporate debt;

Whereas in December 1997, the United States, the International
Monetary Fund (IMF), other foreign government entities, and a group of
international financial institutions assembled an unprecedented
$58,000,000,000 financial package to prevent the Korean economy from
declaring bankruptcy;

Whereas as part of that rescue package, the Republic of Korea agreed
to put an end to corporate cronyism, and to overhaul the banking and
financial sectors;

Whereas Korea also pledged to permit and require banks to run on
market principles, to allow and enable bankruptcies and workouts to
occur rather than bailouts, and to end subsidies;

Whereas the Republic of Korea agreed to all of these provisions in the
Stand-by Arrangement with the IMF dated December 3, 1997;

Whereas section 602 of the Foreign Operations, Export Financing, and
Related Agencies Appropriations Act, 1999, as enacted by section
101(d) of Division A of the Omnibus Consolidated and Emergency
Supplemental Appropriations Act (Public Law 105-277; 112 Stat.
2681-220) specified that the United States would not authorize further
IMF payments to Korea unless the Secretary of the Treasury certified
that the provisions of the IMF Standby Arrangement were adhered to;

Whereas the Secretary of the Treasury certified to Congress on
December 11, 1998, April 5, 1999, and July 2, 1999 that the Stand-by
Arrangement was being adhered to, and assured Congress that
consultations had been held with the Government of the Republic of
Korea in connection with the certifications;

Whereas the Republic of Korea has acceded to the World Trade
Organization, and to the Agreement on Subsidies and Countervailing
Measures (as defined in section 101(d)(12) of the Uruguay Round
Agreements Act);

Whereas the Agreement on Subsidies and Countervailing Measures
specifically prohibits export subsidies, and makes actionable other
subsidies bestowed upon a specific enterprise that causes adverse
effects;

Whereas Hyundai Electronics is a major exporter of semiconductor
products from the Republic of Korea to the United States; and

Whereas the Republic of Korea has now engaged in a massive
$2,100,000,000 bailout of Hyundai Electronics which contravenes the
commitments the Government of the Republic of Korea made to the IMF,
the World Trade Organization and other agreements, and the
understandings and certifications made to Congress under the Omnibus
Consolidated and Emergency Supplemental Appropriations Act, 1999: Now,
therefore, be it

Resolved by the Senate (the House of Representatives concurring), That
Congress--

(1) believes strongly that the relationship between the United States
and Republic of Korea has been and will continue to be harmed
significantly by the bailout of a major exporter of products from
Korea to the United States;

(2) calls on the Republic of Korea to immediately end the bailout of
Hyundai Electronics;

(3) calls on the Republic of Korea to comply immediately with its
commitments to the IMF, with its trade agreements, and with the
assurances it made to the Secretary of the Treasury;

(4) calls on the Secretary of the Treasury, the Secretary of Commerce,
and the United States Trade Representative to take immediately such
action as is necessary to assure that the unlawful bailout by the
Republic of Korea is stopped, and its effects fully offset or
reversed; and

(5) calls on the United States Trade Representative and the Secretary
of Commerce to monitor and report to Congress on steps that have been
taken to end this bailout and reverse its effects.

Mr. CRAIG. Mr. President, I rise to introduce a concurrent resolution
expressing the sense of the Senate regarding the Republic of Korea's
unlawful bailout of Hyundai Electronics, an issue of great concern to
me and, I believe, should be of concern to the Senate. I rise to
introduce this resolution with my colleagues Mr. Lott, Mr. Crapo, and
Mr. Bennett.

In 1997, the International Monetary Fund, in cooperation with the
United States and a group of financial institutions, put together an
unprecedented $58 billion financial package to prevent the Korean
economy from bankruptcy. As a part of that rescue package, the Korean
government agreed to implement specific reforms aimed at addressing
the problems that had led to the economic crisis in the first place.

In recent weeks, the Korean government has decided to break completely
with the policies that it has adopted over the past three years and is
promising to provide a $2.1 billion bailout of Hyundai Electronics.
This action not only runs contrary to the stated policy of the Korean
government but also flies in the face of the government's clear
assurances that this sort of wholesale bailout would not happen.

This resolution is necessary because the present actions of the Korean
government are a flagrant violation of Korean's international
commitments. The Hyundai bailout violates Korea's International
Monetary Fund Agreement; the World Trade Organization Agreement on
Subsidies and Countervailing Measures; U.S. legislation to stop
subsidies to the semiconductor industry in Korea; Section 301 of the
U.S. trade laws, and U.S. countervailing duty laws. This unlawful and
unwise bailout must be stopped.

The conditions of the IMF Agreement are clear. The corporate
governance provision of the IMF Agreement required Korea to end
government-directed lending companies; to stop government subsidized
support or tax privileges to bail out individual companies; to reduce
the high debt-to-equity ratios of corporations; to reduce mutual
guarantees within conglomerates; and to permit Korean bankruptcy laws
to operate without interference from the government.

The government's special waiver of the debt ceiling for Hyundai
Electronic is a violation of Korea's commitment not to interfere in
the lending practices of private banks and not to provide subsidies.
The audacious Korean government announcement on January 3, 2001
dropped every pretense of legitimacy by notifying the intend to
provide for the outright bailout of Hyundai. In a press statement, the
government announced that the Korean Development Bank, a Korean
government agency, would purchase $2.1 billion of Hyundai Electronic
corporate bonds over the next twelve months. The move was clearly
aimed at keeping Hyundai from defaulting on its massive debt. This
action is outrageous and demands the immediate attention of the Korean
government as well as Congress and the Administration.

The bailout violates Korea commitments under the World Trade
Organization Agreement on Subsidies and Countervailing Measures.
Korea's assistance to Hyundai Electronics, including the purchase of
Hyundai's corporate bonds, the waiver of the bank lending limitations,
and the increase in the limits on export loans, are all violative of
Korea's SCM commitments, and are subject to WTO dispute settlement
challenge. The assistance to Hyundai is a prohibited Export Subsidy,
and meets the Adverse Effects or ``injury'' test.

This bailout violates the conditions of the Omnibus Consolidated and
Emergency Supplemental Appropriations Act, Public Law 105-277. Section
602 required that the U.S. Secretary of the Treasury certify that
Korea was in compliance with its IMF Stand-By Arrangement provisions,
including those I mentioned earlier, and that no IMF funds were being
used to provide assistance to the semiconductor industry, among
others. In enacting this provision, the Congress acknowledged the risk
that, in the midst of the financial crisis, the Korean government
would continue to attempt to keep non-viable companies afloat through
directed lending and subsidies. The purpose of the provision was to
create an enforcement mechanism for the IMF reform provisions, by
providing for the withholding of U.S. support for further financial
assistance to Korea, if the government violated the provisions of
Section 602.

The Treasury Secretary made several certifications pursuant to Section
602, making them prior to each remaining disbursement of IMF loans to
Korea. In these certifications, Secretary Rubin certified to Congress
that Korea was implementing the reforms that it had agreed to in its
IMF loan agreement and also that IMF funds were not being used to
provide subsidies to the semiconductor industry. In recent weeks, the
Korean government has violated both the letter and the spirit of
Section 602, directly frustrating Congressional intent. The Korea
government has said that it will not make any further draws on the
stand-by credits from the IMF, so the U.S. government does not have
the leverage of threatening to stop future loan disbursements under
the current IMF program. In sum, they have taken American tax dollars
and run, without fulfilling the commitments they made. It's an
outrage.

The assistance to Hyundai Electronics is a subsidy under the U.S.
countervailing duty law. The benefits received by Hyundai under the
Korea government's bailout program constitute a countervailable
subsidy under the U.S. countervailing duty law. Section 771(5)
provides that a subsidy is one that ``provides a financial
contribution ..... to a person and a benefit is thereby conferred.''
This financial contribution can include ``the direct transfer of
funds, such as grants, loans, and equity infusions, or the potential
direct transfer of funds or liabilities, such as loan guarantees.''
The statute also specifies that the determination of whether a subsidy
exists shall be made ``without regard to whether the subsidy is
provided directly or indirectly on the manufacture, production, or
export or merchandise.'' Thus, a subsidy can exist even if the
government does not directly provide the subsidy, but directs a bank
to provide the subsidy.

The statute also specifies that a benefit ``shall normally be treated
as conferred where there is a benefit to the recipient.'' In the case
of a loan, there is a benefit to a recipient ``if there is a
difference between the amount the recipient of the loan pays on the
loan and the amount the recipient would pay on a comparable commercial
loan that the recipient could actually obtain on the market,'' 19
U.S.C. 1677(5)(E)(ii). Thus, the Commerce Department, when determining
whether a program is a countervailable subsidy, looks to the benefit
to the recipient rather than the cost to the provider of the subsidy.

In the case of Hyundai Electronics, the company would not be able to
obtain any loans ``in the market'' absent government intervention.
Private concerns are reluctantly willing to roll over Hyundai's debt
only because the government is involved.

In short, because of the preferential financing Hyundai receives under
these government actions, and because of the very substantial size of
the loans in question, Commerce's investigation of these programs in
the course of a countervailing duty proceeding would be almost certain
to find substantial subsidy margins.

In conclusion, Mr. President, I am extremely disappointed in Korea's
actions in regards to this matter. It is clear that Korea is
purposefully circumventing the will and intent as well as the spirit
and letter of the IMF agreement the World Trade Organization Agreement
on Subsidies and Countervailing Measures, U.S. legislation to stop
subsidies to the semiconductor industry in Korea, and U.S.
countervailing duty laws.

Korea must not be permitted to backtrack on the reforms it made that
were requirements for IMF and U.S. assistance, just because it is no
longer drawing on those loans. The very purpose of the reform measure
was to put Korea on stable financial footing. Now Korea is unraveling
its reform measures, in order to prevent a failing company from going
bankrupt. Such actions cannot be overlooked, but should be dealt
within the strongest possible manner.

I am very disappointed that the Korean government has acted in bad
faith with respect to its commitments. The U.S. Administration and the
U.S. Congress must work together to find an effective and just
response to Korea's action. This bailout undermines Korea's
credibility in international financial circles and threatens the
bilateral economic relationship between the United States and Korea.
It must be stopped.

Mr. President, I would not come to the floor and speak in these terms,
nor would I have gained the sponsorship by key leaders here in the
Senate that I have, if we did not think this was important. American
taxpayers willing to help stabilize the world economy and willing to
help stabilize its friends in the world by contributing $58 billion
for those purposes, in working with the International Monetary Fund
and the World Trade Organization, should not now be ignored, nor
should what we have said be ignored in this process.

With that, I introduce this Senate concurrent resolution speaking to
that very issue.

(end transcript)

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