Japan - Alcoholic Beverage Ii 1) Who Are Parties of The Case? [PDF]

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JAPAN - ALCOHOLIC BEVERAGE II 1) Who are parties of the case? Parties

Agreement

Complainants

Respondent

Timeline of the dispute

Canada, GATT 1994 Establishment European Article III Panel Communities, Circulation United States Panel Report Japan

of 27 September 1995 of 11 July 1996

Circulation of AB 4 October 1996 Report Adoption

1 November 1996

The EC requested consultations on 21 June 1995, and Canada and the US on 7 July 1995. The complainants claimed that spirits exported to Japan were discriminated against under the Japanese liquor tax system which, in their view, levies a substantially lower tax on “shochu” than on whisky, cognac and white spirits. 1 1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds8_e.htm

1) Which measure is at the issue of the case? Japanese Liquor Tax Law that established a system of internal taxes applicable to all liquors at different tax rates depending on which category they fell within. The tax law at issue taxed “shochu” at a lower rate than the other products. 2) How did the panel and Appellate body clarify Article III:1? GATT Art. III:1 (national treatment – general principles): The Appellate Body agreed with the Panel that Art. III:1, as a provision containing general principles, informs the rest of Art. III, and further elaborated that, because of the textual differences in the two sentences, Art. III:1 informs the first and second sentences of Art. III:2 in different ways. 3) What is the structure of Article III:2? Paragraph 6.11; 6.20; 6.24; 6.28; 6.33

With regard to the application of Article III:2, jurisprudence shows that the scope of the first and the second sentence of Article III:2 differ substantially from one another. A combine reading this text as well as relevant interpretation reveal that a two-tiered test exists in order to ascertain whether the measure is in violation in Article III:2, first sentence: + whether the imported products of one contracting parties and domestic products of another are “like products”

+ whether the imported products are taxed “in excess” of the like domestic product . The criteria relating to “likeness” will involved a case-by-case determination of the product’s properties, natural and quality; the product’s end-uses in the given market; consumer’s tastes and habits and uniform tariff classification. In addition, the test with regard to the phrase “in excess of” is applied strictly to the tax or charge faced by the imported products and the domestic products, and tax/charge in question is nor required to be the scrutinized under a “trade effects” test or a de minimis standard. Even a small amount of tax on imported products which is “in excess ” of the tax on the like domestic product will attract a violation of the first sentence of Article III:2. The following points of interpretations thus arise from Article III:2, second sentence First, the phrase “ in a manner contrary to the principles set forth in paragraph 1”indicates that it specifically invokes the application of the Article III:1, as opposed to the implicit invocation of the Article III:1 in the first sentence of Article III:2 Furthermore, for a measure to be in violation of the second sentence of Article III:2, the following elements must be fulfilled: + The imported products an the domestic products are “directly competitive or substitutable products” which are in competition with each other + The directly competitive or substitutable products are “not similarly taxed”. + The dissimilar taxation of directly competitive or substitutable imported products is “applied...so as to afford protection to domestic production”, a criterion which is present in Article III:1 As can be inferred from the above requirements, the category of goods that can be evaluated under the second sentence of the Article III:2 is broaden to “directly competitive or substitutable products” from “like products” in the first sentence of Article III:2. 4) How many elements need to be proved in order to decide whether a measure violate Article III:2, first sentence? GATT Art. III:2 (national treatment – taxes and charges), first sentence (like products): The Appellate Body upheld the Panel's finding that vodka was taxed in excess of shochu, in violation of Art. III:2, first sentence, accepting the Panel's

interpretation that Art. III:2, first sentence requires an examination of the conformity of an internal tax measures by determining two elements: (i) whether the taxed imported and domestic products are like; and (ii) whether the taxes applied to the imported products are in excess of those applied to the like domestic products. 5) How many elements need to be proved in order to decide whether a measure violate Article III:2, second sentence? GATT Art. III:2 (national treatment – taxes and charge), second sentence (directly competitive or substitutable products): The Appellate Body upheld the Panel's finding that shochu and whisky, brandy, rum, gin, genever, and liqueurs were not similarly taxed so as to afford protection to domestic production, in violation of Art. III:2, second sentence. Modifying some of the Panel's reasoning, the Appellate Body clarified three separate issues that must be addressed to determine whether a certain measure is inconsistent with Art. III:2, second sentence: (i) whether imported and domestic products are directly competitive or substitutable products; (ii) whether the directly competitive or substitutable imported and domestic products are not similarly taxed; and (iii) whether the dissimilar taxation of the directly competitive or substitutable imported and domestic products is applied so as to afford protection to domestic production Paragraph 6.28 and 6.33 6) What is the difference(s) between a ‘like product’ and a ‘directly competitive and substitutable product’? The obvious corollary to this proposition is that the two products in question are like products only when they are substitutable. Physical similarity is an attribute of products, whereas substitutability or competitiveness is an attribute of consumers or producers. In other words, even though in reality a substantial portion of the two will overlap, there exist two different “conceptual” dimensions: physical characteristics, as attributes of products; and functional interchangeability, from the perspective of use by consumers and producers. It should be noted that the “like” concept is based on both of those dimensions, whereas the “competitive” or “substitutable” concepts are

linked only with the latter dimension. Thus, in order to be “like”, the two products being compared should have both physical similarity and “non-physical” competitiveness or substitutability. By contrast, in the substitutability test, the former dimension is disregarded (except for such a case as when the former is referred to as a proof of existence for the latter dimension). For example, in the case of Korean- Alcoholic Beverage, the DBS explained that the term “directly competitive or substitutable” describes a particular type of relationship between two products, one imported and the other domestic. It is evident from the wording of the term that the essence of that relationship is that the products are in competition. This much is clear both from the word “competitive” which means “characterized by competition”, and from the word “substitutable” which means “able to be substituted”. The context of the competitive relationship is necessarily the marketplace since this is the forum where consumers choose between different products. Competition in the market place is a dynamic, evolving process. Accordingly, the wording of the term “directly competitive or substitutable” implies that the competitive relationship between products is not to be analyzed exclusively by reference to current consumer preferences. In our view, the word “substitutable” indicates that the requisite relationship may exist between products that are not, at a given moment, considered by consumers to be substitutes but which are, nonetheless, capable of being substituted for one another. “Like” products are a subset of directly competitive or substitutable products: all like products are, by definition, directly competitive or substitutable products, whereas not all “directly competitive or substitutable” products are “like”. The notion of like products must be construed narrowly but the category of directly competitive or substitutable products is broader. While perfectly substitutable products fall within Article III:2, first sentence, imperfectly substitutable products can be assessed under Article III:2, second sentence.