(c) Channels of Distribution

62. The Panel relied on the "anecdotal" evidence provided by the United States embassy staff to show that Korea was drawing distinctions which were too fine. The Panel's reasoning, in the European Communities' view, was that the only relevant distinction was between off-premise consumption (i.e. consumption at home or at friends' places) and on-premise consumption (i.e. consumption at public places such as restaurants and bars).⁵² Korea does not challenge the Panel's finding that both soju and western-style spirits are currently sold in a similar manner for off-premise consumption. Nor has Korea disputed that off-premise consumption represents a substantial share of total consumption. Further, if western-style spirits were taxed similarly to soju, more people would drink them in inexpensive public places than at present.

63. The European Communities notes that Korea does not challenge the Panel's view that consumer responsiveness to changes in relative prices is, in principle, more relevant than a comparison of absolute prices when assessing whether products are directly competitive or substitutable. Korea argues that premium soju "only represents 5 per cent of the market". To put things in perspective, the European Communities recalls that the total sales volume of premium diluted soju exceeds the combined sales volume of all imported spirits.

64. Korea also claims that the Panel "wilfully neglected" ⁵³ Korea's evidence when it observed that premium diluted soju was a "fast growing category" ⁵⁴ of product. The Panel, however, responded to Korea's arguments during the interim review, stating that, although sales had slowed, that was true for all higher priced products and was a consequence of the financial crisis. In any event, Korea did not submit evidence to show that sales of premium diluted soju had decreased.

65. Korea's arguments concerning the Dodwell Study seek, purely and simply, a de novo examination by the Appellate Body of facts already determined by the Panel. Korea's critique of the Dodwell Study's methodology was refuted point-by-point by the European Communities in its submissions to the Panel, and the European Communities does not consider it necessary to repeat those arguments on appeal.

66. The European Communities underlines that the authors of the Sofres Report, who also prepared the Dodwell Study, assumed that all spirits were part of the same market. Although overlooked by Korea, this Report also states that imported beverages are increasingly preferred by Koreans. The passages Korea relies on have been quoted out of context.

67. The Panel's finding that tequila and soju are "directly competitive or substitutable" products was based on the similarity of their physical characteristics and end-uses.⁵⁵ In addition, the Panel relied upon the Dodwell study.

68. In respect of Korea's assertion that the Panel failed to accord due deference to Korea's description of the Korean market, the European Communities states that the "deferential" standard of review advocated by Korea finds no support in either the DSU or the GATT 1994. As stated by the Appellate Body⁵⁶, the appropriate standard of review for the application of the GATT 1994 and of all other covered agreements (with the sole exception of the Agreement on the Implementation of Article VI of GATT 1994) is contained in Article 11 of the DSU. A different standard of review would alter a "finely drawn balance".⁵⁷

69. This ground of appeal does not raise any issue that has not been addressed already.

70. The United States observes that many of Korea's complaints in this case relate to questions of fact. Each allegation must be examined to determine whether it concerns a legal question that may be the subject of appellate review.

71. According to the United States, the Panel followed the Appellate Body's guidance in Japan - Alcoholic Beverages that the breadth of the category of "directly competitive or substitutable" products "is a matter for the panel to determine based on all the relevant facts", and that product comparisons "involve an unavoidable element of individual, discretionary judgment." ⁵⁸

72. The United States considers that the concepts of "potential" and "actual" competition are redundancies. Competition may be shown by many means, including through a demonstration that current substitution is occurring or through the inherent degree of substitutability evidenced by the products' similar physical characteristics and basic end-uses.

73. Contrary to Korea's claims, the United States observes that the Panel did not rely exclusively, or even mostly, on evidence of potential competition. The Panel's reference to "significant potential competition" ⁵⁹ does not detract from the fact that it concluded that there was evidence of "present direct competition".⁶⁰

74. In any event, the Panel was correct to consider evidence of potential competition in concluding that the imported products and the domestic products were "directly competitive or substitutable". Korea's argument to the contrary finds no support in the ordinary meaning of the relevant GATT 1994 provisions, taken in their context and read in light of their object and purpose, nor is it consistent with past panel and Appellate Body reports.

75. According to the United States, the purpose of the provisions at issue is to prohibit protective taxation. The word "substitutable" clearly shows that Article III:2, second sentence, applies in the case of "potential substitution" (i.e. where products are able to be substituted). The French and Spanish texts of the provision support this reading. Likewise, the ordinary economic sense of the word "competition" is not limited to actual instances of observed substitution. The phrase "competition was involved"⁶¹ must be read as referring to situations where competition -- both current and potential -- is present.

76. Article III:2 protects "expectations" and Members' "potentialities" as exporters. The Panel was, therefore, correct to reject Korea's argument for a quantification of current substitution. A complete absence of imports is not a defence in the case of a violation of Article III and a particular degree of current market penetration of imports should not, therefore, be required.

77. The Panel was also correct, the United States believes, to consider that evidence from other markets could be "relevant, albeit of less relative evidentiary weight" than evidence from the market actually at issue.⁶² Indeed, evidence from another market may be highly probative, whereas evidence from the market at issue may be unreliable because of protection. Although the Panel could have considered more than one other market, it may have felt it most relevant and useful to consider the Japanese market, given its history of restrictions and the structure of its tax laws which appear similar to those of the Korean market. The United States also notes that the Panel's decision to consider other markets is consistent with broader GATT practice.⁶³

78. The United States views Korea's arguments concerning Article 19.2 of the DSU, the principle of in dubio mitius and the so-called principle of "predictability" as aids to the interpretation of Article III rather than as independent claims. In any event, the United States argues that it is Korea's interpretation which would violate Article 19.2 of the DSU and the principle of predictability. Furthermore, the principle in dubio mitius only applies in case of ambiguity, and there is none here.

79. The United States contends that the Panel properly examined extensive evidence concerning the categorization of products, including physical characteristics, end-uses, channels of distribution and points of sale, and prices. The Panel's determinations with regard to the "grouping" of products was an analytical methodology that was not used to "prejudge the substantive discussion". Moreover, the Panel also analyzed the competitive relationship between individual categories of imported and domestic products. Thus, the use of the "analytical tool" had no practical repercussions on the outcome of the case.

80. Korea's objections to the Panel's decision to "combine" diluted and distilled soju for the purposes of the comparison with imported spirits amount to a disagreement with the Panel's finding that the two types of soju are similar. Pursuant to Article 17.6 of the DSU, such issues cannot, however, form the subject of an appeal.

81. The Panel analyzed the protectionist character of the measures in a manner consistent with the guidance given by the Appellate Body in Japan - Alcoholic Beverages. The three factors relied upon by the Panel were: the size of the tax differentials, the structure of the Liquor Tax Law and its application. The United States observes that Korea's explanation of the structure of the tax provides no objective reason to tax the domestic and imported products at issue so differently, given the very minor physical differences between them. The fact that detailed product definitions, corresponding to the western beverages, were introduced over time shows a specific intent to apply different fiscal treatment to soju and imports as the imports entered the Korean market. The fact that there was no imported soju shows only that the design of the law can be safely equated with protection of domestic production.

82. To the United States, Korea's argument that the large price differences between diluted soju and the imported products prevented the tax measures from affording protection is specious. First, the magnitude of the tax differentials itself can be sufficient to conclude that there is a protective effect. Second, the Panel had already made a factual finding that, despite the large price differentials, the products were directly competitive or substitutable. Third, since the tax differentials exceeded de minimis levels, there is no factual or legal basis to argue that the measures are incapable of affording protection.

83. According to the United States, Korea's request to have the Appellate Body review the "misapplication of the facts" and Korea's arguments under various articles of the DSU and international law principles amount, in essence, to an attempt to relitigate the facts. To the extent that Korea has raised any legal claims, for instance, specific violations of Article 11 and 12.7 of the DSU, these are without basis and would, if accepted, undermine Article 17.6 of the DSU.

84. Korea alleges that the Panel refused to recognize that the complainants did not satisfy the burden of proof requirements. According to the United States, these arguments amount to an objection to the Panel's weighing of the evidence.

85. In short, to establish that the Panel has failed to discharge its duties under Article 11 of the DSU, Korea must show that the Panel committed an error so egregious that it calls into question the "good faith" of the Panel. This is a high standard and appropriately so. As Korea concedes, its allegations concerning the facts do not call into question the Panel's good faith. Therefore, none of Korea's allegations meet the requisite standard for a violation of Article 11 of the DSU.

86. Nevertheless, Korea asks the Appellate Body to look beyond instances of bad faith. In particular, Korea asks the Appellate Body to lower the present standard by introducing new criteria for the term "objective assessment". The Appellate Body should reject these proposals as they would require it to undertake a de novo factual review, thereby contradicting Article 17.6 of the DSU.

87. Korea's criticisms of the Dodwell Study and the Sofres Report basically find fault with the credibility and weight given to a piece of evidence, which the Appellate Body has confirmed is "part and parcel of the fact finding process".⁶⁴ Although the Panel does not explicitly mention the Sofres Report in its findings, the Panel is clearly aware of that Report. It is mentioned in the Panel Report and is quoted extensively in Korea's oral arguments.⁶⁵

88. Korea's allegations concerning the application of a "double standard" of proof relate largely to the Panel's appreciation of the evidence before it. Korea's argument that the Panel did not have enough evidence to enable it to conduct an objective assessment is, essentially, an objection to the sufficiency of the evidence before the Panel. This is, again, a criticism of the weight and credibility of the facts.

89. While the United States agrees that a country's description of its own market and culture should be respected, there is no basis in the DSU for Korea's claim that, in the event of a disagreement about the Korean market, the Panel should accept Korea's descriptions unless the complainants submit compelling evidence to the contrary. Moreover, this is a standard never before contemplated in any panel or Appellate Body report.

90. The term "basic rationale" is not defined in the DSU. Under Article 31(1) of the Vienna Convention on the Law of Treaties⁶⁶, the text of a provision is to be given its "ordinary meaning". Dictionary definitions emphasize the minimal nature of the explanation required by Article 12.7 of the DSU.⁶⁷

91. Given the ordinary meaning of these terms, the United States sees no basis for Korea's allegation that the Panel failed to provide a sufficient explanation of its findings. A panel need not give a detailed and exhaustive statement of its reasons for every factual determination it makes. It need only provide the fundamental reasoning behind each factual and legal finding or recommendation, thereby making it possible for the Appellate Body to exercise its review and ensuring that Members understand the manner in which the panel applied the provision in question. The Panel has more than satisfied this threshold, examining each legal element in great detail and listing the factual elements it considered important.

To continue with Arguments of the Third Participant - Mexico

⁵²Panel Report, para. 10.86.

⁵³Korea's appellant's submission, para. 155.

⁵⁴Panel Report, para. 10.94.

⁵⁵Panel Report, para. 10.58.

⁵⁶European Communities - Hormones, supra, footnote 47, para. 114.

⁵⁷European Communities - Hormones, supra, footnote 47, para. 115.

⁵⁸Appellate Body Report, Japan - Alcoholic Beverages, supra, footnote 20, pp. 25 and 21.

⁵⁹Panel Report, para. 10.97.

⁶⁰Panel Report, para 10.98. The United States also refers to Panel Report, paras. 10.71 - 10.73, 10.79, 10.82, 10.83, 10.86 and 10.95, all of which refer to aspects of current competition between the products.

⁶¹Ad Article III:2, second sentence.

⁶²Panel Report, para. 10.78.

⁶³The United States refers, in particular, to Panel on Poultry, GATT Doc. L/2088, unadopted report issued 21 November 1963, para. 10, and Japan - Restrictions on Imports of Certain Agricultural Products, BISD 35S/163, adopted 22 March 1988, para. 5.1.3.7.

⁶⁴European Communities - Hormones, supra, footnote 47, para. 132.

⁶⁵See, for example, Panel Report, paras. 6.121 and 6.125.

⁶⁶Done at Vienna, 23 May 1969, 1155 U.N.T.S. 331; (1969), 8 International Legal Materials, 679.

⁶⁷Webster's Dictionary defines the word "basic" as "of, relating to, or forming the base or essence; fundamental; constituting or serving as the basis or starting-point", and "rationale" as "an explanation of controlling principles of opinion, belief, practice, or phenomena; an underlying reason; basis". The Concise Oxford Dictionary defines "basic" as "forming or serving as a base; fundamental; simplest or lowest in level," and "rationale" as "the fundamental reason or logical basis of anything; a reasoned exposition; a statement of reason".