B. "So As To Afford Protection"

146. We now address whether the Panel erred in its application of the term "so as to afford protection", which is incorporated into Article III:2, second sentence, by specific reference to paragraph 1 of Article III.

147. With regard to this third element of Article III:2, second sentence, the Panel stated:

148. According to Korea, the Panel committed several errors in applying the third element of Article III:2, second sentence. It ignored Korea's explanations for the structure of the tax. It made "much" of the virtual absence of imported soju. It did not observe the Appellate Body's guidance in Japan - Alcoholic Beverages, that, even though the tax differential may prove that a tax is applied "so as to afford protection", "in other cases, there may be other factors that will be just as relevant or more relevant to demonstrating that the dissimilar taxation at issue was applied 'so as to afford protection'." ¹³³

149. In our Report in Japan - Alcoholic Beverages, we said that examination of whether a tax regime affords protection to domestic production "is an issue of how the measure in question is applied", and that such an examination "requires a comprehensive and objective analysis" ¹³⁴:

150. The Panel followed this approach. In finding that the Korean measures afford protection to domestic production, the Panel relied, first, on the fact that "the Korean tax law ... has very large differences in levels of taxation." ¹³⁶ Although it considered that the magnitude of the tax differences was sufficiently large to support a finding that the contested measures afforded protection to domestic production, the Panel also considered the structure and design of the measures.¹³⁷ In addition, the Panel found that, in practice, "[t]here is virtually no imported soju so the beneficiaries of this structure are almost exclusively domestic producers".¹³⁸ In other words, the tax operates in such a way that the lower tax brackets cover almost exclusively domestic production, whereas the higher tax brackets embrace almost exclusively imported products. In such circumstances, the reasons given by Korea as to why the tax is structured in a particular way do not call into question the conclusion that the measures are applied "so as to afford protection to domestic production". Likewise, the reason why there is very little imported soju in Korea does not change the pattern of application of the contested measures.

151. Korea claims that the Panel erred in failing to find that the "intrinsic" pre-tax price difference between diluted soju and the imported alcoholic beverages was so large that "the additional difference created by the variation in tax can have no [protective] effect".¹³⁹ According to Korea, the Panel "should have inquired whether the tax is capable of affecting reasonable expectations about the competitive relationship between the products." ¹⁴⁰ Korea also argued that "the demand for a product like distilled soju is specific and static and that it would be difficult to affect it a great deal in either direction by altering the price." ¹⁴¹

152. In making these arguments, Korea seems to be revisiting the question whether the products can be treated as directly competitive or substitutable. As regards diluted soju, Korea seems to be saying, in effect, that the large pre-tax price difference is such that consumers do not treat the products as substitutable, and that consumers' decisions whether to buy the imported products will not, therefore, be affected by the higher tax burden imposed on these imports. Similarly, as regards distilled soju, Korea is arguing that there is no cross-elasticity of demand between distilled soju and the imported beverages. However, Korea overlooks the fact that the two products have already been found to be directly competitive or substitutable.¹⁴² Its arguments are, therefore, misplaced at this stage of the analysis and do not cast doubt on the Panel's finding that the contested measures afford protection to domestic production.

153. Korea also seems to be insisting that a finding that a measure affords protection must be supported by proof that the tax difference has some identifiable trade effect. But, as we have said above, Article III is not concerned with trade volumes.¹⁴³ It is, therefore, not incumbent on a complaining party to prove that tax measures are capable of producing any particular trade effect.

154. We believe, and so hold, that the Panel did not err in its application of the term "so as to afford protection", which is incorporated into Article III:2, second sentence, by specific reference to paragraph 1 of Article III.

C. Allocation of the Burden of Proof

155. Korea argues that the Panel misapplied the burden of proof and that it applied a "double standard" when assessing the evidence. We note that although the Panel did not actually articulate the rules on allocation of the burden of proof, it made specific reference to passages of our Report in United States - Shirts and Blouses where we enunciated these rules.¹⁴⁴

156. It is clear from paragraphs 10.57, 10.58 and 10.82 of the Panel Report that the Panel properly understood and applied the rules on allocation of the burden of proof. ¹⁴⁵ First, the Panel insisted that it could make findings under Article III:2, second sentence, only with respect to products for which a prima facie case had been made out on the basis of evidence presented.¹⁴⁶ Second, it declined to establish a presumption concerning all alcoholic beverages within HS 2208.¹⁴⁷ Such a presumption would be inconsistent with the rules on the burden of proof because it would prematurely shift the burden of proof to the defending party. The Panel, therefore, did not consider alleged violations of Article III:2, second sentence, concerning products for which evidence was not presented.¹⁴⁸ Thus, the Panel examined tequila because evidence was presented for it, but did not examine mescal and certain other alcoholic beverages included in HS 2208 for which no evidence was presented. Third, contrary to Korea's assertions, the Panel did consider the evidence presented by Korea in rebuttal¹⁴⁹, but concluded that there was "sufficient unrebutted evidence" for it to make findings of inconsistency.¹⁵⁰ (emphasis added)

157. It is, therefore, clear that the Panel did not err in its application of the rules on allocation of the burden of proof.

158. We note, finally, that many of Korea's arguments concerning the burden of proof are, in reality, arguments about whether the Panel made an objective assessment of the matter before it. This is considered in the next section.

D. Article 11 of the DSU

159. Korea claims that the Panel failed to make an objective assessment of the matter before it and failed to apply the appropriate standard of review under Article 11 of the DSU. Korea contends that the Panel did not have sufficient evidence before it to enable it to conduct an objective assessment of the matter, and that, as regards the evidence that was, in fact, before it, the Panel made a series of "manifest and/or egregious errors of assessment". ¹⁵¹

160. In European Communities - Hormones, we stated:

161. The Panel's examination and weighing of the evidence submitted fall, in principle, within the scope of the Panel's discretion as the trier of facts and, accordingly, outside the scope of appellate review. This is true, for instance, with respect to the Panel's treatment of the Dodwell Study, the Sofres Report and the Nielsen Study. We cannot second-guess the Panel in appreciating either the evidentiary value of such studies or the consequences, if any, of alleged defects in those studies. Similarly, it is not for us to review the relative weight ascribed to evidence on such matters as marketing studies, methods of production, taste, colour, places of consumption, consumption with "meals" or with "snacks", and prices.

162. A panel's discretion as trier of facts is not, of course, unlimited. That discretion is always subject to, and is circumscribed by, among other things, the panel's duty to render an objective assessment of the matter before it. In European Communities - Hormones, we dealt with allegations that the panel had "disregarded", "distorted" and "misrepresented" the evidence before it. We held that these allegations amounted to charges that the panel had violated its duty under Article 11 of the DSU, allegations which, at the end of the day, we found to be unsubstantiated:

163. We have scrutinized with great care Korea's allegations that the Panel acted in breach of its duty under Article 11 of the DSU, especially Korea's contentions that the Panel applied a "double standard" in assessing the evidence before it: one standard, relaxed and permissive, for the complainants, and another, very strict and demanding, for the defending party, Korea. In our view, notwithstanding Korea's express disclaimer that it is not challenging the good faith of the Panel, an allegation of a "double standard" of proof in relation to the facts is equivalent to an allegation of failure to render an "objective assessment of the matter" under Article 11 of the DSU. In European Communities - Poultry, we observed:

164. We are bound to conclude that Korea has not succeeded in showing that the Panel has committed any egregious errors that can be characterized as a failure to make an objective assessment of the matter before it. Korea's arguments, when read together with the Panel Report and the record of the Panel proceedings, do not disclose that the Panel has distorted, misrepresented or disregarded evidence, or has applied a "double standard" of proof in this case. It is not an error, let alone an egregious error, for the Panel to fail to accord the weight to the evidence that one of the parties believes should be accorded to it.

165. In light of the above, we do not believe that the Panel has failed to make an objective assessment of the matter before it within the meaning of Article 11 of the DSU.

E. Article 12.7 of the DSU

166. Korea claims that the Panel has failed to fulfil its obligation under Article 12.7 of the DSU to set out the basic rationale behind its findings and recommendations. Korea maintains that "much" of the Panel Report contains contradictions and that it is vague.¹⁵⁵

167. Article 12.7 of the DSU reads, in relevant part:

168. In this case, we do not consider it either necessary, or desirable, to attempt to define the scope of the obligation provided for in Article 12.7 of the DSU. It suffices to state that the Panel has set out a detailed and thorough rationale for its findings and recommendations in this case. The Panel went to some length to take account of competing considerations and to explain why, nonetheless, it made the findings and recommendations it did. The rationale set out by the Panel may not be one that Korea agrees with, but it is certainly more than adequate, on any view, to satisfy the requirements of Article 12.7 of the DSU. We, therefore, conclude that the Panel did not fail to set out the basic rationale for its findings and recommendations as required by Article 12.7 of the DSU.

V. Findings and Conclusions

169. For the reasons set out in this Report, the Appellate Body:

170. The Appellate Body recommends that the Dispute Settlement Body request Korea to bring the Liquor Tax Law and the Education Tax Law into conformity with its obligations under the General Agreement on Tariffs and Trade 1994.

Signed in the original at Geneva this 16th day of December 1998 by:

¹³²Panel Report, paras. 10.101 and 10.102.

¹³³Supra, footnote 20, p. 30.

¹³⁴Supra, footnote 20, p. 28.

¹³⁵Supra, footnote 20, p. 29.

¹³⁶Panel Report, para. 10.101. In para. 10.100, the Panel set out the tax differentials: "the total tax on diluted soju is 38.5 percent; on distilled soju and liqueurs it is 55 percent; on vodka, gin, rum, tequila and admixtures it is 104 percent; on whisky, brandy and cognac it is 130 percent".

¹³⁷Panel Report, para. 10.101.

¹³⁸Panel Report, para. 10.102. We note that we considered a similar finding by the panel in Japan - Alcoholic Beverages, supra, footnote 16, p. 31, to be relevant for the establishment of the third element of Article III:2, second sentence.

¹³⁹Korea's appellant's submission, para. 75.

¹⁴⁰Korea's appellant's submission, para. 76.

¹⁴¹Korea's appellant's submission, para. 79.

¹⁴²The significant price differential between the products was taken into account in determining whether the products are, in fact, directly competitive or substitutable (Panel Report, para. 10.94).

¹⁴³Supra, para. 119.

¹⁴⁴Panel Report, footnote 374.

¹⁴⁵In paragraphs 10.57 and 10.58 of its Report, the Panel considered whether it was entitled to make findings with respect to products, including tequila, mescal and certain other alcoholic beverages, for which "virtually no evidence" had been provided. In para. 10.82, the Panel assessed whether the complainants had satisfied the burden of proof with respect to end-uses.

¹⁴⁶Panel Report, para. 10.57. See also Panel Report, para. 10.82, where the Panel considered that, with respect to end-uses, "the complainants submitted adequate evidence ... to establish this portion of their case".

¹⁴⁷Panel Report, para. 10.57. HS 2208 is the category in Section IV, Chapter 22 of the Harmonised System of Customs Classification that applies to "Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80% vol; spirits, liqueurs and other spiritous beverages".

¹⁴⁸Panel Report, paras. 10.57 and 10.58.

¹⁴⁹See, for example, Panel Report, paras. 10.71, 10.82 and 10.85.

¹⁵⁰Panel Report, para. 10.98.

¹⁵¹Korea's appellant's submission, para. 84.

¹⁵²Supra, footnote 47, para. 132.

¹⁵³Supra, footnote 47, para. 133.

¹⁵⁴Supra, footnote 47, para. 133. This passage was cited in our Report in Australia - Measures Affecting Importation of Salmon, adopted 6 November 1998, WT/DS18/AB/R, para. 265.

¹⁵⁵Korea's appellant's submission, para. 172.