IV. Claims of the Parties

1.1. The European Communities claims that:

1.2. The United States claims that the Korean laws outlined above differentiate among distilled spirits on the basis of arbitrary characteristics, resulting in great disparities in the treatment of soju and imported distilled spirits. According to the United States, at the very minimum:

1. General

1.1. The complainants argue that Korea's request for preliminary rulings was not properly formulated and it was unclear what provisions of the WTO Agreement, if any, Korea considers to have been violated by the complainants, and that it was also unclear what precisely is the issue being addressed by Korea to the Panel.

1.2. According to the European Communities, it is unclear whether Korea is asking the Panel to find that the European Communities has violated ceratin procedural provisions of the DSU, or whether it is asking the Panel to dismiss the complaint because certain procedural pre-requisites were not fulfilled, or whether it is asking the Panel to discharge itself.

1.3. The United States was of the view was that given the scarce information provided by Korea in Korea's oral statement (which formed the basis of its request for preliminary rulings) it considers that any preliminary ruling by the Panel would not be warranted. The United States adds that to the extent the request for a preliminary ruling warrants any attention, it may be addressed in the Final Panel report.

2. Specificity of the Panel Requests

1.4. Korea takes issue with the specificity of the requests for a panel made by both the European Communities and the Unites States.

1.5. Korea notes that the European Communities, in its request for a panel, has referred to a preferential tax rate on 'soju' vis-a-vis 'certain' alcoholic beverages falling within HS heading 2208. Korea states that the European Communities has not clarified its position even in its written submission. Korea further notes that the European Communities claim that 'all other distilled spirits and liqueurs' other than 'soju' falling within HS 2208 are within the purview of this dispute.

1.6. Korea states that the US' request for a panel lacks specificity as well. Korea notes that the United States, in its request for a panel, refers to higher tax rates on 'other distilled spirits', while specifically mentioning 'whisky, brandy, vodka, rum, gin, and ad mixtures'. Korea further notes that the United States, in its first submission, seeks to broaden the dispute to all distilled spirits, other than soju, that are classified under HS 2208.

1.7. Korea argues that such vaguely worded complaints violate its rights of defence. According to Korea, HS 2208 is a very broad tariff classification, which covers a wide variety of alcoholic beverages, including non-western liquors such as koryangu, Korean soju, Insam ju, Ogapiju, and Japanese shochu. Korea notes that it is surprising that both complainants refer to 'western-style liquors', yet HS 2208 also includes non-'western-style liquors'.

1.8. Korea argues that this lack of specificity of the complainants' claims is improper for two reasons -

1.9. Korea, therefore, requests the panel to issue a preliminary ruling, limiting the products at issue in this dispute. Korea submits that the only imported liquors whose tax rates are to be compared with the tax rate on the domestic soju products are: whisky, brandy, vodka, gin, and rum. According to Korea, these are the liquors identified specifically by the United States in its request for a panel In Korea's view, parties to a dispute cannot unilaterally alter the terms of reference by expanding, in their first submission, on issues not previously raised.

1.10. Korea also submits that it is unable to identify which items the United States is referring to by its reference to 'ad mixtures' in its request for a panel.

1.11. Korea also claims that the complainants have not clearly distinguished the domestic liquors that are supposed to be more favourably taxed in Korea. Korea states, in particular, that the complainants have not distinguished between Korea's distilled soju, an artisanal product sold at very high prices in tiny quantities, and subject to a 50% tax rate, on the one hand, and, on the other hand, diluted or standard soju, which is a large volume, inexpensive drink, consumed with meals and taxed at a rate of 35%.

1.12. Korea argues that both complainants, in their requests for a panel, have referred to one 'soju' product, without acknowledging that there are, in reality, two different products, with two different tax rates. Korea also states that the complainants have not recognized that one group of western-style spirits ('liqueurs'), which they have mentioned in passing, is taxed at the same rate as distilled soju (50%).

1.13. The European Communities argues that its panel request is more than sufficiently specific to meet the minimum requirements of Article 6.2 of the DSU. According to the European Communities, the mere fact that HS 22.08 covers many different types of liquors is no basis to consider that it lacks specificity.

1.14. The European Communities also rejects Korea's assertion that it has, through its first submission, broadened the scope of its complaint as contained in the request for a panel. According to the European Communities, its request for a panel refers to '.. certain alcoholic beverages falling within HS 22.08'. In the EC's view, that HS position does not cover only 'spirits' but also 'undentured ethyl alcohol of an alcoholic strength by volume of less than 80% 'liqueurs' and 'other spirituos beverages' not falling within any other position of chapter 22 of the HS.

1.15. The European Communities notes that its first submission refers to 'soju and all other distilled spirits and liqueurs falling within HS 22.08. In the EC's view, therefore, its first submission if anything narrows rather than broadens the scope of its complaint.

1.16. The United States argues that Article 6.2 of the DSU requires, inter alia, that the request for a panel "identify the specific measures at issue and provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly." According to the United States, its panel request satisfied both these requirements, and it also clearly includes all distilled spirits within HS heading 2208, as maintained in the first US submission.

1.17. The United States argues that in accordance with Article 6.2 of the DSU, its request for the establishment of a panel defined the Korean measures at issue: the general liquor tax law and the Education Tax; and provided a brief summary of the legal basis of the complaint. The United States refers to Bananas III, where the Appellate Body allegedly noted that this provision concerning the legal basis requires that the request for a panel must be sufficiently specific with respect to the claims being advanced, but need not lay out all the arguments³⁴ that will subsequently be made in the party's submission. The United States argues that with respect to its request in this dispute, the legal claim is clear: that Korea's taxes are higher on imported distilled spirits than on its domestic product "soju," in violation of Article III:2 of the GATT.

1.18. The United States argues that Korea's request that the Panel limit the proceeding to five specific products -- whisky, brandy, vodka, rum, and gin, is equally without basis. According to the United States, the panel request, which defines the terms of reference of the panel, refers to taxation of "other distilled spirits" -- i.e., distilled spirits other than soju. By using the term "such as," it sets forth the five products and "ad mixtures"³⁵ as examples, and not as an exclusive list. According to the United States, the extent to which the United States and European Communities establish to the Panel that all such products are "like" or "directly competitive or substitutable" is a matter to be determined through the course of these proceedings, beginning with the first submission. The United States notes that, under Article 7 of the DSU, the Panel may not decline to address products that are clearly within its terms of reference, but must base its findings on the entirety of the proceeding.³⁶

1.19. As regards the challenge of defining which soju is referred to, the European Communities states that it regards all the varieties of soju as one product, with the necessary result that 'liqueurs' are more heavily taxed than some soju. According to the European Communities, the question of whether soju is or is not a single product is a substantive issue which cannot be decided by the panel in a preliminary ruling.

1.20. The United States also argues that with respect to the use of the word "soju," its panel request made it clear that the tax preference for all soju was covered, giving Korea ample objective notice that the entire category was to be challenged. According to the United States, given the major emphasis in Korea's first submission concerning the differences between diluted and distilled soju, it is evident that Korea in fact did have ample notice -- sufficient to structure its entire first submission on the basis of alleged differences in the two kinds of soju.

3. Adequacy of Consultations

1.21. Korea also submits that explicit obligations of the DSU - namely 3.3, 3.7 and 4.5 - have been violated. Korea in effect alleges that the complainants did not engage in consultations in good faith with a view to reaching a mutual solution as envisaged by the DSU.

1.22. Korea alleges that there was no meaningful exchange of facts because the complainants treated the consultations as a one-sided question and answer session, and therefore, frustrated any reasonable chance for a settlement.

1.23. Korea considers this non-observance of specific provisions of the DSU as a "violation of the tenets of the WTO dispute settlement system" and requests the Panel for a ruling (no indication is made as to what relief Korea is seeking on this point).

1.24. Both complainants assert that Korea's claim would appear to be that they have infringed Articles 3.3, 3.7 and 4.5 of the DSU because they did not attempt to reach a mutually acceptable solution to the dispute in the course of the consultations that preceded the establishment of this Panel. They note that at the first meeting with the Panel, Korea asserted that the United States and the European Communities have "ignored":

1.25. The complainants refer to the panel decision in Bananas III in which it was stated

As to the EC argument that consultations must lead to an adequate explanation of the complainants' case, we cannot agree. Consultations are the first step in the dispute settlement process. While one function of the consultations may be to clarify what the case is about, there is nothing in the DSU that provides that a complainant cannot request a panel unless its case is adequately explained in the consultations. The fulfilment of such a requirement would be difficult, if not impossible for the complainant to demonstrate if a respondent chose to claim a lack of understanding of the case, a result which would undermine the automatic nature of the panel establishment under the DSU. The only per-requisite for requesting a panel is that consultations have 'failed to settle a dispute within 60 days of receipt of the request for consultations... Ultimately, the function of providing notice to a respondent of a complainant's claims and arguments is served by the request for the establishment of a panel and by the complainants' submissions to that panel.³⁷

The complainants point out that Korea cannot dispute the fact that consultations were in fact held on three separate occasions between itself and both the United States and the European Communities.

1.26. The complainants state that, in any event it is not true that they refused to engage in a 'meaningful exchange of facts' during the GATT Article XXII consultations. They allege that it was Korea's attitude during the consultations which prevented such exchange from taking place.

1.27. The United States further argues that Korea's complaints about the alleged inadequacy of the complainants' attempts to settle the dispute or engage in good faith consultations have no bearing on the authority of the Panel or the progress of this proceeding.

1.28. The United States asserts that Korea's assertion that the United States and the European Communities failed to engage in good faith consultations is belied by the record. According to the United States, the three parties to this dispute (Korea, the United States and the European Communities) held consultations on three separate occasions over a six-week period, in which numerous factual and legal issues were discussed, including the fact that the Korean Liquor Law applies to all types of distilled spirits covered by HS 2208. The United States asserts that it presented detailed factual questions to Korea and requested that the answers be provided in writing. According to the United States, Korea refused to reply in writing but did agree to provide oral answers. The United States also states that Korea acknowledged that it was in possession of a market study commissioned by Korean producers of distilled spirits, but declined to provide a copy.

1.29. The United States asserts that with the European Communities, it requested Korean data for 1990-1996 on all distilled spirits under HS heading 2208, by both volume and value, Korea initially stated at the 24 June consultation that it would try to provide this information. According to the United States, however, during the consultations held on 8 August 1997, the Korean delegation refused to provide copies of this information, stating that it was only for the use of its private lawyers for defensive purposes in the event a panel proceeding was initiated.

1.30. The United States, therefore, believes that these events make all the more baffling Korea's request for a procedural ruling, given that the United States failed to obtain sufficient factual information from Korea.

4. Confidentiality

1.31. Korea alleges that both complainants breach the confidentiality requirement of Article 4.6 of the DSU by making reference, in their submissions, to information supplied by Korea during consultations.

1.32. The European Communities argues that Korea's interpretation of Article 4.6 of the DSU is wrong. According to the European Communities, the confidentiality requirement of Article 4.6 of the DSU concerns parties not involved in the dispute and the public in general. The European Communities stresses that the requirement cannot in any way be read as referring to the panel itself. In the EC view, Article 4.6 cannot be interpreted as a limitation on the rights of parties at the panel stage.

1.33. It is also the EC view that, if the interpretation by Korea of Article 4.6 were correct, it is Korea which has violated Article 4.6 of the DSU by making extensive reference to the consultations in support of its claim under Article 3.3, 3.7, and 4.5 of the DSU.

1.34. The European Communities concludes that it is not the purpose of Article 4.6 of the DSU to limit the possibilities available to a panel to be apprised of information on the dispute before it. In the EC's view, there can be no 'artificial wall' between the consultation and the panel proceeding through which the transfer of information is blocked.

1.35. The United States considers that Korea's claim concerning a breach of confidentiality in the U.S. and EC submission is unclear concerning the relief it requests. to the extent it alleges a violation of the DSU, such a claim is not within the panel's terms of reference. Moreover, according to the Untied States, the citation in a footnote in the first U.S. submission cited by Korea attempted to highlight a factual issue concerning which there was confusion in the Korean law, a point that was rectified by the first submission and is of no consequence as a factual or legal matter.

To continue with Panel and Appellate Body Reports

³⁴ Appellate Body Report on European Communities - Regime for the Importation, Sale and Distribution of Bananas (Bananas III), adopted on 25 September 1997, WT/DS27/AB/R, para. 141.

³⁵ According to the United States, ad-mixtures are generally low grade distilled spirits composed of a percentage of high grade spirits combined with neutral spirits and water. They are taxed as "other liquors" under Article 3.11 of the Korean Liquor Law, and are thus well within the terms of reference. For instance, in Korea, there are many brands of ad mixes, such as Black Joker malt whisky. The alcohol in Black Joker contains 19.9% whisky, with the other 80.1% coming from neutral spirits. The product then looks and tastes like whisky, but is considerably cheaper. This is due to the fact that neutral spirits do not undergo any post distillation processing, unlike whisky which must be aged in wooden barrels for two years, or more.

³⁶ Appellate Body Report on Japan - Taxes on Alcoholic Beverages adopted on 1 November 1996, WT/DS8/AB/R, WT/DS1O/AB/R, WT/DS11/AB/R at 27; Appellate Body Report, Bananas III, paras. 145-147.

³⁷ Panel Report on Bananas III, WT/DS27/R, paras. 7.18-7.19.