1.71. The United States also notes that the evolution of the marketplace in Korea and Japan also bears great similarity. Only a decade ago, Japanese "izakayas" (the Japanese equivalent of traditional Korean restaurants) used to serve only shochu, sake and beer, whereas western style "snack bars" would serve western distilled spirits, but not shochu. Today, shochu and western distilled spirits are usually available at both the "izakayas" and "snack bars." Korea is beginning to resemble the Japanese market of today, with increasing availability of western spirits in traditional, casual Korean restaurants and bars. According to the United States, Korea's greater constraint of choice of distilled spirits availability in various bar and restaurant venues bears a closer resemblance to Japan before its last round of market liberalization in 1989.

1.72. The United states notes that the marketplace does reveal some differences between Korea and Japan. The market for Western spirits in Korea is predominantly served by one type of imported spirit (whisky), while Japan has matured into a market for many types of imported spirits, with the most recent spirit to become popular being tequila. According to the United States, Korean consumption patterns are much more fixed in traditional, family-type restaurants than in Japan, where a wider range of distilled spirits is consumed. However, most of these differences between shochu/soju consumption in Korea and Japan are a function of market maturity and evolution of drinking tastes and styles.

1.73. The United States further states that Korea has conceded that it classifies both soju and shochu in the same HS classification at the eight-digit level -- item 2208.90.40. The fact that Korean manufacturers may export two kinds of soju to Japan (namely, Jinro Gold and Jinro Export) does not make these products any less similar. It is common for companies to modestly differentiate their products in order to meet the needs of different sets of consumers -- one version for expatriates and another, seasoned differently, to meet local tastes and customs. Korean manufacturers do the same when they market two versions of soju in Japan. In fact the differences in the two kinds of soju exports probably reflect Japanese laws and cost considerations more than anything else. Most of the additives in Korean soju are sweeteners with varying thickening qualities (fructose, oligosaccharide and stevioside) -- functions served by sugar in the version for Japanese consumers. Most importantly though, these are clearly additives, as opposed to ingredients. Liquor laws around the world, including Korea's, recognize the distinction by placing a limit on the percentage of sugar that may be added to a distilled spirit (on the order of 2 percent), after which it becomes yet another competitive product, a liqueur. At the same time, there is no requirement in Korean law to use any sweetener at all in soju, thus making it possible for soju to contain no additives at all. Korea also classifies soju and shochu identically for both tax and tariff purposes.

1.74. Furthermore, according to the United States, Korea's reliance on differences in the additives between shochu and soju as establishing that they are fundamentally different is contradicted by its description of premium soju. Even though premium soju differs from standard soju by its additives, such as honey, Korea states that premium soju is "only an upgraded version of standard soju." Why are differences in additives critical in the context of vodka and shochu, but irrelevant with respect to premium and standard soju? Clearly, Korea's conclusion concerning premium soju is the legally correct one: such additives should not be decisive in examining these products under Article III.

C. The Burden of Proof

1. Korea

1.75. Korea proceeds from the premise that to prove a violation of the first sentence of Article III:2, the Appellate Body in the Japanese Liquor Taxes case clearly stated that there are two limbs that must be proved by the complainant. First the complainants must prove that the products concerned are in fact 'like'. Secondly, the complainants must prove that the imported product was taxed in excess of the domestic 'like' product.

1.76. According to Korea, regarding Article III:2 second sentence, the complainants must prove three things: first, that the imported and domestic products are directly competitive and substitutable products, second, that foreign products are subject to tax differentials that are more than 'de minimis', and third that tax was applied 'so as to afford protection' to domestic production.

1.77. Korea further argues that under both the first sentence and second sentence, the obligation rests on the complainant to prove all the requirements of the respective sentences. In Korea's view, this burden cannot be discharged by making inadmissible analogies to another case and another set of facts. Korea emphasizes that the burden must be discharged with regard to the facts of the case at hand.

1.78. According to Korea, the Panel can make no ruling about the tax rates of all products falling under HS 2208 in the abstract. Therefore, the complainants must prove, on a product-by-product basis, that the products at issue are directly competitive or substitutable, or even 'like', products.

1.79. Korea points out that the complainants have only submitted evidence regarding a limited number of imported alcoholic drinks falling under HS 2208: whisky, brandy, vodka, gin, and rum. They have also mentioned by name a few other, though by no means all, alcoholic beverages (liqueurs, tequila, ad mixtures, koryangju, Japanese shochu) covered by HS 2208, without providing an intelligible argument or evidence in their regard.⁶⁰ In Korea's view, the complainants have not met their burden of proving that these are 'like', or directly competitive or substitutable products with the Korean sojus.

1.80. Korea submits that the complainants' principal and theoretical argument that all distilled spirits necessarily compete everywhere in the world, because of some similarities in physical characteristics and end use, runs counter to the controlling precedent. This precedent, Japan - Taxes on Alcoholic Beverages II, clearly requires a concrete market analysis. Furthermore, to the extent the complainants have analysed the Korean market, this analysis is demonstrably poor. Accordingly, the complainants have not met their burden of proof; and they cannot meet their burden by quibbling with Korea's positions.

1.81. Korea submits that it is not up to Korea to prove that the western-style liquors are not DCSP or 'like' any of the Korean sojus. It is up to the complainants to show that they are. Korea does not need to prove that there is no cross-elasticity of demand. In Korea's view, the complainants brought this case; they ought to carry their burden of proving that such cross-elasticities exist. All Korea has to do is rebut the proof brought by the complainants.⁶¹

1.82. Korea further argues that there is not much evidence in the complainants' documents. According to Korea, the complainants make many assertions without any attempt at evidence. Korea further argues that, absent an intelligible argument and supporting evidence, Korea has had no way to defend itself so that this part of the complaint also infringes a fundamental principle of due process.⁶²

1.83. Korea therefore submits that the Panel should reject any such broad-ranging complaints out of hand.

2. Complainants

1.84. The European communities notes that Korea alleges that it has only submitted evidence regarding a limited number of imported alcoholic beverages (namely whisky, brandy, vodka, gin and rum) and claims that the Panel should reject the EC complaint as far as other distilled spirits falling within HS 2280 are concerned.

1.85. According to the European Communities, Korea's claim is factually wrong. In the EC view, Korea appears to have derived its list of products from Annex 9 of the EC submission, yet that Annex is by no means the only piece of evidence submitted by the EC in this case. Other pieces of evidence submitted by the European Communities allegedly do cover specifically other types of distilled spirits.

1.86. In particular, the European Communities takes issue with the proposition that, in order to meet its burden of proof in this case, it is required to provide specific evidence with respect to each and every single type of distilled liquor falling within HS 2208.

1.87. The European Communities refers to Korea's assertion that, "if one travels around the world, one will encounter a seemingly infinite variety of alcoholic beverages." In the EC view, even a much shorter trip within the borders of the EC would suffice to convince the Panel of the large variety of distilled spirits produced in the EC.

1.88. According to the European Communities, had the EC submitted specific evidence with regard to each and every known type of distilled spirit manufactured in the European Communities, the Panel would have been unnecessarily overburdened. Further, the EC view is also that in some cases it would have been materially impossible to gather such evidence. The European Communities refers to one of the criticisms levelled by Korea against the Dodwell study, that the respondents may have been confused by an allegedly too complex set of questions. What, asks the European Communities, if the respondents had been asked to look at the prices of forty or fifty different types of western distilled spirits instead of just seven?

1.89. The European Communities reiterates that all distilled spirits are produced according to the same method and, as a result, share the same basic physical characteristics. The European Communities states that the distilled spirits for which it has submitted specific evidence are those traded in largest volumes, both between the European Communities and Korea, and globally. They are allegedly representative of the full spectrum of distilled spirits. According to the European Communities, there is virtually no distilled spirit whose production process and physical characteristics do not resemble closely those of at least one of the spirits for which the EC has provided specific evidence.

1.90. The European Communities concludes, therefore, that if the Panel found, as it should, that those spirits for which specific evidence has been submitted are "directly competitive and substitutable" with soju, it should infer that all other distilled spirits falling within HS 2208 also are "directly competitive and substitutable" with soju.

1.91. According to the European Communities, this approach has been endorsed by the Appellate Body in Japan - Taxes on Alcoholic Beverages II. In that case, the complainants claimed that shochu was "directly competitive or substitutable" with all other distilled spirits falling within HS 2208. Nevertheless, like the complainants in this case, they submitted specific evidence only with respect to a limited number of representative spirits. The Panel concluded that only certain spirits falling within HS 2208 were "directly competitive or substitutable" with shochu.⁶³ According to the European Communities, on appeal, this finding was reversed by the Appellate Body which ruled that the Panel's failure to incorporate in its conclusions all the liquors falling within its terms of reference (i.e. all distilled spirits falling within 2208) was an error of law.⁶⁴

1.92. The United States noted Korea's claim that product-specific evidence must be submitted for every conceivable type of distilled spirit classified under Heading 2208. The United States clarified that the Dodwell study covered the full spectrum of distilled spirits in this dispute and those currently being exported by the United States. While there may be other products of importance, such as pre-mixed cocktails and admixtures, these are only variations of the products employed in the Dodwell study. There is no distilled spirit produced in the United States that is not akin to those employed in the Dodwell study.

1.93. More importantly, argues the United States, given the fundamental similarities between all distilled spirits, it is not necessary to provide specific evidence, even less a market study, for every conceivable product that might fall within HS heading 2208. The products are all fairly highly concentrated forms of distilled alcohol consumed for socialization and relaxation, and all markets recognize them as being in competition. The Korean measures themselves group these products together in the same law, mostly as exceptions to soju. In the Korean tax law, to the extent the Western spirits are not designated in specific categories such as whiskey and brandy, most are lumped in the general category of "general distilled spirits,"⁶⁵ with the same tax rate. Given Korea's own recognition of the similarities of the products, and the other evidence presented in this dispute that the products in the Dodwell study are directly competitive or substitutable with soju, it is reasonable to conclude that all imported distilled spirits are equally so. The Appellate Body in the Japan case took precisely this approach. In the Japan case, the panel had not included all products within HS heading 2208 in its findings under Article III:2, second sentence, having specified only whisky, brandy, rum, gin and liqueurs.⁶⁶ The Appellate Body found the limited finding was in error and modified it to include all distilled spirits in HS 2208.⁶⁷

D. Article III Arguments

1. Complainants

1.94. In this sub-section, the arguments of the European Communities and the United states are combined as the arguments of the "complainants".

(A) GATT Article III:2, First Sentence

i) General

1.95. The complainants draw the attention of the Panel to GATT Article III:2, first sentence, which provides that:

1.96. The complainants state that as confirmed by the Appellate Body in Japan - Taxes on Alcoholic Beverages II,⁶⁸ in order to establish whether an internal tax is applied in violation of Article III:2, first sentence, it is necessary to make two determinations:

1.97. According to the complainants, before making those two determinations, it must be ascertained whether the taxes in question constitute an "internal tax".

1.98. The complainants refer to the decision by the Appellate Body in Japan - Taxes on Alcoholic Beverages II, wherein the Appellate Body stated that the general principle contained in Article III:1 informs also the first sentence of Article III:2. Nevertheless, in order to establish a violation of Article III:2, first sentence, it is not necessary to show that the measure at issue is applied "so as to afford protection to domestic production" separately from the above requirements.⁶⁹

To continue with The Liquor Tax and the Education Tax are "Internal Taxes"

⁶⁰ Korea argues that these products are granted only the most perfunctory mentions by the EC and the US. They do not even figure on the comparative charts that the US and EC have provided (see, for example, EC Annex 9, which only shows standard soju, distilled soju, whisky, brandy, gin, and rum, and the US first submission, table at page 20, which only shows whisky, brandy, gin, rum, vodka, soju and shochu).

⁶¹ According to the European Communities, this case is not like US - Measure Affecting Imports of Woven Wool Shirts and Blouses from India, adopted on 23 May 1997, WT/DS33/AB/R. & WT/DS33/R . There the defendant bore the burden of proof in invoking an exception to the GATT.

⁶² See India-Patent Protection for Pharmaceutical and Agricultural Chemical Products, adopted on 16 January 1998, WT/DS50/AB/R, at p. 33 (Korea states that due process is a principle implicit in the WTO Dispute Settlement Understanding).

⁶³ Panel Report, para. 7.1.

⁶⁴ Appellate Body Report, p. 26.

⁶⁵ Korean Liquor Tax Law, Article 3.9.

⁶⁶ Panel Report in Japan - Taxes on Alcoholic Beverages II, supra., at para. 7.1

⁶⁷ Appellate Body Report in Japan -Taxes on Alcoholic Beverages II, supra., at pp. 26, 32.

⁶⁸ Ibid. at pp.18-19. See also Appellate Body Report on Canada - Certain Measures Concerning Periodicals, supra.

⁶⁹ Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., pp. 18-19. See also Appellate Body Report on European Communities - Bananas III, supra., para 216.