Analysis of the "So as to Afford Protection" Requirement

1.306. According to Korea, the marketing strategies of rum and standard soju reflect the different geographical origins of the drinks. Rum is marketed as an exotic drink, which is ideally used as a cocktail during night-time occasions. The marketing of distilled soju, on the other hand, reflects the traditional Korean life-style (illustrated by its presentation in special Korean ceramic bottles, often as a set with ceramic cups).

1.307. Korea states that, as with diluted soju, Korea has presented an explanation, product-by-product, of why distilled soju is not 'like' vodka or directly competitive and substitutable for any of the imported liquors involved in this case.

1.308. Korea states that even if the Panel disagrees with Korea's point of view, the complainants have still failed to make out a violation of Article III. In Korea's view, in order to prove a violation, the complainants must show that the tax differential at issue is 'so as to afford protection to domestic production.'

1.309. Korea states that distilled soju is a traditional, artisanal product. It is not a mass-marketed, international product such as the imported beverages concerned. In other words, the demand for a product like distilled soju is specific and static -- it would be difficult to affect it a great deal in either direction by altering the price, especially not to the degree at issue in this case. Indeed, despite the lower tax applied to distilled soju, its sales are still minuscule.

1.310. Korea wants the Panel to imagine, quod non, that it found that whisky and distilled soju were directly competitive and substitutable products, and that the other conditions of Article III were met. Korea would then be forced to harmonise the tax rates on these two products. Korea submits that it could not lower the tax rate on whisky for distilled soju, as the impact on its revenues would be too great. Instead, it would have to raise the tax rate on distilled soju, crippling a tiny artisanal product which is part of its heritage, with no benefit to the imported beverages.¹⁴⁹

1.311. According to Korea, the result of this analysis is that even if the Panel disagrees with Korea's arguments that distilled soju is not directly competitive and substitutable to any of the imported beverages concerned, the requirement of Article III:1 has still not been met: the complainants have not proved that the different tax applies 'so as to afford protection' to distilled soju.

VI. Rebuttal Arguments

A. European Communities

1. Shochu and Soju

1.1. The European Communities notes that according to Korea, the only difference between shochu and soju is that shochu contains two additives only (sugar and citric acid) whereas soju contains four to five more additives. However, according to the European Communities, it is still unclear whether there is a legal requirement to use any of those additional four to five additives or whether it is simply a characteristic of certain brands.

1.2. The European Communities argues that all the extra additives except one (mineral salt) supposedly found in soju but not in shochu are sweeteners. Thus, the EC view is that the alleged difference between soju and shochu appears to be nothing other than the fact that soju is somewhat "sweeter" than shochu. The European Communities adds that Korea does not specify how much "sweeter" soju must be. According to the European Communities, there appears to be no legal requirement in Korea regarding the minimum sugar content of soju. The analytical tests conducted by the Scotch Whisky Research Institute have allegedly revealed no trace of this supposed difference in "sweetness" alleged by Korea.¹⁵⁰

1.3. The European Communities further argues that at any rate, the difference alleged by Korea is a very minor one. The European Communities asserts that Coca Cola, for example, also is slightly sweeter in some countries than in others, so as to match different local tastes. Significantly, Korea does not even allude to this supposed characteristic of soju when it attempts to distinguish it from vodka and other distilled spirits.

1.4. The EC view is also that Korea also implies that, unlike soju, the majority of shochu A is frequently aged and brown coloured. According to the European Communities, over 99% of shochu is white¹⁵¹ and non aged.¹⁵²

1.5. The European Communities also notes Korea's contention that, unlike soju expressly manufactured for the Japanese market, "true" soju consumed by the Korean minority in Japan is not treated as shochu by the Japanese authorities for customs and tax purposes. According to the European Communities, this claim seems to be at odds with the statements made by Japan before the 1996 Panel on Japan - Taxes on Alcoholic Beverages II.¹⁵³ The EC view is that even if Korea' claims were correct, they would only go to show that Japan applied its Liquor Tax Law so as to afford protection to its domestic production of shochu not only vis-à-vis imports of western spirits but also vis-à-vis imports of soju.

2. The Japanese Market and the Korean Market

1.6. The European Communities argues that according to Korea, the main difference between the Korean market and the Japanese market would be that in Japan the prices of shochu and of imported liquors are "within a relatively short range", whereas in Korea soju is much less expensive than imported liquors.

1.7. According to the European Communities, Korea does not provide any evidence to support its allegations regarding the Japanese market, but instead makes a misleading reference to an argument made by the European Communities in the Japan - Taxes on Alcoholic Beverages II case.

1.8. The European Communities argues that the prices of shochu on the Japanese market vary considerably. At one extreme, there is inexpensive standard shochu sold in bulky plastic bottles of 1.8 to 4 litres or even in paper packages. At the other extreme, there are premium brands sold in 0.7 litre bottles which are generally three to four times more expensive than standard shochu.¹⁵⁴ According to the European Communities, standard shochu still accounts for the majority of sales, like in Korea, even though sales of premium shochu are growing rapidly. The price range for western-style spirits is allegedly even wider than that of shochu, especially in the case of whisky and brandy.

1.9. The European Communities explains that when it argued that in Japan the pre-tax prices for shochu and western spirits were within a relatively close range, it based itself on a comparison of the prices for premium shochu brands, on the one hand, and standard brands of western spirits, on the other hand¹⁵⁵. According to the European Communities, even on that basis, the pre-tax prices for standard imported whisky were sometimes as much as twice the price for shochu. It was never disputed by the EC that the prices of premium whisky or premium brandy in the Japanese market could be many times higher than the prices of standard shochu.

1.10. The European Communities notes that like Korea in this dispute, Japan submitted to the Panel a comparison of pre-tax weighted average prices. According to that comparison, the pre-tax price for brandy and whisky were 13 times and 5 times higher, respectively, than the pre-tax price for shochu A.¹⁵⁶

1.11. The European Communities also notes Korea's claim that another important difference is that in Japan shochu A and shochu B are sold in comparable volumes and at similar prices. The EC view is that this is correct but irrelevant. The European Communities fails to see how this difference can be conducive to stronger competition between shochu and western spirits, as compared to soju.

1.12. Finally, the European Communities notes that Korea invokes differences in drinking styles. According to Korea, soju is always drunk "straight", whereas shochu is drunk in other styles in addition to "straight", such as diluted with warm water and mixed in cocktails. According to the European Communities, this is inaccurate as far as soju is concerned. The EC view is that soju is not always drunk straight, and in particular, it is also drunk as cocktail, as attested by the growing sales of pre-mixes. As to the fact that shochu is drunk with warm water (i.e. in a style which is not characteristic of any western spirit) the European Communities fails to see how this may have had the paradoxical result of making shochu more competitive with western spirits than soju.

3. All Types of Soju are One and the Same Product

(a) Distilled and Diluted Soju

1.13. The European Communities notes that Korea attempts to create an artificial distinction between the two basic types of soju: distilled soju and diluted soju¹⁵⁷, with an obvious strategy: many of the alleged differences which, according to Korea, make soju "unlike" or "not directly competitive or substitutable" with western-style liquors (including in particular the differences in pricing) cannot be substantiated when those liquors are compared to distilled soju.

1.14. According to the European Communities, Korea seems to be ready to "sacrifice" distilled soju in order to spare diluted soju. In the EC view, that sacrifice would be more apparent than real, in view of Korea's statement that under certain conditions the producers of distilled soju may be designated as possessors of an "intangible cultural asset". The European Communities retorts that Korea carefully omits to say that this may entail an exemption from the Liquor Tax and the Education Tax.¹⁵⁸

1.15. According to the European Communities, the reality, however, is that distilled soju and diluted soju are but two varieties of the same product, as it should be obvious already from the fact that the two bear the same name. The European Communities notes that many other spirits are also produced in different types or varieties. In the case of whisky, for instance, it is possible to distinguish between malt Scotch, grain Scotch, blended Scotch, Canadian, Irish, Bourbon, Rye, etc. According to the European Communities, in relative terms distilled soju is no more different from diluted soju than, for example, malt Scotch from grain Scotch.

1.16. The European Communities argues that the distinction between distilled soju and diluted soju was not introduced in the Liquor Tax Law until 1991.¹⁵⁹ In the EC view, it was a distinction created exclusively for tax purposes as no similar distinction is found in Korea's tariff schedule, where all soju is classified within a single heading with the description "soju".¹⁶⁰

1.17. The European Communities notes that until the 1960s, most soju sold in Korea was produced according to the method described in the legal definition of "distilled soju". The origins of what the Liquor Tax Law calls "diluted soju" go back to 1962, when, in order to cope with a severe shortage of grains, the Korean Government adopted a series of measures to encourage the use of ethyl alcohol. By the mid seventies, the European Communities further argues, distilled soju had given way to diluted soju. According to the European Communities, such swift transition was possible only because, in the eyes of Korean consumers, the two varieties of soju are the same product.

1.18. The European Communities asserts that the differences between distilled soju and diluted soju are aptly described by a decision of Korea's Fair Trade Commission.¹⁶¹ According to the first "Established Fact" of that Decision,

1.19. The European Communities notes that other spirits such as whisky and brandy can also be obtained either by single-step distillation (also referred to as "pot still" or "discontinuous") or by continuous distillation. It further notes for instance, that malt Scotch whisky is produced by pot-still distillation, while grain Scotch whisky is obtained by continuous distillation.

1.20. The European Communities argues that the close similarity of the two types of soju is attested by the fact that distilled soju and diluted soju can be and are often blended with each other. When distilled soju represents more than 20% of the total alcohol content, the admixture is taxed as distilled soju and not as diluted soju. Again, a parallelism can be drawn to whisky. The most common type of Scotch whisky is blended whisky, which is produced by mixing malt Scotch and grain Scotch.

1.21. The European Communities further argues that the other differences between diluted soju and distilled soju alleged by Korea are either exaggerated or irrelevant because:

1.22. The European Communities reiterates that, a new segment of so-called "premium soju" brands is emerging rapidly within the category of diluted soju. Premium soju is characterised by a milder taste, the use of flavourings and/or ageing and more sophisticated packaging.¹⁶³ All this makes premium diluted soju even more similar to western-style spirits than standard diluted soju.

1.23. The European Communities argues that Korea cannot deny that premium diluted soju is the same product as standard diluted soju, since this is not a distinction which is reflected in Korea's regulations. Instead, Korea allegedly attempts to minimise the importance of premium soju by presenting it as an exception of minor importance and then ignores it in the remainder of its submission. 1.24. The European Communities notes, however, that this "exception" accounts for a volume of sales which exceeds the mbined sales volume of all imported spirits. The EC claimed that premium diluted soju may have accounted for as much as 10 percent of soju sales in 1997.¹⁶⁴

To continue with Soju Vodka are Like Products

¹⁴⁹ According to Korea, in this regard, it could even be said that the special position of distilled soju for Korea merits an exception under Article XX(f) of the GATT.

¹⁵⁰ See EC Annex 8. The EC states that although Korea attempts to discredit that research by describing it as a "partisan report", it offers no evidence to dispute the findings of that report.

¹⁵¹ The optical density of shochu, measured by the light of 430 nana-meter wavelength is, at the maximum, 0.08. The usual optical density of Scotch whisky is between 0.45 and 0.70.

¹⁵² See Panel Report on, Japan - Taxes on Alcoholic Beverages II, supra., para. 4.54.

¹⁵³ Ibid., para. 6.35.

¹⁵⁴ See EC Annex 1.

¹⁵⁵ See EC Annex 2.

¹⁵⁶ See EC Annex 3.

¹⁵⁷ The EC argues that "diluted soju" is a term used in the Liquor Tax Law and other official Korean sources and not one created by the complainants, as Korea seems to imply. See, for example, the decision of the Fair Trade Commission in Attachment 1 to Korea's First Submission and the 1997 Korean Taxation Guide published by the Ministry of Finance in Annex 4 to this submission.

¹⁵⁸ See the 1997 Korean Taxation Guide published by Korea's Ministry of Finance in EC Annex 4.

¹⁵⁹ The distinction was introduced in response to pressure from the EC to eliminate the tax differentials between soju and the other distilled spirits. The creation of the category of distilled soju was but a fig leave, which allowed Korea to claim that "expensive" soju was no less taxed than "some" imported liquors (namely the category of "liqueurs").

¹⁶⁰ See EC Annex 5.

¹⁶¹ See Attachment 1 to First Submission of Korea.

¹⁶² For instance, according to the Sofres Report, the Premium Soju brand Kim Sat Gat uses rice or barley. See the Sofres Report, p. 23.

¹⁶³ See the Sofres Report, at pp. 23-24

¹⁶⁴ According to footnote No 30 of Korea's First Submission, in 1996 the total taxed volume of premium soju was 35,108 kl. In comparison, the total volume of imports of whisky, cognac, rum, gin and vodka during the first eleven months of 1996 was 22,286 kl (see EC's First Submission, Annex 7).

Also according to footnote No 30 of Korea's First Submission, in 1997 total taxed volume of premium soju was 43.878 kl. During the same year, the total taxed volume of "whisky" was 24.530 kl (see Attachment 5 to Korea's First Submission, ).

There is no legal definition of "premium soju". The discrepancy between the market share of premium soju estimated by the EC in its First Submission (at para. 54) and the share mentioned by Korea may be explained by the fact that Korea uses a narrower definition of premium soju.