4. Soju Vodka are Like Products

The Standard for the Interpretation of "Like Products"

1.25. The European Communities argues that Korea seems to consider that it is sufficient to point to the existence of any difference, however minor, between two liquors, such as for instance a vaguely defined difference in taste, in order to exclude a finding of "likeness" for the purposes of GATT Article III:2, first sentence.

1.26. According to the European Communities, as clarified by the Appellate Body in Japan - Taxes on Alcoholic Beverages II, in Article III:2, first sentence, the notion of "like" product must be construed "narrowly".¹⁶⁵ Nevertheless, the EC view is that it is also a well established principle that in order to be "like" two products need not be "equal" or "identical" in all respects.¹⁶⁶ The European Communities notes that according to Japan - Taxes on Alcoholic Beverages I:

1.27. According to the European Communities, Korea's position appears to be based on the mistaken notion that in order to be "like" two products must be "perfectly substitutable". The European Communities argues that contrary to Korea's allegations, the Appellate Body has never taken such an extreme view, and that Korea's reasoning is a classical non sequitur. The European Communities further argues that in Canada - Certain Measures Concerning Periodicals,¹⁶⁸ the Panel noted that a case of perfect substitutability would fall within Article III:2, first sentence, in order to reject an argument by the defendant to the effect that between the products concerned there was "imperfect substitutability" only. According to the European Communities, the Appellate Body, however, did not thereby imply that two products must always be "perfectly substitutable" in order to be "like". Indeed, such an interpretation would make Article III:2, first sentence, inapplicable except in cases of overt origin based discrimination between identical products.

1.28. The European Communities asserts that, in order to escape the implications of the two Panel reports on Japan - Taxes on Alcoholic Beverages , Korea over-emphasises the importance of the "consumers' tastes and habits" as one of the relevant criteria for a "like" product determination. According to the European Communities, that criterion was indeed mentioned by the Working Party on Border Tax Adjustments,¹⁶⁹ which has been cited with approval by the Appellate Body in Japan - Taxes on Alcoholic Beverages¹⁷⁰ and Canada - Certain Measures concerning Periodicals.¹⁷¹

1.29. The European Communities argues however, that in practice, past panels have given little weight to "consumers' tastes and habits" when making "like product" determinations. Instead, they have focused on objective factors such as the physical characteristics of the products and their end uses. According to the European Communities, the reason for that approach is that "consumers' tastes and habits", unlike the physical characteristics of products and their objective end uses, are influenced by prices and, consequently, also by taxes. Alleged differences in "consumers' tastes and habits" may have been created, or at least "fossilised", through discriminatory internal taxes and cannot, therefore, constitute a valid justification for continuing to apply those discriminatory taxes.

1.30. According to the European Communities, an example of this approach is provided by the Panel report in Japan - Taxes on Alcoholic Beverages II:

1.31. The European Communities asserts that Korea invokes the fact that vodka is allegedly more expensive than soju as one of the reasons that make those two spirits "unlike". According to the European Communities, the differences in prices between diluted soju and vodka have been grossly overstated by Korea, whereas distilled soju may, in fact, be more expensive than vodka.

1.32. The EC view is also that prices are not relevant for a "like" product determination. According to the European Communities, prices are not one of the criteria mentioned in the Working Party on Border Tax Adjustments. Nor are they mentioned as a relevant criterion by the Appellate Body in Japan -Taxes on Alcoholic Beverages or Canada - Certain Measures affecting Periodicals. The EC view is that it is not aware of any single case in which prices have been taken into account for a "like" product determination, whether for the purposes of Article III:2, or of any of the other GATT provisions incorporating that notion.

1.33. In fact, notes the European Communities, in Japan - Taxes on Alcoholic Beverages II, the Panel rejected in categorical terms an argument by Japan to the effect that local spirits were not "like" imported ones because they were less expensive:

1.34. The European Communities also argues that there are two additional reasons for disregarding prices when making a "like" product determination. The first reason is that Article III:2, first sentence, purports to establish a hard-and-fast rule. Once it is determined that two products are sufficiently similar to be "like", it is irrefutably presumed that any difference in taxation between them will afford protection to the domestic production and, therefore, must be condemned. The European Communities continues that implicit in this presumption, there is also the assumption that products which are sufficiently similar to be "like" must of necessity be "directly competitive or substitutable". According to the EC view, Korea's interpretation would undermine that assumption and require complainants to prove that products which are sufficiently similar to be "like" are also "directly competitive and substitutable" in terms of price. The European Communities argues that if a such view was upheld, the presumption established in the first sentence of Article III:2 would lose much of its effectiveness and the clear textual distinction between the first and the second sentences of Article III:2 would become blurred.

1.35. The European Communities argues that the second reason is that Korea's reliance upon price differences for justifying a different tax treatment is fraught with dangerous implications for the world trade system. According to the European Communities, the present dispute is concerned with a situation where imported products tend to be more expensive than the local products. Yet, if prices were deemed relevant for a "like" product determination, it would be open for developed country Members to claim that cheap imports from low cost developing country Members are too inexpensive to be on the same market with identical local products and to impose higher taxes on those imports. In the EC view, the mere possibility for a developing country Member to demonstrate before a Panel, in respect of each single category of products, that its exports do compete in terms of price with identical products of the importing country is likely to be an ineffective deterrent against this kind of abuses.

(a) Vodka and Diluted Soju

1.36. The European Communities also argues that Korea is able to identify only one single difference between vodka and diluted soju, namely that vodka has a higher alcohol content than diluted soju. According to the European Communities, whereas diluted soju is usually bottled at an alcoholic strength of 25%, vodka has between 37% and 40% alcohol content by volume¹⁷⁴.

1.37. The European Communities further notes that the two Panel Reports on Japan - Taxes on Alcoholic Beverages have established that differences in alcoholic content do not suffice to make two liquors "unlike". In particular, Japan - Taxes on Alcoholic Beverages II concluded in unequivocal terms that:

1.38. According to the European Communities, this conclusion was not based on the observation of the specific "tastes and habits" of the Japanese consumers but purported to have a general validity on all markets.

1.39. The European Communities also notes that Korea, while admitting implicitly that vodka and diluted soju are virtually identical, denies that they are "like" by pointing to differences in customs classification, end-uses and pricing.

1.40. In the EC view, the alleged differences regarding end uses are the same as those invoked by Korea with respect to other spirits. They are allegedly either overstated or irrelevant.

1.41. The European Communities argues that the difference in customs classification is totally irrelevant. The European Communities notes that Korea's tariff is based on the 1996 version of the Harmonised System (HS). Under the previous version of the HS, vodka was allegedly classified into the same basket heading as soju (HS 2208.90, "other"). In the 1996 HS classification, it was allegedly decided to create a separate position for vodka (HS 2208.60) simply because that spirit had become one of the most internationally traded spirits and not because in the meantime it had developed new physical characteristics or end uses which made it "unlike" soju and all the other liquors falling within HS 2208.90.

1.42. According to the European Communities, for these reasons, the alleged differences in prices are also irrelevant. The EC view is that in any event, Korea grossly overstates the actual differences. The pre-tax prices for soju shown in the Dodwell Study, on which Korea bases its comparison, are prices for standard diluted soju. The pre-tax prices for premium diluted soju are between two and three times higher.¹⁷⁶ If an adjustment is made to take into account differences in alcohol content, the pre-tax price for a bottle of imported vodka is two to three times higher than the pre-tax price for a bottle of premium soju.¹⁷⁷ In the EC view, in relative terms the difference in prices between premium diluted soju and vodka is the same as the difference between standard and premium diluted soju and much less than the difference between either premium or standard diluted soju and distilled soju.

(b) Vodka and Distilled Soju

1.43. The European Communities asserts that it has identified two differences between distilled soju and vodka:

1.44. The European Communities asserts that Korea does not even mention these two differences in its argument. The EC view is that this confirms that, as claimed by the EC, those differences in manufacturing process have little impact on the final characteristics of the products and do not prevent vodka and distilled soju from being "like" products.

1.45. The European Communities notes that in Korea's submission, the main difference between distilled soju and vodka would be a difference in taste: "Vodka approaches 'flavourlessness', while the taste of distilled soju is linked to its raw material".

1.46. According to the European Communities, this difference, however, is clearly minor and cannot preclude a finding of "likeness". Once again, it is necessary to recall that according to Japan - Taxes on Alcoholic Beverages I : "[M]inor differences in taste, colour and other properties (including differences in alcohol contents) do not prevent products from qualifying as like products."¹⁷⁸

1.47. The European Communities argues that in terms of flavour, distilled soju is no more different from vodka than, for example, Japanese shochu B, which is also obtained by non-continuous distillation of, inter alia, grains.

1.48. The European Communities further argues that in order to compensate for the absence of any significant difference in physical characteristics between distilled soju and vodka, Korea invokes differences in end uses and marketing.

To continue with Soju and the other Distilled are Competitive

¹⁶⁵ Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., pp. 19-20

¹⁶⁶ See Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., para. 6.21. See also the Panel Report on Japan - Taxes on Alcoholic Beverages I, supra., at par. 5.5, referring to the Panel Report on United States - Taxes on Petroleum and certain Imported Substances, supra at para. 5.1.1, where the Panel found that some of the imported and domestic products, albeit not identical, were like products since they served substantially the same uses.

¹⁶⁷ Ibid., para. 5.9.

¹⁶⁸ Appellate Body Report on Canada - Certain Measures Concerning Periodicals, supra., p.28

¹⁶⁹ Report of the Working Party on Border Tax Adjustments, BISD 18S/97, para. 18.

¹⁷⁰ Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, , supra., p. 20.

¹⁷¹ Appellate Body Report on Canada - Certain Measures Concerning Periodicals, supra., p.21.

¹⁷² Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., para. 5.7.

¹⁷³ Ibid., para. 5.9 (b)

¹⁷⁴ This difference is not reflected in the Liquor Tax Law, which sets no minimum alcohol content for either diluted soju or vodka.

¹⁷⁵ Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., para. 6.23.

¹⁷⁶ See EC Annex 6.

¹⁷⁷ See EC Annex 7.

¹⁷⁸ Panel Report on Japan - Taxes on Alcoholic Beverages I, supra., para. 5.9.