7. The Sofres Report

1.121. The European Communities notes that Korea, while disparaging the Dodwell study, places considerable reliance on another document commissioned by the European Communities and prepared by the same market research organisation as the Dodwell study: the document entitled "Your Guide to Exporting Food Products to Korea - Alcoholic Beverages" (the "Sofres Report").

1.122. In the EC view, although it is obvious that Korea has perused the Sofres Report for "quotable" passages, the results of that search are rather meagre: just two short passages of two sentences each.

1.123. According to the European Communities, the Sofres report is a generic report intended to provide a description of the current market situation, which may serve as a guide to the EC exporters. The Sofres report did not even attempt to address the question tackled by the Dodwell study, namely whether a connection can be established between the price of western-style spirits and the sales of soju and vice-versa.

1.124. The European Communities further argues that the Sofres Report relies on the assumption that, not just soju and western-style spirits, but all alcoholic beverages are part of the same market. For instance, market shares are calculated with respect to the entire alcoholic beverages market, which would have been meaningless if the authors of the report had considered that soju and other spirits do not compete on the same market.

1.125. The European Communities also argues that when the Sofres report states that "soju remains virtually unaffected by imported alcoholic drinks" it means simply that, despite the considerable increase in imports of whisky and other western-style liquors, soju continues to account for the vast majority of sales of spirits. At the same time, the use of the term "virtually" before "unaffected" shows that the authors considered that there was actual, even if limited in terms of the volumes concerned, competition between soju and other western-style spirits. In the EC view, the term "remains" clearly indicates that the authors of the report did not regard the current predominance of soju as a fixed and permanent feature of the Korean market but as a temporary situation which could change in the future as a result of increased sales of western-style spirits.

8. The Trendscope Survey

1.126. The Trendscope survey addresses two questions, the first of which was - "in which of the following places have you drunk whisky/soju during the last six months."

1.127. According to the European Communities, the response to this question confirms that although soju is still consumed more often at traditional Korean venues and whisky at western-style or entertainment outlets, there is no rigid segregation between the two.

1.128. The European Communities further argues, that the survey shows that, contrary to Korea's allegations, there is already a significant degree of overlap. Firstly, the European Communities alleges that soju is also consumed in places where whisky has already established a presence. The EC view is that 8% of respondents declared to have drunk soju at Karaoke bars, which are still the main places for drinking whisky. Furthermore, the European Communities states that the Trendscope survey shows that whisky is also drunk in places where soju has traditionally been the predominant spirit, such as Korean restaurants and bars.

1.129. The European Communities also argues that the survey confirms that home consumption at home is one of the main end-uses for both whisky and soju. According to the European Communities, as much as 34% of respondents declared to have drunk whisky at home whereas the percentage of respondents who had drunk soju at home was 43%.

1.130. The second question asked to the respondents was whether they had the habit of drinking whisky/soju with meals or without meals. According to the European Communities, the response to this question confirms that whisky is also drunk with meals, even if less often than soju. The European Communities claims that 7% of the respondents answered that they had the habit of drinking whisky with meals.

1.131. The European Communities further argues the survey also shows that, contrary to the claims repeatedly made by Korea, soju is by no means always consumed with meals. It is the EC view that the respondents who declared to have the habit of drinking soju with meals was just 36%.

1.132. As a complement to the second question, the respondents were also asked whether they had the habit of drinking whisky/soju with or without food. According to the European Communities, the response to this question was very similar in both cases: whereas the percentage of respondents who declared to have consumed whisky with food was 86%, the percentage of respondent who declared to have drunk soju with food was 97%.

1.133. The European Communities concludes that both the Nielsen study and Trendscope survey show that despite the fact that western spirits have been virtually excluded from the Korean market until very recently, and that western spirits remain subject to much higher taxes than soju, there is already a significant degree of overlap as regards their end-uses. In the EC view, the extent of that overlap could only increase if the tax differentials between soju and western spirits were eliminated.

9. The Measures are Applied "So as to Afford Protection to Domestic Production"

1.134. The European Communities argues that Korea has not presented any meaningful argument in order to refute the claim that the measures at issue afford protection to its domestic production.

1.135. According to the European Communities, Korea's main defence is that whisky bottled in Korea from imported concentrated whisky should be considered as a domestic production. In the alternative, Korea claims that soju produced in Korea from imported neutral spirits should be considered as imported.

1.136. In the EC view, there is an obvious difference between those two situations. Concentrated whisky has already all the essential characteristics of whisky and can be used only to bottle whisky. It is imported under the same tariff heading as bottled whisky (HS 2208.30) and is subject to the same import duties.

1.137. The European Communities further argues that in contrast, neutral spirits are a raw material which can be used to produce a variety of alcoholic beverages, including for example vodka and gin, as well as other products, such as heating fuel or pharmaceutical products. Neutral spirits are imported under a different tariff heading and are subject to much lower import duty than soju. In the EC view, if Korea takes the view that soju is the same product as neutral spirits, it should explain why it does not apply the same taxes to all liquors made from neutral spirits.

1.138. The European Communities further argues that at any rate, even if Scotch whisky bottled in Korea had to be considered as a domestic product, soju would still account for almost all of Korea's domestic production of spirits. It is thus beyond question that by protecting soju, Korea protects its domestic production of sprits.

1.139. The European Communities asserts that in this regard, it is worth recalling that the existence of a substantial production of genuine domestic whisky in Japan did not prevent the two Panels on Japan - Taxes on Alcoholic Beverages from concluding that Japan's Liquor Tax Law infringed Article III:2, second sentence. ²⁰⁸ Further, according to the European Communities, it is also worth noting that almost all Japanese shochu A is made from imported neutral spirits. Yet, the two Panels on Japan - Taxes on Alcoholic Beverages had no hesitation to consider shochu A as a domestic production.

1.140. The European Communities argues, therefore, that Korea's allegation that soju is isolated from imports by "commercial realities", rather than regulatory action has not been substantiated and is in any event totally irrelevant. What matters is that imports of soju are and have always been negligible and, therefore, that by favouring soju the Korean Government can be assured that it protects a domestic production, and a domestic production alone.

1.141. According to the European Communities, Korea's argument that the tax differentials cannot be protective because the pre-tax price differentials are too large is logically flawed. If the Panel found that the products concerned are "directly competitive or substitutable" despite the pre-tax price differentials, it would follow necessarily that those price differentials are not large enough to exclude, of themselves, the possibility that the tax differentials may afford protection to domestic production.

1.142. The European Communities also notes that Korea denies emphatically that the Liquor Tax Law's very structure and design reveals a protectionist purpose, but fails to offer a minimally reasonable explanation for the Liquor Tax Law's many apparent inconsistencies.

1.143. The European Communities states for instance, that Korea attempts to explain the Liquor Tax Law's product categorisation by saying that, originally, soju was the only product subject to the Liquor Tax Law and new tax categories were created only as other spirits appeared on the market. In the EC view, this does not explain why it was considered necessary to add to the definition of soju a series of exceptions, so as to exclude the most important categories of imported spirits, nor does it explain why it was necessary to apply much higher rates on the newly created categories.

1.144. According to the European Communities, the closest that Korea comes to giving a coherent explanation for the Liquor Tax Law's apparent lack of rationality is when it states that "as tax rules are developed, they must accommodate varying levels of taxpayer resistance" and that "in sum, taxes are a delicate balancing act for any government." In the EC view, this means that if soju is subject to lower taxes it is simply because soju producers have more political weight than importers of whisky.

1.145. With respect to distilled soju, the European Communities notes that Korea advances the argument that equalising the taxes for distilled soju and whisky would "cripple" the distilled soju industry with no benefit to the imported beverages industry. According to the European Communities, this argument, is totally irrelevant in order to determine whether the current system "affords protection to domestic production." It is also allegedly at odds with Korea's previous allegation that demand for distilled soju is "specific and static" and that, for that reason, "it would be difficult to affect it a great deal in either direction by altering its price".

B. United States

1. General: Violation of Article III:2

1.146. The United States notes that in its first submission, it showed that Korea's application of preferential tax rates to soju discriminates against vodka, a "like" product and against all other distilled spirits, which are directly competitive or substitutable, in violation of Article III:2. According to the United States, in response, Korea has principally argued that soju is a unique product in a unique market, and that a violation of Article III cannot be alleged in light of the differences it cites between soju and other distilled spirits.

1.147. The United States notes that Korea, in an attempt to assist its attempt to distinguish western distilled spirits from soju, characterizes distilled soju as a product distinct from diluted soju in an apparent willingness to sacrifice the tax preference for this "special" artisanal product that makes up 0.2% of its total soju sales. The United States argues that the effort is to downplay the characteristics of distilled soju that are identical to those of western distilled spirits, such as its alcohol content and use of aging. According to the United States, however, the different types of soju, however, are the same or "like" product for all practical purposes.²⁰⁹

1.148. The United States asserts that in the first instance, the two varieties have the same name. Both standard and distilled are clear in appearance and filtered similarly, and unlike vodka, which is taxed at 30 percent, the Education Tax rate of distilled and standard soju is 10 percent. The United States adds that although distilled soju is made from discontinuous (pot still) distillation, the distinction has minimal tangible effect on the product. Products such as whisky and brandy can be manufactured by either continuous distillation or pot still (discontinuous) distillation. The United States further argues that both types of soju are derived from the same raw materials, and Korean law apparently does not require the use of any particular starch source such as rice; any starch source can be used. Finally, the United States notes that, as to their packaging, whether a product is marketed as "artisanal" or not is a reflection of the manufacturer's marketing savvy, rather than a fundamental departure from the nature of the product.

1.149. The United States argues that a better perspective on Korea's emphasis on differences between standard and distilled soju (namely price, taste, and marketing) may be seen by comparing with another category of alcoholic beverage such as wine. According to the United States, wines cover a broad range of prices and qualities, yet it would be difficult to argue that a $10 table wine and a $100 bottle of Bordeaux wine are not "like." The price difference between inexpensive and expensive wine can vary by a factor of ten or more. The United States continues that, similar to distilled soju, expensive wines are marketed in small volumes with distinctive advertising and packaging in order to emphasize uniqueness, and might, in the opinion of some, possess more complex bouquet and aroma than inexpensive wines.

1.150. According to the United States, therefore, variations in price, taste and marketing of products with similar end uses mply offer consumers alternative choices and do not mean they are not the same or "like" products.

To continue with Violation of Article III:2, First Sentence

²⁰⁸ According to the European Communities, in Japan - Taxes on Alcoholic Beverage I, supra., Japan argued that the Liquor Tax Law did not afford protection to domestic production because imports of special grade whisky accounted for merely 14.6 % of total sales of that product. This argument was disregarded by the Panel which only took into account the fact that the less taxed product (Shochu) was produced almost exclusively in Japan. Panel Report on Japan - Taxes on Alcoholic Beverages I, supra., paras. 3.10 (f) and 5.11.

²⁰⁹ The United States argues that it is not necessary, for purposes of Article III:2, to determine whether a product is the same product or simply "like." The drafters obviously avoided limiting the application of the national treatment disciplines to the "same" products for fear of definitional disagreements on the basis of minor variations in products.