(b) Price (Cont.)

1.270. Korea also notes that the Panel repeated the Community's argument:

1.271. According to Korea, one can only conclude that the European Communities was describing the facts in one way before the Japanese liquor taxes Panel, and is now changing its story before this Panel. In Korea's view, these two versions simply do not match. Korea asks how the European Communities was able to say that pre-tax, prices of many western-style liquors would be less expensive than Japanese shochu, and now say that pre-tax prices of western style liquors in Japan were actually significantly higher than shochu?

1.272. Korea further argues that neither the Panel nor the Appellate Body in their legal findings reflected on any significant price differences in Japan - Taxes on Alcoholic Beverages II. According to Korea, it is clear from the evidence presented to this panel that in Korea, after the removal of the liquor taxes, none of the western-style liquors would become cheaper than Korean soju. On the contrary, very substantial price differences would remain.

1.273. Korea maintains that, together with the other distinguishing factors such as end use (whisky is not a meal drink, etc.) these price differences demonstrate that there is no directly competitive or substitutable relationship between the western-style drinks in dispute and standard soju.

(c) End Use

1.274. Korea states that it has also shown in its submission that the end uses for diluted soju differ greatly from those of the imported liquors at issue in this case. In particular, Korea states that it has pointed out that the overwhelming use of diluted soju is as an accompaniment to meals -- a use for which the imported liquors are considered unsuitable and too expensive.

1.275. According to Korea, the complainants have not been able to provide an answer to this argument. While the European Communities allegedly acknowledges that standard soju is 'often consumed with meals', it argues that there are exceptions, such as sojubangs. However, meals are served as well at sojubangs. In Korea's view, to the extent that Koreans sometimes drink soju without a meal, these are the exceptions that confirm the rule.

1.276. Korea notes that neither of the complainants has been able to demonstrate concretely that any of the five western-style liquors in dispute are consumed with meals in Korea.²⁶⁶

1.277. According to Korea, the European Communities closes its eyes to the existing differences in end use, simply asserting that, in the case of vodka: 'Vodka and soju are like products because they have virtually the same physical characteristics and, therefore, serve for the same end uses.' ²⁶⁷ In Korea's view, even if the EC assertions about physical characteristics were true, the one does not necessarily follow from the other, and the actual behaviour of customers belies the EC assertion.

1.278. Korea further argues that according to the United States, bottled water and tap water must be directly substitutable within the meaning of Art. III.2 GATT, despite their large difference in price, because they serve similar end uses. According to Korea, if one accepts that, one could start to argue that price differences alone need not justify tax differences. That argument might seem to go against Korea's case, although it must be recalled that Korea's case not only relies on price differences, but also on differences in physical characteristics (and taste), as well as differences in end use (meal drink versus non-meal drinks).

1.279. According to Korea, consumers are not silly. If they are consistently willing to pay a much higher price for one product, compared to a seemingly similar product, then small differences are probably very important to them, and thus for the market performance of these products. According to Korea, the United States and the European Communities obviously have difficulties accepting that, as a difference in market performance would block the application of Art. III.2.

1.280. Korea further argues that in some developing countries bottled water is safe, and tap water may not be safe for tourists. For tourists, that makes quite a difference, and they will probably be willing to pay a higher price for bottled water. Again, the US's argument is flawed by its refusal to look at market-specific situations. Korea asks whether Article III:2 GATT would prohibit developing countries from charging a higher tax rate on bottled water than on their tap water?

1.281. Korea further argues that in developed countries as well, bottled water may in fact target an entirely different group of consumers or have different end uses than tap water. Korea gives the example that in Brussels parents are advised not to use tap water to prepare baby formula, as tap water contains too many additives and residues. Parents therefore use much more expensive and purer bottled water. Further, according to Korea, in the United States restaurants commonly serve pitchers of tap water with meals. Nevertheless, quite a number of customers order bottled water, for reasons such as health or taste. According to Korea, despite their ostensible physical similarities and capability for the same end use, these products are not substitutes at all in many countries and markets. Korea asserts that it has been able to ascertain that tap water and bottled water are taxed differently, at least in the EC.²⁶⁸

1.282. Korea also notes the US argument that 'end use can differ between substitute or competing products. For example, one would not use oranges in an apple pie . . . but these products do compete for consumer spending on fruit purchases.' ²⁶⁹ Korea notes the alleged US commitment to the idea that consumers have a fixed budget for classes of expenditure, for example, for fruit purchases and distilled spirit purchases, and wonders, if this proposition is to be central to the US case, whether it is going to provide any evidence in support of it.

1.283. According to Korea, even if that view of the world could be substantiated, the United States in effect concedes, in the quotation above, that apples belong to two distinct budgetary items - consumer spending on fresh fruit and consumer spending on pie fillings. It also allegedly concedes that oranges do not compete in the pie filling segment. In a country where the principal use for fruit is making pies, therefore, substantial changes in the price of apples may have little or no impact on the demand for oranges. In Korea's view, this would be powerful evidence that in that particular country apples and oranges are not directly competitive or substitutable.

1.284. In the present case, according to Korea, the end use for diluted soju with which imported liquors do not compete, is far and away the most important use to which diluted soju is put: it is typically consumed with meals, and the imported beverages are not.²⁷⁰ In Korea's view, that major difference in end use means that the products at issue in this case are neither 'like' nor directly competitive or substitutable.

1.285. Korea adds that, rather than addressing Korea's specific arguments about end uses, the United States tries to divert the discussion back into generalities, saying 'distilled spirits around the world are used for socialisation, relaxation and celebration.' The standard that the US sets for itself is much too low. There are innumerable types of foods and drinks that could be said to serve these general purposes. However, that does not mean that all of those things are 'like' or directly competitive or substitutable.

1.286. Korea notes that both complainants attribute the argument to Korea that in order to be directly competitive or substitutable, products would have to share 'all' possible economic uses. According to Korea, that is not what Korea has been saying, but it has been referring to the most important end use of each liquor. In Korea's view, it has observed that the most important end use of standard soju is different from the most important end use of western-style liquors.

1.287. Korea reiterates that standard soju is typically a 'meal' drink, while the western-style liquors at issue in this case are not drunk with meals, but rather in room salons and other high-class bars where standard soju is not even on offer.

1.288. Korea notes that the European Communities admits that 'soju is more often consumed with every-day meals than western-style spirits', but it argues that this is so 'simply because western-style spirits are more expensive'.²⁷¹ According to Korea, the European Communities would like this Panel to believe that if taxes were harmonised, Koreans would start drinking western-style spirits with their meals, in spite of the fact that, whisky, for example, would still be on average 11 times more expensive than standard soju. Korea disagrees, especially in light of the fact that regardless of price, Koreans do not consider whisky to be appropriate to drink while eating.

1.289. Korea argues that, those facts being uncontested, the European Communities has then tried to say that Korea has been exaggerating, and alleges that Korea has claimed that soju is 'always' drunk with meals. Korea denies claiming that, but has stated that the bulk of standard soju is drunk with meals, which is its most important end use. Korea further alleges that the European Communities claims that sojubangs are one of the most typical places for drinking soju, and supposedly a place where meals are not served. In fact, according to Korea, sojubangs are an exceptional outlet and they do serve meals. This contrasts with the end use of western-style liquors which are hardly, if ever, drunk with meals. According to Korea, the Nielsen study which Korea attached to its written rebuttal bears this out.

1.290. According to Korea, the complainants have not provided any evidence to dispel this important difference in end use. One point they have made much of is that some respondents to Nielsen said that they drank whisky with their meals. That was a very small percentage indeed, and could also be a human error. The complainants are focusing on exceptions again. The ordinary fact of life is that very few, if any, Koreans would buy whisky to drink with their meals at home. They receive whisky as a gift, and enjoy this on a special occasion that is usually not a meal.

1.291. Korea states that soju is not suited to penetrate the establishments where western-style liquors are sold. The main characteristic of soju is that it is an inexpensive meal drink. Barring exceptions, you would not expect to find such a drink in bars. This was borne out by the Nielsen study, which Korea submitted. In Korea's view, the complainants have submitted no evidence to contradict this. The Hankook study, which they submitted earlier on the distribution patterns of liquors only refers to whisky, and ignores soju.²⁷²

1.292. Korea further argues that western-style liquors are not, or very rarely, found in Korean restaurants, mobile street vendors and Chinese restaurants. These establishments always serve standard soju. Western style liquors are found more often, though not always, in Japanese restaurants (presumably as a before or after meal drink, as customers reported that they do not drink whisky with Japanese meals). Japanese restaurants always serve soju. Again, there is a notable difference in distribution.²⁷³ Korea notes that the EC Hankook Study does not even mention restaurants.

1.293. Korea notes the recent visits of US Embassy personnel to Korean restaurants. According to Korea, they are nine of the most expensive restaurants in Seoul. The fact that Embassy officials visit these restaurants explains, Korea suspects, why they had whisky in stock. It really says very little about the drinking behaviour of the vast mass of the Korean population.

(d) Places of Sale and Consumption

1.294. One of Korea's arguments that standard and distilled soju do not compete with imported liquors has been that diluted soju and distilled soju are not even available in many of the outlets in which imported liquors are consumed, notably, in room salons and other high class bars. In order to provide the Panel with support for that proposition, Korea commissioned the Nielsen study. This study surveyed room salons, night clubs and danlanjujums, asking which alcoholic beverages they offered. According to Korea, in this survey, 96.7% responded that they sell whisky, while 0% responded that they offered diluted soju.

1.295. Korea argues that, contrary to what the European Communities seems to suggest, Korea has not argued that whisky has not 'gained considerable distribution penetration'. Korea's point is rather that diluted soju and the western-spirits are not available in the same outlets, an important indicator of a difference in end use and lack of competition. According to Korea, its emphasis has been in particular on the fact that standard soju does not penetrate the establishments where the western-style liquors are available.

1.296. Korea also states that it does not find persuasive the US exhibit showing, for example, Seagram Extra Dry Gin and Alexander vodka next to Korean premium soju in a convenience store.²⁷⁴ According to Korea, the same photograph shows that Gillette shaving foam is also displayed next to these alcoholic beverages. Korea's argument is that convenience stores are pressed for shelf space. The fact that two items are displayed next to each other would hardly be compelling evidence of a competitive relationship in any context, but in the context of a small Korean convenience store, is truly devoid of meaning.

(e) Consumer Spending "Categories"

1.297. Korea also claims that instead of the classic more detailed analysis outlined above, the United States suggests that the Panel only needs to "consider whether the products in question compete for consumer spending on a category of goods." Korea further claims that the United States asserts that "consumers in Korea, like anywhere else, budget their spending on alcoholic beverages, and subsequently spend that budget according to taste, prices and social occasions." Korea believes that the United States is confusing a model of reality with reality. According to Korea, academic researchers may find it interesting to hypothesize that consumers act as if they first decide how much to spend on a category of goods, and then on how that amount will be divided between the goods within the category. That academic researchers may find it interesting to hypothesise, however, is very far from saying that this is how consumers have been shown to behave 'in Korea, as elsewhere'.

1.298. According to Korea, the more important point is that the notion of a category of goods begs the central question in this proceeding. Korea asks how the United States knows what categories are relevant for actual consumers - in particular, for Korean consumers? In Korea's view, it presents no evidence to underpin its conjectures. Korea adds that the United States itself seems unsure of what the relevant category is. Korea notes that sometimes the United States says that it is 'alcoholic beverages', but at other points it is 'alcoholic spirits.' According to Korea, `alcoholic beverages', which includes wine and beer, is very different, especially in Korea, from 'alcoholic spirits'.

(f) Future Competition

1.299. Korea also states that the complainants suggest that the market is developing so that the imported beverages and standard soju and distilled soju might compete in the future.²⁷⁵ Korea considers this assertion to be speculative, at best. If the pre-tax price differences remain the same, there is no reason to assume that future consumers will consider them to be direct substitutes.

1.300. Korea notes the US argument that, Korea's population is changing and becoming more 'internationally-oriented' and it may be that in the future the market for imported beverages will grow. In Korea's view, however, the idea that Koreans may wish to drink more whisky does not mean that they will abandon standard soju as the drink to accompany their meals. The growth, for example, of the whisky market could be completely independent of the standard soju market.

1.301. Korea claims that this was observed by the EC Guide on exports of alcoholic beverages to Korea:

1.302. Korea argues that if in the future, the market does develop such that standard and distilled soju and the imported liquors compete, then the complainants are free to resort again to WTO proceedings. However, at the present time, the products are not competing, and that lack of competition has not been shown to be tax-related.

5. Broad or Narrow Interpretation of Products in Dispute

1.303. Korea notes the EC argument that the GATT drafters aimed to provide stricter rules with respect to internal tax measures (Article III:2) than with respect to other internal regulations (Article III:4), rather than the opposite which is supposedly argued by Korea.

1.304. Korea further notes the EC argument that by including directly competitive or substitutable in Article III:2, the drafters intended to create stricter rules for tax discrimination than for internal regulation. If not, they would have limited themselves to 'like products' just as in Article III:4. Korea submits that this is as yet undecided.

1.305. Korea points out that firstly, in Japan - Taxes on Alcoholic Beverages, the Panel said that the coverage of Article III:2 might or might not be identical to that of Article III:4.²⁷⁷ In Korea's view, therefore, it is not clear, as the European Communities claims, that the GATT drafters aimed to provide stricter rules with respect to internal tax measures than with respect to other internal regulations.

1.306. According to Korea, however that may be, it does not alter the fact that Article III:2 treads heavily upon national sovereignty. Korea refers to the Appellate Body's statement in Japan - Taxes on Alcoholic Beverages, that 'the members of the WTO have made a bargain'.²⁷⁸ In Korea's view, that bargain implies limitations on thexpect to derive as a Member of the WTO.

1.307. Korea argues that in this context, WTO Members agreed that Article III:2 prohibits tax discrimination on 'like products' and directly competitive or substitutable products. Thus, the language of Article III:2 expresses the concessions that the WTO members were ready to make in this regard. In Korea's view, every concession represents a limitation of the sovereignty of the members. A broad interpretation of the expressed restriction could threaten the carefully negotiated balance between the restriction and the benefit which the members expected from this restriction.

To continue with "So As to Afford Protection"

²⁶⁵ Ibid.

²⁶⁶ According to Korea, the EC has merely asserted that 'other spirits can be and sometimes are drunk with meals', without providing examples and their relative importance (EC oral statement, p. 8).

²⁶⁷ See EC oral statement, p. 3.

²⁶⁸ Korea states that in Belgium tap water is subject to a VAT of 6% while bottled water is subject to a VAT of 21%.

²⁶⁹ See US oral statement, para. 8.

²⁷⁰ According to Korea, this is shown by the Nielsen study.

²⁷¹ EC written rebuttal, at para. 115.

²⁷² See EC Annex 10.

²⁷³ According to Korea, these are the findings of the AC Nielsen study.

²⁷⁴ US Exhibit G.

²⁷⁵ See for example, the EC oral statement at p. 5 and the US oral statement at para. 19 et. seq.

²⁷⁶ Korea cites the Sofres report, p. 22.

²⁷⁷ Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., para. 6.20. The Appellate Body did not take a position on this issue.

²⁷⁸ Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., p. 15.