IX. Interim Review

1. In letters dated 7 July 1998 the European Communities, the United States and Korea all requested an interim review by the panel of certain aspects of the Interim Report issued to the parties on 26 June 1998. The requests dealt with certain aspects of the descriptive portion of the Interim Report including the summaries of the arguments as well as with the Findings. None of the parties requested a further meeting with the Panel. ³²⁷
2. The major issue of concern of the parties with the descriptive portion (other than some individual and technical points which we have accomodated) was inclusion of the oral statements of the parties. In the initial version of the descriptive portion of the report, little was included from the oral statements. Oral statements generally are intended to be summaries of the written statements, not presentations of new evidence or arguments. Nonetheless, we have accommodated the requests as appropriate. However, we must note a particular difficulty in this regard in accommodating some of the comments of the United States. In part of the comments, the United States did not request specific portions of their oral statements to be included in specific spots in the descriptive portion. Instead, the United States offered a redrafting of its arguments that effectively recast whole portions of their presentation.
3. We have taken note of the implicit approach of the United States that parties to a dispute should submit draft summaries of their arguments for inclusion in the descriptive portion of a panel report. However, this is an approach that should be agreed with all the parties at the outset of a proceeding rather than made by one party at the close of the proceedings. Future panels may wish to adopt such an approach. Unfortunately, no suggestions were made and no discussion of this approach was held at an early stage of these such proceedings. Therefore, we cannot accept the wholesale changes requested by the United States. Instead, we attempted to include in the descriptive part some of the sections of the U.S. oral statements reflecting the issues identified by the United States.
4. With respect to the Findings, the European Communities requested language changes in several paragraphs. We agree with most of the recommended changes as clarifications of the existing language and have amended paragraphs 10.43, 10.53, 10.100 and 10.101, accordingly.
5. The European Communities disagreed with the finding in paragraph 10.57 that the complainants provided "no evidence whatsoever" with respect to distilled alcoholic beverages not identified during the course of the proceedings. The EC's argument is that they have identified physical characteristics and end-uses common to all distilled alcoholic beverages and, therefore, that all such beverages identified in HS classification 2208 should be included. These general statements included very weak evidence with respect to products not even identified. In addition, these other beverages were not even included in the Dodwell study. Economic studies such as the Dodwell study are not necessary, but they are very useful. In other words, such market surveys are a source of information, not a limitation. Paragraph 10.57 has been amended to clarify this point.
6. The United States made a number of recommended changes in language that we agree provides greater clarity to the existing language. Therefore, we have amended the language in paragraphs 10.1, 10.41, 10.42, 10.43, 10.47, 10.51, 10.74, 10.95, 10.97, 10.100 and 10.101, accordingly. ³²⁸
7. The United States requested changes in paragraphs 10.18 and 10.23 to the effect that the issues covered in those paragraphs should be decided on the basis that the Korean requests were not within the panels terms of reference. We disagree with the US position. Under the US interpretation, many jurisdictional and other issues affirmatively raised by respondents would by definition be outside the terms of reference of a panel because the terms of reference are defined by the substantive issues raised in the complaining party's request for establishment of a panel. We think any panel has the right and obligation to address fundamental jurisdictional questions and issues relating to the proper functioning of the panel raised by any party to the dispute. Accordingly, we declined to change the basis of our decision in this regard.
8. The United States requested we delete paragraph 10.39 relating to discussions during the original negotiating sessions. This paragraph deals with a hypothetical and does not draw any conclusions about the specific products that were discussed in 1947-48. Rather, it was the nature of the discussion and what the discussion itself brought to light about the interpretation of Ad Article III:2 which is of relevance. We do not reach a legal or factual conclusion that "such products could not compete 'directly' under Article III." We have amended the language of 10.39 to provide further clarification.
9. The United States requested that the panel eliminate the two sentences at the end of the footnote in paragraph 10.42. In our view, the first sentence is a useful clarification. The second sentence has been eliminated.
10. The United States recommended changing the fourth sentence of paragraph 10.48. We assume the United States is referring to the fifth sentence. However, it is obvious from the whole paragraph that we are discussing methodology, not the facts of the Korean market. Therefore, we have declined to amend the paragraph.
11. With respect to paragraphs 10.55-10.57, the United States argued that classification under the same tariff heading is in itself evidence that products compete directly. We do not agree with the characterization of the issue proposed by the United States. The products first must be properly identified. As we noted above in regard to the EC's comments, these general statements are very weak evidence at best. The US argument also somewhat begs the question because there is a related issue of what level of detail in the tariff headings is appropriate for such analysis in any given case. The problem in this case is that we were left uninformed about what products constitute the remainder of the category. We declined to make the changes suggested by the United States in this regard beyond the clarification mentioned with respect to the EC comments above.
12. With respect to paragraph 10.81, the United States requested several changes for purposes of clarification. We have eliminated one sentence as redundant, but have otherwise kept the original language.
13. Korea stated that it had great difficulty accepting the outcome of the case. In Korea's view, the complainants failed to prove the necessary elements to establish a violation of Article III:2. In its General Comments, Korea states, among other things, that soju is consumed "primarily" with meals and that whisky and other spirits are consumed "primarily" as cocktails. We note as a general matter that Korea was drawing far too fine a distinction between end-uses for purposes of Article III:2, second sentence. We note that, even in Korea's approach (which we do not accept), it is only a matter of the "primary" use where there are differences. There are overlapping end-uses even within the Korean definition.
14. Korea further states that "Korea finds it difficult to accept that the Panel puts into doubt Korea's description of its own market". Korea implies that any party to a dispute has an exclusive authority to assess the facts relating to its domestic market. We find no support for such a proposition in GATT/WTO jurisprudence. Indeed, that is the very function of a panel in a case such as this, to assess the facts and arguments and make findings based on a weighing of the evidence presented.
15. In its General Comments section Korea also made the specific comment that it did not argue that western-style liquors were found in "expensive restaurants" but soju was not. However, we note that in writing its comments, Korea in fact described the restaurants referred to by the United States that served whisky as well as soju as "expensive" restaurants. ³²⁹ This also is how Korea referred to these establishments during the Second Meeting of the Panel. These establishments were not offered as a representative sample and we did not view them that way. Rather, we reviewed all of the arguments of all of the parties and took account of and balanced all of the evidence presented. Arguments here and elsewhere that the Panel "relied" upon any particular piece of evidence or assessment must be evaluated in that light. Korea examines in too isolated a manner the various other factors assessed by us in reaching our conclusions. Ultimately, we relied upon all of the evidence presented, not any single element. In our view, the arguments at that time and in the Korean comments on the Interim Report were not persuasive, in light of all the evidence, in rebutting the case established by the complainants.
16. With respect to paragraph 10.45, Korea emphasized that an analysis of the particular market in question is required. We agree. However, as stated in the Findings, that does not imply that evidence of product relationships from other markets is irrelevant to an assessment of the competitive relationship of the products in the market in question. It is a matter of utilization and weighing of the evidence. Korea then states that it is relevant to look at how Korean manufacturers market shochu and soju in Japan and argues that there are differences. We do not disagree that there are some differences between soju and shochu, but, in our view, the differences are minor and we disagree that such differences contradict our conclusions with respect to the Korean market. ³³⁰ We also note that the Korean companies have created products and advertised them in Korean and international markets that emphasize the similarity of soju to western-style beverages which is the question here. We took into account the evidence presented by Korea with respect to soju and shochu. As part of our weighing of the evidence, we also took note of other information from outside of the Korean market for its implications for the situation within the Korean market. We declined to change paragraph 9.45 in this regard.
17. With respect to paragraph 10.52, Korea noted that the figures for premium diluted soju should state that it is five percent of the soju market not the distilled beverages market. We have corrected the reference. Korea also noted that premium soju sales currently have slowed. We do not think this detracts from the conclusions. As complainants noted, sales of imports have also slowed in recent months due to the current financial crisis in Korea. ³³¹ The higher priced products such as premium diluted soju and imports have fallen off and sales of lower priced products have increased. The parties did not present extensive arguments about the relationship of the sales of the products to events occurring during the recent financial crisis ³³² and we did not refer to such a period extensively, but, if anything, the similar trends in sales of imports and premium diluted soju (as well as the differential movement of standard diluted soju) in the situation can be taken to support our Findings. We made clarifications to paragraph 10.52 to reflect these comments.
18. In comments regarding paragraphs 10.93 and 10.94, Korea took exception to several statements regarding pricing information. Korea stated that "Korea cannot fathom how such huge price differences can lead to a competitive relationship". Our conclusion was that, overall, there was persuasive evidence of a directly competitive relationship in spite of the price differences. We recall our observation that absolute price ratios are not a good basis upon which to assess whether there is a directly competitive relationship between products. Information as to how consumers behave in the face of relative price changes is more persuasive.
19. Korea also stated that it strongly objects to the Panel's alleged approach of narrowing the price differences between the products and argues that the Panel "conveniently" mismatched products because some comparisons were made between imports and premium diluted soju rather than standard diluted soju. However, in the textual discussion of the price differences, the first sentence of the listing stated the price difference between premium diluted soju and standard diluted soju. There followed a listing of the price differences between some imports and premium diluted soju. We included a footnote with further price differences between imports and premium diluted soju and standard diluted soju. We do not understand what Korea apparently thought was concealed by these figures as all information was included. Nonetheless, we will amend the paragraph and footnote to calculate the remaining figures for purposes of clarity. We made the appropriate changes to paragraph 10.94.
20. Also with respect to paragraph 10.94, Korea objected to the Panel's alleged reliance on prices based on alcohol strength to support its conclusions. We made no such reliance. In mentioning price adjusted for alcohol strength in a footnote to the paragraph, we merely observed that this was the manner of the price comparisons used in the case of Japan � Taxes on Alcoholic Beverages II and noted that the absolute price ratio differences in the present case were more similar to those in that case than would otherwise appear from a casual reference to the appendices in that case. Or, alternatively, if the prices in the Japanese case were not adjusted for alcohol strength, the price ratios between the imported and domestic products in Japan are shown to be more similar to the price ratios of imported and domestic products in Korea than would otherwise appear to be the case. We further clarified the language in the paragraph and footnote to reflect this concern.
21. Korea disagreed with our treatment of distilled and diluted soju. They note that the Korean Fair Trade Commission ("KFTC") statement outlines one difference regarding distillation methods, but that there are others including differences in price. However, the KFTC did not simply state that the method of distillation was a difference; it stated that it was "the basic difference". ³³³ After noting this we went on to discuss the other differences, including price. We declined to change paragraph 10.54 in this regard.
22. With respect to a footnote to paragraph 10.67, Korea argued that the Findings take their statements regarding differences in bottle sizes and types out of context. Korea states that it was emphasizing that the bottles used for exports of soju to Japan were different from shochu and that shochu bottles were meant to be similar to imports such as whisky. Presumably, Korea wished us to draw the conclusion that soju is marketed differently from shochu and whisky as a point of product distinction. This, in fact, was the issue we addressed. In any event, we clarified the specific reference to bottle size and shape differences made by Korea.
23. Korea requested the panel to amend the Findings in paragraphs 10.63 and 10.64 to "incorporate and consider" Korea's arguments in its Second Oral Statement on whether bottled and tap water are competitive products. We listened to Korea's statements in this regard and considered them. Lack of a specific citation to every single argument made by parties in the Findings does not in any manner imply that such arguments were not considered. We did not find the Korea analogy about tap water and bottled water probative or useful. The analogy is incomplete and refers to different products in different countries and thus no useful inference could be drawn for the inquiry at hand. However, we have added Korea's requested statements to the descriptive portion of the Report but have declined to amend these paragraphs in this regard.
24. Korea argued with the statement in paragraph 10.78 that soju and shochu are traditional drinks in their respective countries. Korea argues that sake "is the traditional drink of Japan". ³³⁴ We did not state that shochu is the traditional drink of Japan. We referred to it and soju as traditional drinks without further qualification. We do not agree that there is only one traditional drink per country. Various regions or groups within countries may have traditional drinks We declined to alter this paragraph.
25. With respect to paragraph 10.79, Korea noted that references to colourings with respect to premium soju are inaccurate. With respect to mention of the photographic exhibits submitted by complainants, Korea objects to references to pictures of premium diluted soju. We do not agree with the objection; advertisements of premium soju are relevant. Korea also objected to use of advertisements aimed at the Japanese market. Paragraph 10.80 deals with much of the Korea disagreement. However, we take note of their point with respect to some of the photographs. For instance, Exhibit I should not be included in this specific footnote because it is a Japanese product. However, we again note the statement by Japan in Japan � Taxes on Alcoholic Beverages II that soju and shochu are essentially identical products. ³³⁵ We also take note that Exhibit D is distilled soju rather than diluted soju. However, given our conclusions regarding distilled and diluted soju, no substantive difference results. The paragraph and footnote references were amended as appropriate.
26. Korea also objected to references in paragraphs 10.79 and 10.80 to Jinro's website advertisement because, according to Korea, all advertising is essentially local. We do not agree with this argument. As discussed in these and other paragraphs, we consider such evidence relevant. The question is one of evidentiary significance, i.e., how much weight should be given to such evidence. We declined to further amend these paragraphs in this regard.

X. Findings

a. Claims of the Parties

1. The European Communities and the United States claim that Korea applies its internal tax laws (the Liquor Tax Law and the Education Tax Law) on vodka in excess of taxes applied to soju and is therefore in breach of its obligations under Article III:2, first sentence, of GATT 1994. The complainants also argue that these internal tax laws are applied in a dissimilar manner to other imported distilled alcoholic beverages so as to afford protection to the domestic industry in breach of Korea's obligations under Article III:2, second sentence. The complainants have identified the imported products as all distilled alcoholic beverages described within Harmonized System classification 2208. They have identified specific examples of such beverages as including whiskies, brandies, cognac, liqueurs, vodka, gin, rum, tequila and "ad-mixtures". The complainants have identified soju as the domestically produced distilled alcoholic beverage which they claim receives preferential tax treatment.
2. Korea has responded that its internal tax measures are not inconsistent with its obligations under Article III:2. Korea argues that there are two types of soju, distilled and diluted, and that neither of these products are like the imported products and that the imports and the domestic products also are not directly competitive or substitutable. Korea argues that Article III:2 should be narrowly construed so as not to unduly infringe the sovereign right of Members of the WTO to structure their tax laws as they see fit. Korea claims that the complainants have not proved that with respect to the Korean market the products in question are either like or directly competitive or substitutable.

To continue with Preliminary Issues

³²⁷ The Interim Report constitutes Section IX of the Final Panel Report. Inclusion of this section makes the Findings portion of the Report Section X. References to paragraph numbers and comments of the parties have been adjusted accordingly.

³²⁸ The United States made a reference to paragraphs 10.42-10.43 in one comment. We assume they were referring to paragraphs 10.41-10.42.

³²⁹ Korea referred to the US statements about nine Korean-style restaurants found in the vicinity of the US embassy. However, Korea describes these establishments as "a few very expensive Korean restaurants" and "these nine expensive restaurants". Korean Comments on the Interim Report at p. 1. (emphasis added)

³³⁰ We take note that Japan stated in the panel proceedings of Japan � Taxes on Alcoholic Beverages II that soju and shochu were essentially identical products. Japan � Taxes on Alcoholic Beverages II, supra., at para. 4.178.

³³¹ See EC Answer to Questions, Question 1 from the Panel at 1-2, and accompanying chart.

³³² We note that the Nielsen study and the Trendscope survey were done in 1998.

³³³ Emphasis added.

³³⁴ Emphasis added.

³³⁵ Japan � Taxes on Alcoholic Beverages II, supra., at para. 4.178.