6. Arguments on Each Factor

(a) Physical Characteristics

86. The European Communities argues that pisco and the other distilled spirits share the same basic physical characteristics. All of them have the essential feature of being beverages containing alcohol obtained from naturally fermented ingredients by using similar distillation processes. The choice of raw materials from which the alcohol is distilled and/or the use of post-distillation processes such as ageing, colouring or flavouring confer to each type of distilled spirits its own distinctive identity. The resulting differences, however, are not so important as to render the various types of distilled spirits non-substitutable with each other.
87. In Tables 7 and 8 below, the European Communities compares the physical properties and manufacturing processes of pisco and the main types of imported distilled spirits. The essential differences between them may be summarised as follows:

1. Raw materials: like most types of brandy (e.g., cognac, armagnac, sherry brandy⁷⁰), pisco is distilled from grape wine. Other spirits are made from grains (whisky, korn, gin, vodka, aquavit, soju, shochu), potatoes (vodka, soju, shochu), sugar cane or molasses (rum, ouzo), fruits (fruit brandies) or neutral spirits (gin, vodka, aquavit, soju, shochu).
2. Colour: the colour of pisco may go from "clear" or "white" to "light amber". Whisky and the majority of other brandy types are "amber". ⁷¹ Rum, aquavit and fruit brandies may be both "white" and "amber". Gin, vodka, ouzo and korn are generally "clear" or "white".
3. Ageing: like whisky and brandy, pisco is matured in wooden casks. This differentiates pisco from spirits such as vodka, aquavit, korn or ouzo, which are not aged. Rum and certain types of fruit brandy may also be aged in wooden casks.
4. Flavouring: some spirits have specific flavourings added during or after distillation. For instance, gin has the distinctive feature of being flavoured with juniper berries
5. Alcohol content: pisco is bottled at 30° to 50° . Whisky, gin, rum, vodka, ouzo, korn and aquavit, are bottled at 37/37.5° to 50° . Brandy is bottled at 36 ° to 50 ° .

Table 7 ⁷²

Physical characteristics of distilled spirits

	Alcohol Strength (% vol.)	Colour	Added flavourings	Body/flavour (sensory attributes)
Whisky	37-50	Amber	Yes	Medium to high
Brandy	36-50	Amber/Clear*	Yes	Medium
Gin	37-50	Clear	Yes	Light to medium
Rum	37-50	Clear/Amber	Yes	Light to medium
Vodka	37-50	Clear	Yes	Light
Pisco	30-50	Clear/light amber	Yes	Light to medium
Soju	25-45	Clear/light amber	Yes	Light to medium
Shochu	20-45	Clear/ light amber	Yes	Light to medium
Ouzo	37.5-50	Clear	Yes	Medium to high
Korn	32-45	Clear	No	Light to medium
Aquavit	37.5-50	Clear/light amber	Yes	Light to medium
Fruit brandy	37.5-45	Clear***	Yes**	Light to medium

* Grappa is an example of clear brandy

** Certain countries (e.g., EC) do not permit flavourings in whisky, rum and fruit brandies

*** Except plum brandy (light amber/amber)

Table 8 ⁷³

Manufacturing processes of distilled spirits

	Raw material*	Distillation strength (% vol.)	Method of distillation	Maturation in wooden casks	Reduction with water to bottling strength	Bottling strength (% vol.)
Whisky	Grain	Less than 95	Continuous or pot still	Yes	Yes	37-50**
Brandy	Grapes	Less than 95	Continuous or pot still	Yes	Yes	36-50
Gin	Grain Neutral spirits	At or above 95	Continuous	No	Yes	37-50
Rum	Sugar cane / Juices Molasses	Less than 96	Continuous	Varies	Yes	37-55
Vodka	Grain Potatoes Neutral spirit	At or above 95	Continuous	No	Yes	37-50
Pisco	Grapes	Less than 95	Pot still	Yes	Yes	30-50
Soju	Grain Potatoes Neutral spirits	At or above 85	Continuous or pot still	Varies	Yes	25-45
Shochu	Grain potatoes Neutral spirits	At or above 85	Continuous or pot still	Varies	Yes	20-45
Ouzo	Molasses	55-80	Pot still	No	Yes	37.5-50
Korn	Whole grain	At or above 95	Continuous	No	Yes	37.5-50
Aquavit	Grain molasses Neutral spirits	At or above 95	Continuous	No	Yes	37.5-50
Fruit brandy	Fruits Neutral spirits	Less than 86	Continuous or pot still	No***	Yes	37.5-50

* Neutral spirit is an alcohol spirit distilled at no less than 95 % vol. from any material of agricultural origin.

** Many countries set a minimum alcohol strength of 40 % vol. for whisky, e.g., the EC, the USA and Chile. In some countries, higher or lower minimum strength requirements apply, e.g., Australia (37 %), Brazil (38 degrees Gay Lussac) and South Africa (43 %). Canada sets no minimum strength for whisky.

*** Except plum brandy.

88. According to the European Communities, the above differences are relatively minor and do not prevent pisco and the other distilled spirits from being "directly competitive or substitutable" within the meaning of Article III:2, second sentence. To the contrary, the degree of similarity between pisco and other spirits is such that, even in the absence of any other evidence, it could be sufficient for this Panel to conclude that they are "directly competitive or substitutable" products.
89. The European Communities considers that, indeed, some of the differences between pisco and the other distilled spirits would not even be sufficient to exclude a finding of "likeness". In accordance with well-established case law, "minor differences in taste, colour and other properties (including different alcohol contents) do not prevent products from qualifying as like products". ⁷⁴ In particular, previous panels have determined that differences in alcohol content do not, of themselves, make two liquors "unlike". Thus, the two panels on Japan � Taxes on Alcoholic Beverages I and II concluded that shochu was "like" vodka, even though shochu has generally a lower alcohol content. A fortiori, differences in alcohol content cannot prevent two products from falling within the broader category of "directly competitive or substitutable" products.
90. The European Communities points out that Panel Report on Japan � Taxes on Alcoholic Beverages II noted in this regard that:

... a difference in the physical characteristics of alcohol strength of two products did not preclude a finding of likeness, especially since alcoholic beverages are often drunk in diluted form ... ⁷⁵

91. In the view of the European Communities, as evidenced by Tables 7 and 8, the differences between pisco and other distilled spirits are similar to the differences between Japanese shochu and other distilled spirits. For example, shochu is generally made from unmalted cereals, potatoes or neutral spirits, unlike brandy, rum, whisky or fruit brandies; is not usually aged or coloured, unlike brandy, whisky or rum; and has an alcohol content of 25° to 30° , unlike the main types of western spirits, which have a strength of 37/37.5° to 50° . Yet, despite those differences, shochu was found to be directly competitive and substitutable with the other distilled spirits falling within HS 22.08 by the two successive panels on Japan � Taxes on Alcoholic Beverages I and II.
92. According to the European Communities, the characteristic of being a "distilled alcoholic beverage" is the essential feature of all the products in dispute. Even if there was no other evidence in the record establishing the existence of actual competition on the Chilean market between pisco and other spirits, the fact that all of them share that essential characteristic could, in and of itself, be sufficient to conclude that they are objectively apt to serve the same end-uses and are therefore "directly competitive or substitutable" within the meaning of the second sentence of Article III:2.
93. Chile responds that as to the much more objective question of common ingredients and physical characteristics, it is apparent that the products share virtually no ingredients or characteristics, other than containing alcohol. One might as readily find trucks and bicycles to be substitutable because both contain wheels.
94. Chile considers that it is not irrelevant that all the products in question are distilled alcoholic beverages. However, in the evaluation whether the products are directly competitive or substitutable, this single common characteristic is not in itself sufficient.
95. In Chile's view, previous panels considered that to evaluate products as being directly competitive and substitutable, the complaining parties need to show evidence that the products in question share not only physical characteristics (such as nature and quality), but also similar end-uses, channels of distribution and points of sale, marketing strategies, elasticity of substitution, and price. ⁷⁶ The European Communities failed to submit to the Panel evidence that is conclusive or reliable. (Chile notes, for example, that in its evaluation the European Communities does not seem to take into account that pisco is based on perishable grapes produced domestically, whereas whisky and other distilled beverages are produced on the basis of grain, which can be produced, shipped and stored anywhere.)
96. Chile does not consider that all physical characteristics of the products involved need to overlap for the products in question to be considered "directly competitive or substitutable". However, Chile does consider that the European Communities needs to demonstrate more than a coincidence of one physical characteristic, in this case the alcohol content of the beverage, before claiming that products are directly competitive or substitutable in the sense required by Article III.
97. The European Communities responds that together, ethyl alcohol and water account for more than 99 % of the volume of all distilled spirits. Thus, even if Chile's assertion that pisco and other spirits share "virtually no ingredients or characteristics, other than containing alcohol", was true in all cases (quod non), it would hardly be condemning. According to the European Communities, the analogy drawn by Chile between ethyl alcohol and the wheels contained in bicycles and trucks is manifestly inept. Wheels do not account for 99 % of the components of either bicycles or trucks. Furthermore, the wheels of a truck are different from the wheels of a bicycle, whereas ethyl alcohol is always the same product, irrespective of the spirit in which it is contained. Finally, unlike pisco and the other distilled spirits, bicycles and trucks do not have similar end-uses. Someone invited to a cocktail party in Santiago is likely to be offered the choice between a pisco drink and a whisky drink. If Capel or Control want to ship some pisco from La Serena to Santiago, they are unlikely to do so by bicycle.
98. Chile further states that it does not deny that all spirits contain alcohol, nor that alcohol and water account for over 99% of volume. However, it cannot be concluded from here that all such spirits are directly competitive without much more proof.
99. Chile indicates that to accept that all spirits have the same end uses, because their basic constitution is water and alcohol, is to say that the only consideration for the consumer is the alcohol, no matter in which beverage it is contained. That is equivalent to say that pasta competes with bread, because both of them are basically wheat flour and water.
100. Chile notes that distilled spirits are by no means the only products that share that same characteristic. Wine and beer also contain approximately 99% of water and ethyl alcohol, but, according to the European Communities, they are not directly competitive and substitutable. Chile says that according to the European Communities, only some products that have the same intrinsic characteristics are competitors. That is highly questionable reasoning.
101. Chile further states that the European Communities having insisted, albeit unpersuasively, that distilled spirits should all be viewed as directly competitive or substitutable, it is impossible to sympathise with claims that each producer must have a right to market its product based on its alleged unique characteristics. The large exporters of distilled spirits cannot condemn systems for making tax distinctions based on arbitrary type distinctions and then turn around and insist that Article III not only tolerate but actively enforce those type distinctions when that suits the interest of the exporters. The creative effort to take the Panel through such mental gymnastics may warrant admiration on one level, but does not warrant support as a matter of interpretation of Article III:2.

To continue with End-uses

⁷⁰ The European Communities notes that brandy can also be made from grape marc (e.g. grappa)

⁷¹ The European Communities notes that grappa is generally "white".

⁷² EC First Submission, Table 10.

⁷³ EC First Submission, Table 11.

⁷⁴ Panel Report on Japan - Taxes on Alcoholic Beverages I, supra., para. 5.9 d).

⁷⁵ Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., para. 6.23.

⁷⁶ Report of the working party on Border Tax Adjustments, BISD 18S/97, para. 18; Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., paras. 6.22 and 6.28.