VI. Interim Review

1. In letters dated 25 February 1999, the European Communities and Chile requested an Interim Review by the Panel of certain aspects of the Interim Report issued to the parties on 15 February 1999. The parties did not request an Interim Review meeting.
2. The European Communities has argued that paragraphs 2.1 and 2.3 and footnote 1 should be amended to reflect the fact that Chilean Law No. 19.534 did not repeal and replace Decree 825/74, but instead amended it. We changed the Descriptive Part of the Report in this regard to reflect Chile's legal characterization of its own law. While the EC has pointed out that the title of Law No. 19.534 refers to it as a modification, we will accept Chile's characterization of its legislation in this regard. As we noted in footnote 1, we do not find the characterization of whether the law is a replacement or a modification to be of any substantive importance to our Findings.
3. With respect to the Findings, the European Communities has made suggestions for clarifications with respect to paragraph 7.46 and footnotes 370, 390 and 407. We generally agree with these points and have made changes accordingly.
4. With respect to paragraph 7.35, the European Communities argues that the proper reference is to the 1998 SM Survey rather than to the 1997 SM Survey and that this paragraph and the following one should be moved. However, these paragraphs refer to Chile's disagreement with both surveys. One of the references in paragraph 7.35 was incorrect and we have changed it. Otherwise the paragraphs are accurate and have not been amended.
5. The European Communities claims that the statements in paragraph 7.60 were not in reference to the 1998 SM Survey, but instead referred to another section of the EC's First Submission. The references in paragraph 7.60 et seq., are taken from the section of the EC's first submission beginning at paragraph 145 and were direct references to the 1998 SM Market Survey. The Tables referred to therein are derived from that survey. Upon further consideration, we decided that it would be helpful to reverse the data references in paragraphs 7.60 and 7.61 and modify the language of these paragraphs in order to further clarify this point.
6. With respect to paragraphs 7.71 and 7.77, the European Communities strongly objects to the characterization of the cross-price elasticity shown in the 1995 Gemines study as being "low". We continue to be of the view that a cross-price elasticity of .26 is low. However, we also note our extensive discussion of the reasons why this estimated cross-price elasticity is lower than the actual ratio would be, which is also the conclusion reached by the authors of the study. Therefore, we decline to change the paragraphs.
7. The European Communities argues that paragraph 7.100 does not accurately reflect their argument. After reviewing their statement and submissions to the Panel, we have made some modifications to this paragraph.
8. The European Communities states that the third sentence of paragraph 7.105 is not accurate in that an ad valorem system would not provide similar taxation unless it applied the same rates or rates with less than de minimis differences. This is what we intended when referring to "purely" ad valorem systems. Nonetheless, we will clarify the reference. We consider the remainder of the paragraph accurate and appropriate in its qualifications and decline to further modify it.
9. The European Communities requests that we eliminate footnote 420 because reference to other taxation systems is not relevant to this dispute. Furthermore, the European Communities argues that the discussion is beyond the Panel's Terms of Reference. As the European Communities correctly notes, we stated in footnote 430 that inquiry into other tax systems for alleged inconsistency with GATT rules is not relevant. However, Chile offered this argument by analogy and, in our view, it is worth noting some of the specific problems that can arise from such arguments. In our view, this fuller explanation serves a useful purpose in this regard. We specifically noted in the footnote that the examination required to determine the accuracy of the analogy would in fact be beyond the Panel's terms of reference. Accordingly, we decline to delete this footnote.
10. The European Communities objects to paragraph 7.109 for the same reasons described above in regard to footnote 420. We decline to make the requested change for the same reasons discussed in regard to that footnote.
11. The European Communities argues that paragraph 7.121 mis-characterizes their position on the question of the Chilean legislative process. In our view, the language requested by the European Communities is merely a more in-depth description of their position than what is contained in paragraph 7.121. We note that a full description of the EC position can be found in the Descriptive Part of the report at paragraphs 4.559-4.585. In our view, paragraph 7.121 is accurate and we decline to make the requested change.
12. The European Communities argues that paragraph 7.122 does not address the EC argument. In its interim review request, the European Communities states that:

The Pisco industry was not trying to "push a tax burden onto another" but, rather to attract upon itself an additional tax burden. Neither Chile, nor now the Panel, have given any satisfactory explanation for that unusual request.

13. The European Communities then goes on to argue that we should draw inferences from the alleged willingness of the Chilean government to negotiate certain benefits with one constituent but not another. In our view, there is no basis for the EC's demand that the Panel provide it with a "satisfactory explanation" of the Chilean legislative process. Indeed, the inferences that it wishes us to draw are precisely the sort of delving into domestic politics that previous panels and the Appellate Body have declined to do. The European Communities does not provide direct evidence of the Chilean government position. Rather it wishes us to conduct an investigation to draw inferences from a series of policy negotiations. It is manifestly unclear what standards we should use to evaluate such discussions and negotiations or what the authority is for conducting such an investigation of the Chilean legislative processes. We agree with the guidance provided by the Appellate Body in this regard and decline to make the changes requested by the European Communities.
14. The European Communities requests that we change subparagraph 7.131(iv) for the reasons it requested we change paragraph 7.121. We decline to make this change for the same reasons we declined to change paragraph 7.121.
15. The European Communities has asked us to revise the summary of its argument in paragraph 7.137 to better reflect its argument. We have made some changes to that paragraph to better reflect its argument.
16. With respect to paragraph 7.146, the European Communities suggests that it is inaccurate to state that "to a certain extent both parties are correct in their arguments" because the Panels conclusions in the following two paragraphs accord with the EC position. We noted that Chile argued that we should not review the legitimacy of its policy objectives. We agree. However, we also agree with the EC's argument that the lack of a rational connection between the stated objectives and the measure was evidence of protective design, structure and architecture. Thus, we consider our summary in paragraph 7.146 accurate and decline to make the requested change.
17. Chile notes its disappointment in and disagreement with the Panel's conclusions in this dispute.
18. In its specific comments, Chile disagrees with our characterization of their position in paragraph 7.28. Chile states that it provided arguments against the determination that HS 2208 is the "relevant market". However, this paragraph is not concerned with a determination of "relevant markets" and we did not use that term. Rather it deals on the one hand, with the identification of the appropriate category of certain imports and, on the other, with the appropriate categorization of certain domestic products. We have reviewed the record once again and do not find where Chile argued that the list of distilled alcoholic beverages identified by HS 2208 was not the appropriate category of imported products. Chile also never argued that particular sub-categories of HS 2208 should be excluded, as was done, for example, in the panel findings in Korea �Taxes on Alcoholic Beverages.
19. While Chile did argue that various distinctions between products undercut the EC's arguments with respect to the question of directly competitive or substitutable products, this does not go to the question of whether certain distilled alcoholic beverages contained within HS 2208 should be grouped separately or excluded from the Findings. Furthermore, we discussed various sub-categories of products at various points in the Findings when there were differences in products that we felt warranted further examination (see, for example, paragraph 7.54). Had such examination revealed differences that justified finding certain products not within the groupings utilised or not directly competitive or substitutable, we would have made such a determination. Finally, in discussing this question in paragraph 7.28, we specifically discussed why such grouping of products would not prejudge the substantive discussion of the question of whether the imported and domestic products are directly competitive or substitutable.
20. Chile also made the following argument in regard to paragraph 7.28:

Chile also provided information proving that the different kinds of pisco are marketed in different markets and are produced using different technology. If it is later argued that a diluted whisky is not whisky, why should a 43� pisco diluted to 30� continue to be a Gran Pisco.

21. We note again that this argument really goes elsewhere; namely, to the substantive Findings on "dissimilar taxation" or "so as to afford protection" relating to Chile's argument that products can easily be diluted to achieve tax parity. However, we note that it is a matter of Chilean law that all pisco is grouped together regardless of its strength in the Old Chilean System and the Transitional System and that the geographic denomination under Chilean law of "pisco" does not refer to alcohol strength. We also note that it is a matter of Chilean regulation that whisky and other products lose their generic names if they are diluted. Thus, the term pisco is available to spirits at various levels of alcohol content while the term whisky is available only at 40� of alcohol content and above. We are not convinced to change paragraph 7.28.
22. Chile further argued that it showed that "when wine is included in the regression, for example the coefficient ceases to become statistically significant". This argument also does not really go to the point of the discussion in paragraph 7.28. Nonetheless, we note that Chile supplied a new regression analysis, so it is not accurate to state that the results change when wine is added to the regression. We discussed the methodological problems with the new Chilean analysis as well as the others submitted. We also discussed the question of including wine (and beer) in our overall analysis. Our conclusion was that it was possible that wine and beer are also directly competitive or substitutable with pisco. However, that does not refute the extensive evidence that pisco is directly competitive or substitutable with the other distilled spirits. This also appears to be the conclusion recently reached by the Chilean competition authorities.
23. With respect to paragraph 7.41, Chile disagrees with our use of the Adimark Survey as relevant evidence. We recognized its limitations based on sample size and we specifically stated that we did not wish to make too much of the survey. However, we found it both relevant and useful in that it was a study presented to the Chilean legislature and not one developed for purposes of this dispute. Chile states that we should not draw any conclusions about its value "without proper knowledge of the market". However, we specifically stated that we took note of the survey because of its consistency with other market information.
24. Chile also argued with respect to the Adimark survey that the panel attached greater validity to one segment of the market than another. Chile's criticism implies that there must be high degree of current substitutability among all portions of Chilean society for products to be considered directly competitive or substitutable. That is not correct. We found it to be relevant evidence that a focus group representing a significant portion of Chilean society (the portion with the highest disposable income and therefore a proportionally greater share of domestic consumption) showed a high level of willingness to substitute whisky for pisco. We also noted that another segment would be interested in trying whisky although the second group of respondents thought they would revert to consumption of pisco later. Complainants do not have to show that all consumers would shift all consumption; rather, that some portion would under some circumstances. There is then a question which we have addressed at length as to whether such amount of substitutability is sufficient. In our view, the weight we have accorded to the Adimark survey is consistent with its limitations and its conclusions. We decline to make the changes requested by Chile.
25. Chile disagrees with footnote 393 regarding its inability to provide the 1996 Gemines Study pursuant to requests by the European Communities and the Panel. In Chile's view this footnote mis-allocates the burden of proof and implies an uncooperative position by Chile. Chile further notes that it is not obligated to provide evidence contrary to its own arguments. Chile also states that the Panel should have given more credence to the fact that the study was the property of a private party. First, the question here is not one of allocation of the burden of proof. The European Communities is required to present evidence to establish its claims. With respect to this piece of its overall evidence, the European Communities presented statements made in the Chilean press to the effect that the 1996 Gemines Study showed a high degree of substitutability between whisky and pisco. Our statement in footnote 393 was that Chile (and its industry) had foregone the opportunity to rebut this evidence by not presenting the study for examination. Second, we made no statement about Chile being uncooperative. Chile adopted a fully cooperative position during the whole period of the proceeding, of which we are appreciative. Third, we specifically noted that the study was in the pisco industry's hands and the industry had refused to provide it. As we noted, it would be an artificial distinction to state that we would refuse to accept the unrebutted information provided by the European Communities as it referred to a study that we could not see ourselves because it was retained in the hands of the directly interested domestic Chilean industry.
26. Finally, we specifically noted that there is no compulsory discovery under the DSU. However, we do find it regrettable that any industry (or any Member, whether complainant or respondent) would not submit requested relevant evidence for consideration by a panel. We note that we are troubled by Chile's statement that its only duty is in "not obstructing the work of the panel". Article 13 of the DSU states that:

A Member should respond promptly and fully to any request by a panel for such information as the panel considers necessary and appropriate.

27. We think this treaty obligation calls for something more than a lack of obstruction. And, in fact, Chile's approach throughout the proceedings was constructive. Our only conclusion here was that, given that the Chilean industry had refused the repeated requests to produce the report, we would accept the EC's unrebutted evidence about the report's conclusions. Accordingly, we decline to make the requested changes.
28. With respect to paragraph 7.74, Chile notes that its initial basis for comparing prices was mistaken but was later corrected. We agree and will change the paragraph accordingly.
29. Chile claims that, with respect to paragraph 7.76, the conclusions on cross-price elasticity of pisco and imported distilled spirits is not based on any evidence and notes that only two products were involved: whisky and pisco. As we noted, pisco and whisky are two of the most dissimilar products involved. It follows that the evidence for the intermediate products would be supportive of the same conclusions. We must also note that we discussed at great lengths the weaknesses of the studies submitted, but found them useful supportive evidence to be considered along with other factors also discussed at length. We decline to make the change requested.
30. Chile has requested that in paragraph 7.105 we not state that specific tax systems are not generally considered to be applying dissimilar taxation. While not necessarily agreeing with some of Chile's reasoning in its comments, we note that we have found that the New Chilean System is an ad valorem system qualified by reference to alcohol content and that it is not a specific tax system. Therefore, the statement is irrelevant and we agree to remove it.
31. Chile disagrees with our statements in paragraph 7.109 regarding luxury tax systems and claims that the New Chilean System is a type of luxury tax system. As pointed out in this paragraph, we disagree. A system where ad valorem rates change according to alcohol content rather than value is not a luxury tax system. The paragraph illustrates our conclusion and we decline to change it in this regard.
32. Chile objects to footnote 430 claiming that it did not attempt to justify its own measures by reference to other Member's policies. It is the case that Chile did not admit that its measures were GATT-inconsistent and then attempt to defend them by reference to other Members' laws. However, as Chile again acknowledges, it did argue at great length that, in its view, to find Chile's measures GATT-inconsistent would compel a finding that other Members' laws were also inconsistent. Either way, the other Members' laws are irrelevant to our analysis. We will amend this footnote to further clarify Chile's position and our conclusions on this matter.
33. Chile argues that paragraph 7.143 is not correct because Chile disagrees that the products discussed are directly competitive or substitutable. Chile states in its Interim Review comments that such competitive conditions exist only with respect to directly correlated alcoholic content beverages. Chile did not present its arguments in this fashion during the meetings or in its submissions. We are unaware of any evidence that supports an argument that distilled alcoholic beverages are directly competitive or substitutable only with those that contain the same alcohol content. Nonetheless, we will amend the paragraph to more clearly reflect that the statements are our conclusions and not Chilean arguments.
34. Chile disagrees with paragraph 7.149 and claims that we have confused two different concepts. According to Chile "revenue neutrality" does not refer to maintaining the same tax revenue but also takes into account issues of progressivity or regressiveness of application. We disagree. It is quite obvious that "revenue neutrality" refers to just what it says: achieving the same amount of revenue. In our view, it is not correct to conclude that "revenue neutrality" also includes an element of social impact neutrality. To so argue ignores the plain meaning of the word "revenue" and is unsupported by either logic or the evidence. We decline to change paragraph 7.149.
35. With respect to paragraph 7.150, Chile notes that there is more local production of some high alcohol spirits than imports. This is already noted and considered in our Findings. We decline to change this paragraph.
36. In paragraph 7.152, we stated that there "appears to be no correlation between value and alcohol consumption." That is our conclusion. We then continue by noting that there would be an inverse relationship, if any. Chile disagrees with the reference to a possible inverse relationship, stating that this further statement would only be true if the products were perfect substitutes. Chile's comment is not on our conclusion, as much as it is on the further statement about a possible inverse relationship. We do not see the basis for Chile's statement that this further statement is only true if products are "perfect substitutes". We acknowledge that Chile would not agree with the point given its disagreement with our conclusions on the issue of "directly competitive or substitutable". Nonetheless, given our conclusions on that issue, we think the paragraph is accurate and decline to change it.
37. Chile disagrees with our assessment in paragraph 7.154 that the stated policy objectives are not achieved and that, even if they were, it would not be evidence of discrimination but could be due to some other factor. We found no evidence of these other factors here. Therefore, we found this to be supporting evidence of our Finding. As with many other points discussed in the Findings and in this Interim Review, it must be remembered that we did not view any single factor in isolation. In weighing all the evidence, such things as a lack of rational connections between stated objectives and resulting measures constitutes a factor among others. Chile also argued here that competing objectives results in achievement of second best solutions to all the problems. However, we found a lack of rational connections, including second best ones. We decline to change paragraph 7.154.
38. With respect to paragraph 7.155, Chile argues that there is an important distinction between laws and regulations specifically with respect to the regulation concerning minimal alcohol content of beverages. In Chile's view, regulations are more flexible. We think the term "laws" is broad enough to cover both legislation and regulations. Nonetheless, we will change paragraphs 7.145, 7.155 and 7.159 and footnote 437 to reflect Chile's distinction. As we explicitly noted, we make no findings concerning this regulation, but it does constitute a relevant fact of our inquiry. Also, we stated that the Chilean argument concerning dilution of products was not persuasive because such products would need to change both their generic names and certain physical characteristics.
39. In regard to paragraph 7.156, Chile states that it does not attempt to justify its tax regime by referring to the fact that it applies duties lower than the bound rates. Rather, Chile states that it provided this as an example of how Chile does not use such instruments despite their legality. Chile says it offers the example as an indication of the intent and nature of its policy instruments. The very point we made in paragraph 7.156 is that such good intentions in one area are not relevant to an examination of a completely different measure. We do, however, agree that Chile did not attempt to "justify" the tax measure in question, because Chile in fact still maintains that the measure is GATT-consistent and therefore not needing justification. We amended the paragraph accordingly.
40. Chile disagrees with the summary paragraph 7.159. On one particular point, Chile notes that its prior tax systems have not been found inconsistent with GATT or WTO obligations. We note that the structure of the Old Chilean System is precisely the same as the Transitional System. Only the rates of taxation differ. Other than changing the reference to the product labelling measure (which is not at issue) to reflect Chile's prior comment that it is a regulation not legislation, we decline to further amend this paragraph.

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