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WORLD TRADE
ORGANIZATION

WT/DS308/R
7 October 2005

(05-4310)

Original: English


MEXICO – TAX MEASURES ON SOFT DRINKS
AND OTHER BEVERAGES


Report of the Panel


TABLE OF CONTENTS

I. INTRODUCTION

II. FACTUAL ASPECTS

A. THE MEASURES

B. RELEVANT MEASURES

C. PRODUCTS INVOLVED

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

IV. ARGUMENTS OF THE PARTIES

A. REQUEST FOR PRELIMINARY RULING

B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES

1. Introduction

2. Legal argument

(a) The IEPS is an internal tax

(b) The HFCS soft drink tax and distribution tax are inconsistent with GATT Article III:2, first sentence

(i) Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are like products

Physical characteristics

End-uses and channels of distribution

Consumer preferences

Tariff classification

(ii) Soft drinks and syrups sweetened with HFCS are taxed in excess of soft drinks and syrups sweetened with cane sugar

FCS soft drink tax

Distribution tax

(c) The IEPS is inconsistent with Article III:2, second sentence, of GATT 1994

(i) The HFCS soft drink tax as applied to HFCS is inconsistent with GATT Article III:2, second sentence

HFCS and cane sugar are directly competitive or substitutable products

Physical characteristics

End uses and consumer preferences

Channels of distribution

Tariff classification

Price relationships and competition in the marketplace

Summary on direct competition and substitutability

HFCS and cane sugar are not similarly taxed

HFCS soft drink tax is applied so as to afford protection to domestic production

(ii) The HFCS soft drink tax and distribution tax as applied to soft drinks and syrups is inconsistent with GATT Article III:2, second sentence

Soft drinks and syrups sweetened with cane sugar are directly competitive or substitutable with soft drinks and syrups sweetened with HFCS

Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are not similarly taxed

The HFCS soft drink and distribution tax is applied so as to afford protection to domestic production

(d) The HFCS soft drink tax, distribution tax and reporting requirements applied on the use of HFCS are inconsistent with GATT Article III:4

(i) HFCS and cane sugar are like products

(ii) IEPS is a law affecting the use of HFCS

(iii) IEPS accords less favourable treatment to HFCS

3. Conclusion

C. FIRST WRITTEN SUBMISSION OF MEXICO

1. Introduction

2. Facts

(a) The importance of the Mexican sugar industry

(b) The NAFTA negotiations

(i) The United States requests changes

(ii) Subsequent developments

(iii) Throughout this time, the United States recognized the existence of a genuine dispute

(iv) The United States' refusal to submit to dispute settlement

(c) The decision to impose the IEPS on certain beverages

3. Legal arguments

(a) This dispute arises out of a dispute under the NAFTA regarding bilateral trade in sweeteners

(b) Mexico requests a preliminary ruling: the Panel should decline to exercise its jurisdiction

(c) Request for specific recommendation

(d) The measure was not intended to afford protection to domestic production within the meaning of Article III of the GATT 1994

(e) In the event of any inconsistency, the measure is justifiable under Article XX(d)

(i) There was no "arbitrary or unjustifiable discrimination between countries where the same conditions prevail"

(ii) The measure is not a "disguised restriction on international trade"

4. Conclusion

D. OPENING STATEMENT OF THE UNITED STATES AT THE FIRST MEETING OF THE PANEL

1. Article XX(d)

2. Developing countries

3. Recommendations

4. Preliminary ruling request

E. OPENING STATEMENT OF MEXICO AT THE FIRST MEETING OF THE PANEL

1. Introduction

2. The origin of the IEPS tax and the importance for providing relief for the Mexican sugar industry

3. Mexico's request for a preliminary ruling

4. Mexico's defence under Article XX(d) of the GATT 1994

5. Response to the European Communities' third party submission

6. Conclusions

F. CLOSING STATEMENT OF THE UNITED STATES AT THE FIRST MEETING OF THE PANEL

G. CLOSING STATEMENT OF MEXICO AT THE FIRST MEETING OF THE PANEL

H. SECOND WRITTEN SUBMISSION OF THE UNITED STATES

1. Introduction

2. Mexico's tax measures are inconsistent with Article III of the GATT 1994

(a) Burden of proof

(b) Mexico's tax measures are inconsistent with Article III of the GATT 1994

(i) Mexico's tax measures on non-cane sugar sweeteners are inconsistent with Article III:2 of the GATT 1994

The United States has established a prima facie case that the HFCS soft drink and distribution taxes are inconsistent with Article III:2, second sentence

The HFCS soft drink and distribution taxes are inconsistent with Article III:2, first sentence, with respect to beet sugar

(ii) Mexico's tax measures on soft drinks and syrups are inconsistent with Article III:2 of the GATT 1994

The United States has established a prima facie case that the HFCS soft drink and distribution taxes with respect to soft drinks and syrups are inconsistent with Article III:2, first sentence

The HFCS soft drink and distribution taxes are inconsistent with Article III:2, first sentence, with respect to soft drinks and syrups sweetened with beet sugar

The United States has established a prima facie case that Mexico's tax measures affecting the use of HFCS are inconsistent with Article III:4 of the GATT 1994

3. Mexico's tax measures are not justified under Article XX(d) of the GATT 1994

(a) United States' obligations under the NAFTA are not "laws or regulations"

(b) Mexico's tax measures are not designed to "secure compliance"

(c) Mexico's tax measures are not "necessary"

(d) Mexico's tax measures are incompatible with the chapeau to Article XX

4. Conclusion

I. SECOND WRITTEN SUBMISSION OF MEXICO

1. Introduction

2. Review of the facts

3. The United States' response

(a) The United States' characterization of the NAFTA dispute

(b) General comment on the United States' position

(c) The United States cannot specify what other avenues were open to Mexico

(d) The United States' practice under the NAFTA

(e) The United States' statements before the WTO on taking unilateral action outside of the WTO

4. Legal submissions

(a) This Panel's powers under the applicable "covered agreements" are broader and more flexible than the United States contends

(b) Mexico's measures can be justified under Article XX(d)

(i) The United States' position on Article XX(d) is internally inconsistent

(ii) Article XX(d) of the GATT 1994 can justify measures necessary to secure compliance with laws or regulations applicable outside the territorial jurisdiction of the Member taking the measure

(iii) The United States' distinction is not borne out in NAFTA itself

(c) The nature of the Mexican measures

(d) The measures at issue meet the necessity test under Article XX(d) of the GATT 1994

5. The United States has not responded to Mexico's arguments that the measures meet the requirements of the chapeau of Article XX of the GATT 1994

6. Conclusion

J. OPENING STATEMENT OF THE UNITED STATES AT THE SECOND MEETING OF THE PANEL

1. Introduction

2. Status of this dispute

3. Article XX(d) – "laws or regulations"

4. Article XX(d) – "necessary to secure compliance"

5. Issues relating to Mexico's "preliminary ruling" request

6. "General principles of international law"

7. Conclusion

K. OPENING STATEMENT OF MEXICO AT THE SECOND MEETING OF THE PANEL

1. Introduction

2. The relevance and status of the NAFTA dispute

3. The Panel has greater flexibility to formulate recommendations than the United States admits

4. The two Article III obligations at issue

5. Mexico's defence under Article XX(d) of the GATT 1994

6. Conclusions

L. CLOSING STATEMENT OF MEXICO AT THE SECOND MEETING OF THE PANEL

1. Response to the United States' oral arguments

(a) Paragraphs 6 and 7

(b) Paragraph 11

(c) Paragraphs 16 and 17

(d) Paragraph 17

(e) Paragraph 18

(f) Paragraph 20

(g) Paragraph 22

2. Conclusions

M. CLOSING STATEMENT OF THE UNITED STATES AT THE SECOND MEETING OF THE PANEL

1. Introduction and the relevance and the status of the NAFTA dispute

2. Recommendations

3. Article III

4. Article XX(d)

V. ARGUMENTS OF THE THIRD PARTIES

A. CANADA

1. Introduction

2. Mexico's request for a preliminary ruling

3. The Panel's authority to decline jurisdiction

B. CHINA

1. Introduction

2. Whether the HFCS can be deemed to be taxed in the meaning of GATT 1994 Article III:2, second sentence, based only on the fact that soft drinks and beverages sweetened with HFCS have been taxed in the meaning of GATT Article III:2 second sentence

3. Whether cane sugar can be established as the "like product" of HFCS under GATT Article III:4 conclusively with the analysis on "directly competitive and substitutable products" within the meaning of Article III:2, second sentence of GATT1994

C. THE EUROPEAN COMMUNITIES

1. The preliminary ruling requested by Mexico that the panel should decline to exercise its jurisdiction

2. The relationship of the WTO agreements and other international agreements

3. The claims raised by the United States under Article III:2 of the GATT 1994

4. The defence presented by Mexico under Article XX(d) of the GATT 1994

D. GUATEMALA

E. JAPAN

1. Analysis of IEPS's conformity with the first sentence of Article III:2 of the GATT 1994

2. Analysis of IEPS's conformity with the second sentence of Article III:2 of the GATT 1994

VI. INTERIM REVIEW

A. CLERICAL AND EDITORIAL CHANGES

B. FACTUAL ASPECTS

C. ARGUMENTS OF THE PARTIES

D. PRELIMINARY RULING

E. COMMENTS ON PANEL'S FINDINGS

VII. PRELIMINARY RULING

A. INTRODUCTION

B. THE PANEL'S JURISDICTION TO HEAR THE PRESENT CASE

C. MEXICO'S REQUEST

D. RULING BY THE PANEL

VIII. FINDINGS

A. CLAIMS AND ORDER OF ANALYSIS

1. Claims regarding soft drinks and claims regarding sweeteners

2. Claims under Articles III:2 and III:4 of the GATT 1994, regarding the treatment of sweeteners

(a) Claims under Article III:2 of the GATT 1994

(b) Claims under Article III:4 of the GATT 1994

(c) Simultaneous claims under Articles III:2 and III:4 of the GATT 1994

(d) Panel's analysis of the simultaneous claims

B. BURDEN OF PROOF

1. General rule on burden of proof

2. Burden of proof applied to the present case

C. THE UNITED STATES' CLAIMS REGARDING SWEETENERS UNDER THE FIRST SENTENCE OF ARTICLE III:2 OF GATT 1994

1. The United States' claims

2. Mexico's response

3. Article III:2, first sentence, of the GATT 1994

4. Panel's analysis

(a) Likeness of products

(i) Products' properties, nature and quality

(ii) Products' end-uses

(iii) Consumers' tastes and habits

(iv) Tariff classification of the products

(v) Conclusion

(b) Taxed in excess

(i) Is beet sugar subject, directly or indirectly, to the soft drink tax and the distribution tax?

Soft drink tax

Distribution tax

(ii) Do the soft drink tax and the distribution tax subject imported sweeteners to internal taxes in excess of those applied to like domestic sweeteners?

5. Conclusion

D. THE UNITED STATES' CLAIMS REGARDING SWEETENERS UNDER THE SECOND SENTENCE OF ARTICLE III:2 OF GATT 1994

1. The United States' claims

2. Mexico's response

3. Article III:2, second sentence, of GATT 1994

4. Panel's analysis

(a) Directly competitive or substitutable products

(i) Products' properties, nature and quality

(ii) Products' end-uses

(iii) Consumers' perceptions and behaviour

(iv) Tariff classification of the products

(v) Determination by other authorities

(vi) Conclusion

(b) Not similarly taxed

(c) So as to afford protection to domestic production

5. Conclusion

E. THE UNITED STATES' CLAIMS REGARDING SWEETENERS UNDER ARTICLE III:4 OF GATT 1994

1. The United States' claims

2. Mexico's response

3. Article III:4 of GATT 1994

4. Panel's analysis

(a) Likeness of products

(b) Measures affecting the internal use of sweeteners

(c) Less favourable treatment

5. Conclusions

F. THE UNITED STATES' CLAIMS REGARDING SOFT DRINKS AND SYRUPS UNDER THE FIRST SENTENCE OF ARTICLE III:2 OF GATT 1994

1. The United States' claims

2. Mexico's response

3. Panel's analysis

(a) Likeness of products

(i) Products' properties, nature and quality

(ii) Products' end-uses

(iii) Consumers' perceptions and behaviour

(iv) Tariff classification of the products

(v) Conclusion

(b) Taxed in excess

(i) Soft drink tax at the time of importation

Amendments to the LIEPS

Soft drink tax at the time of importation

Conclusion

(ii) Soft drink tax on internal transfers

(iii) Distribution tax

(iv) Taxes imposed in excess

4. Conclusion

G. THE UNITED STATES' CLAIMS REGARDING SOFT DRINKS AND SYRUPS UNDER THE SECOND SENTENCE OF ARTICLE III:2 OF GATT 1994

1. The United States' claims

2. Mexico's response

3. Panel's analysis

H. MEXICO'S DEFENCE UNDER PARAGRAPH (D) OF ARTICLE XX OF GATT 1994

1. Mexico's defence

2. The United States' response

3. Article XX(d) of GATT 1994

4. Panel's analysis

(a) Order of analysis

(b) Designed to secure compliance with laws or regulations

(i) To secure compliance

(ii) Whether Mexico's tax measures are designed to secure compliance

(iii) Laws and regulations covered by paragraph (d) of Article XX

(iv) Conclusion

(c) Necessary to secure compliance with laws or regulations

(d) Chapeau of Article XX

5. Conclusion

I. ADDITIONAL REQUESTS BY MEXICO

1. Mexico's additional requests

2. The United States response

3. Panel's analysis

(a) The Panel's "discretion"

(b) Determinations of fact requested by Mexico

(c) Mexico's status as a developing country

4. Conclusion

IX. CONCLUSIONS AND RECOMMENDATION


LIST OF ANNEXES

ANNEX A

REQUEST FOR ESTABLISHMENT OF A PANEL

Contents

Page

Annex A       Request for the Establishment of a Panel by the United States –
                    Document WT/DS308/4

A-1

ANNEX B

FAX TO THE PARTIES AND THIRD PARTIES

Contents

Page

Annex B       Fax dated 18 January 2005, from the Panel to the parties

B-1

ANNEX C

RESPONSES AND COMMENTS BY THE PARTIES AND THIRD PARTIES
TO QUESTIONS POSED BY THE PANEL AND OTHER PARTIES

Contents

Page

Annex C-1

Responses by Mexico to Questions Posed by the Panel after the First Substantive Meeting

C-2

Annex C-2

Responses by the United States to Questions Posed by the Panel and Mexico after the First Substantive Meeting

C-24

Annex C-3

Responses by Mexico to Questions Posed by the Panel after the Second Substantive Meeting

C-46

Annex C-4

Responses by the United States to Questions Posed by the Panel after the Second Substantive Meeting

C-69

Annex C-5

Comments by Mexico on the United States' Responses to Questions Posed by the Panel after the Second Substantive Meeting

C-91

Annex C-6

Comments by the United States on Mexico's Responses to Questions Posed by the Panel after the Second Substantive Meeting

C-97

Annex C-7

Responses by Guatemala to Questions Posed by the Panel after the First Substantive Meeting

C-110

TABLE OF WTO CASES CITED IN THIS REPORT

Short Title

Full Case Title and Citation

Argentina – Poultry Anti-Dumping Duties Panel Report, Argentina – Definitive Anti-Dumping Duties on Poultry from Brazil, WT/DS241/R, adopted 19 May 2003
Argentina – Textiles and Apparel Panel Report, Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, WT/DS56/R, adopted 22 April 1998, as modified by the Appellate Body Report, WT/DS56/AB/R, DSR 1998:III, 1033
Australia – Salmon Appellate Body Report, Australia – Measures Affecting Importation of Salmon, WT/DS18/AB/R, adopted 6 November 1998, DSR 1998:VIII, 3327
Australia – Salmon Panel Report, Australia – Measures Affecting Importation of Salmon, WT/DS18/R and Corr.1, adopted 6 November 1998, as modified by the Appellate Body Report, WT/DS18/AB/R, DSR 1998:VIII, 3407
Australia – Salmon

(Article 21.5 – Canada)

Panel Report, Australia – Measures Affecting Importation of Salmon – Recourse to Article 21.5 of the DSU by Canada, WT/DS18/RW, adopted 20 March 2000, DSR 2000:IV, 2031
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377
Canada - Autos Panel Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/R, WT/DS142/R, adopted 19 June 2000, as modified by the Appellate Body Report, WT/DS139/AB/R, WT/DS142/AB/R, DSR 2000:VII, 3043
Canada - Periodicals Appellate Body Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/AB/R, adopted 30 July 1997, DSR 1997:I, 449
Canada - Periodicals Panel Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/R and Corr. 1, adopted 30 July 1997, as modified by the Appellate Body Report, WT/DS31/AB/R, DSR 1997:I, 481

Canada – Wheat Exports and Grain Imports

Panel Report, Canada – Measures Relating to Exports of Wheat and Treatment of Imported Grain, WT/DS276/R, adopted 27 September 2004, as upheld by the Appellate Body Report, WT/DS276/AB/R.
Chile – Price Band System Panel Report, Chile – Price Band System and safeguard Measures Relating to Certain Agricultural Products, WT/DS207/R, adopted 23 October 2002, as modified by the Appellate Body Report, WT/DS207/AB/R
Chile – Alcoholic Beverages Appellate Body Report, Appellate Body Report, Chile – Taxes on Alcoholic Beverages, WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, DSR 2000:I, 281
Chile – Alcoholic Beverages Panel Report, Chile – Taxes on Alcoholic Beverages, WT/DS87/R, WT/DS110/R, adopted 12 January 2000, as modified by the Appellate Body Report, WT/DS87/AB/R, WT/DS110/AB/R, DSR 2000:I, 303
EC – Asbestos Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, adopted 5 April 2001, DSR 2001:VII, 3243
EC – Bananas III Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591
EC – Hormones Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, 135
India – Patents (US) Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9
India – Patents (US) Panel Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, Complaint by the United States, WT/DS50/R, adopted 16 January 1998, as modified by the Appellate Body Report, WT/DS50/AB/R, DSR 1998:I, 41
India – Quantitative Restrictions Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/AB/R, adopted 22 September 1999, DSR 1999:IV, 1763
India – Quantitative Restrictions Panel Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/R, adopted 22 September 1999, as upheld by the Appellate Body Report, WT/DS90/AB/R, DSR 1999:V, 1799
Indonesia - Autos Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr. 1, 2, 3, 4, adopted 23 July 1998, DSR 1998:VI, 2201
Japan – Alcoholic Beverages II Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97
Japan – Alcoholic Beverages II Panel Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/R, WT/DS10/R, WT/DS11/R, adopted 1 November 1996, as modified by the Appellate Body Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, DSR 1996:I, 125
Korea – Various Measures on Beef Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, DSR 2001:I, 5
Korea – Alcoholic Beverages Appellate Body Report, Korea – Taxes on Alcoholic Beverages, WT/DS75/AB/R, WT/DS84/AB/R, adopted 17 February 1999, DSR 1999:I, 3
Korea – Various Measures on Beef Panel Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/R, WT/DS169/R, adopted 10 January 2001, as modified by the Appellate Body Report, WT/DS161/AB/R, WT/DS169/AB/R, DSR 2001:I, 59
Mexico – Corn Syrup Panel Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States, WT/DS132/R and Corr.1, adopted 24 February 2000, DSR 2000:III, 1345
Mexico – Corn Syrup

(Article 21.5 – US)

Appellate Body Report, Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU by the United States, WT/DS132/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6675
Turkey – Textiles Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R, adopted 19 November 1999, DSR 1999:VI, 2345
Turkey – Textiles Panel Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/R, adopted 19 November 1999, as modified by the Appellate Body Report, WT/DS34/AB/R, DSR 1999:VI, 2363
US – 1916 Act Appellate Body Report, United States – Anti-Dumping Act of 1916, WT/DS136/AB/R, WT/DS162/AB/R, adopted 26 September 2000, DSR 2000:X, 4793
US – Certain EC Products Panel Report, United States – Import Measures on Certain Products from the European Communities, WT/DS165/R and Add. 1, adopted 10 January 2001, as modified by the Appellate Body Report, WT/DS165/AB/R, DSR 20001:II, 413
US – Gasoline Panel Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/R, adopted 20 May 1996, as modified by the Appellate Body Report, WT/DS2/AB/R, DSR 1996:I, 29
US – Gasoline Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3
US – Section 301 Trade Act Panel Report, United States – Sections 301-310 of the Trade Act of 1974, WT/DS152/R, adopted 27 January 2000, DSR 2000:II, 815
US – Shrimp Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755
US – Shrimp Panel Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/R and Corr.1, adopted 6 November 1998, as modified by the Appellate Body Report, WT/DS58/AB/R, DSR 1998:VII, 2821
US – Shrimp

(Article 21.5 – Malaysia)

Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products – Recourse to Article 21.5 of the DSU by Malaysia, WT/DS58/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6481
US – Shrimp

(Article 21.5 – Malaysia)

Panel Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products – Recourse to Article 21.5 of the DSU by Malaysia, WT/DS58/RW, adopted 21 November 2001, as upheld by the Appellate Body Report, WT/DS58/AB/RW, DSR 2001:XIII, 6529
US – Gambling Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005.
US – Wool Shirts and Blouses Panel Report, United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/R, adopted 23 May 1997, as upheld by the Appellate Body Report, WT/DS33/AB/R, DSR 1997:I, 343
US – Wool Shirts and Blouses Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R and Corr.1, adopted 23 May 1997, DSR 1997:I, 323

TABLE OF GATT CASES CITED IN THIS REPORT

Short title

Full Case Title and Citation

Brazil – Internal Taxes

Working Party Report, Brazilian Internal Taxes, adopted 30 June 1949, BISD II/181 and 186

Italy – Agricultural Machinery

Panel Report, Italian Discrimination Against Imported Agricultural Machinery, adopted 23 October 1958, BISD 7S/60

Japan – Alcoholic Beverages I

Panel Report, Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages, adopted 10 November 1987, BISD 34S/83

US – Malt Beverages Panel Report, United States – Measures Affecting Alcoholic and Malt Beverages, adopted 19 June 1992, BISD 39S/206
US – Nicaraguan Trade

Panel Report, United States – Trade Measures Affecting Nicaragua, 13 October 1986, unadopted, L/6053

US – Section 337

Panel Report, United States Section 337 of the Tariff Act of 1930, adopted 7 November 1989, BISD 36S/345

US – Sugar Quota

Panel Report, United States – Imports of Sugar from Nicaragua, adopted 13 March 1984, BISD 31S/67

US – Superfund Panel Report, United States – Taxes on Petroleum and Certain Imported Substances, adopted 17 June 1987, BISD 34S/136
US – Tuna (EEC)

Panel Report, United States – Restrictions on Imports of Tuna, 16 June 1994, unadopted, DS29/R

TABLE OF ABBREVIATIONS USED IN THIS REPORT

CFC Comisión Federal de Competencia (Federal Competition Commission)
DSB Dispute Settlement Body
DSU Dispute Settlement Understanding
EC European Communities
GATT General Agreement on Tariffs and Trade
GATT 1947 General Agreement on Tariffs and Trade 1947
GATT 1994 General Agreement on Tariffs and Trade 1994
HFCS High-Fructose Corn Syrup
IEPS Impuesto Especial sobre Producción y Servicios (Special Tax on Production and Services)
LIEPS Ley del Impuesto Especial sobre Producción y Servicios (Law on the Special Tax on Production and Services)
MFN Most-Favoured Nation
NAFTA North American Free Trade Agreement
WTO World Trade Organization

I. INTRODUCTION

1.1 In a communication, dated 16 March 2004, the United States requested consultations with Mexico pursuant to Articles 1 and 4 of the DSU and Article XXII:1 of the GATT 1994, regarding tax measures imposed by Mexico on soft drinks and other beverages that use any sweetener other than cane sugar.1

1.2 The United States stated that it believed that these taxes were inconsistent with Mexico's national treatment obligations under Article III of the GATT 1994. In particular, they appeared to be inconsistent with Article III:2 of the GATT 1994, first and second sentences, and Article III:4 of the GATT 1994.

1.3 The consultations took place on 13 May 2004. Pursuant to its request, Canada was joined in those consultations. However the parties failed to reach a mutually satisfactory resolution to this dispute.

1.4 On 10 June 2004, the United States requested the establishment of a panel pursuant to Article 6 of the DSU.2 The DSB considered this request at its meetings of 22 June and 6 July 2004, and established the Panel on 6 July with standard terms of reference as follows:

"To examine, in the light of the relevant provisions of the covered agreements cited by the United States in document WT/DS308/4, the matter referred to the DSB by the United States in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements."3

1.5 On 18 August 2004, the parties agreed to the following composition of the Panel:

Chairman: Mr Ronald Saborío Soto
 
Members: Mr Edmond McGovern
Mr David Walker

1.6 Canada, China, the European Communities, Guatemala and Japan reserved their rights to participate in the panel proceedings as third parties.4

1.7 The Panel met with the parties on 2 and 3 December 2004 and 23 and 24 February 2005. It met with the third parties on 3 December 2004.

1.8 The Panel submitted its interim report to the parties on 27 June 2005. The final report was issued to the parties on 8 August 2005.

II. FACTUAL ASPECTS

A. THE MEASURES

2.1 This dispute concerns certain tax measures imposed by Mexico on soft drinks and other beverages that use any sweetener other than cane sugar.

2.2 The tax measures concerned include: (i) a 20 per cent tax on the transfer or, as applicable, the importation of soft drinks and other beverages that use any sweetener other than cane sugar ("soft drink tax"); (ii) a 20 per cent tax on specific services (commission, mediation, agency, representation, brokerage, consignment and distribution), when provided for the purpose of transferring products such as soft drinks and other beverages that use any sweetener other than cane sugar ("distribution tax"); and, (iii) a number of requirements imposed on taxpayers subject to the "soft drink tax" and to the "distribution tax" ("bookkeeping requirements").

B. RELEVANT MEASURES

2.3 The soft drink tax, the distribution tax and the bookkeeping requirements are set out in the following measures, which are at issue in this dispute: (1) the Ley del Impuesto Especial sobre Producción y Servicios (Law on the Special Tax on Production and Services, or LIEPS), as amended effective 1 January 2002, and its subsequent amendments published on 30 December 2002, and 31 December 2003; and (2) related or implementing regulations, contained in the Reglamento de la Ley del Impuesto Especial sobre Producción y Servicios (Regulations of the Law on the Special Tax on Production and Services), the Resolución Miscelánea Fiscal para 2003 (Miscellaneous Fiscal Resolution for the year 2003), and the Resolución Miscelánea Fiscal para 2004 (Miscellaneous Fiscal Resolution for the year 2004).

2.4 The measures were introduced in the Mexican legislation as a result of the amendments to the LIEPS approved by the Congress of Mexico and published in the Mexican Official Journal (Diario Oficial) on 1 January 2002. Since that date, the LIEPS has been amended on three occasions. The amendments were published in the Official Journal on 30 December 2002, on 31 December 2003, and on 1 December 2004.

2.5 The measures are further regulated in the Reglamento de la Ley del Impuesto Especial sobre Produccion y Servicios (Regulations of the Law on the Special Tax on Production and Services) published in the Official Journal on 15 May 1990, in Title 6 of the Resolución Miscelánea Fiscal para 2004 (Miscellaneous Fiscal Resolution for the year 2004) published in the Official Journal on 30 April 2004, and in Title 6 of the Resolución Miscelánea Fiscal para 2003 (Miscellaneous Fiscal Resolution for the year 2003) published in the Official Journal on 31 March 2003, which identify, inter alia, details on the scope, calculation, payment and bookkeeping and recording requirements of the IEPS.

C. PRODUCTS INVOLVED

2.6 The dispute concerns two categories of products. First, the products that will be generally referred to as "soft drinks and syrups". Second, the sweeteners used in the preparation of such "soft drinks and syrups" and, particularly, three types of sweeteners: cane sugar, beet sugar and HFCS.

  • Soft drinks and syrups: With respect to the challenged measures, this broad category includes soft drinks; hydrating or rehydrating drinks; concentrates, powders, syrups, essences or flavour extracts that can be diluted to produce soft drinks and hydrating or rehydrating drinks; and, syrups or concentrates for preparing soft drinks sold in open containers which use automatic, electric or mechanical equipment. The category does not include other drinks such as alcoholic beverages, beers, wine, fruit juices, vegetable juices, water or mineral water. According to the available information, the Mexican market for soft drinks is – as in other parts of the world – dominated by multinational companies, such as Coca Cola and Pepsi Cola. Coca Cola controls around 71.9 per cent of the Mexican carbonated soft drink market, while Pepsi Cola controls around 15.1 per cent. The Peruvian-owned company Kola Real holds around 4 per cent of the market and Cadbury Schweppes around 2 per cent.5

  • Cane sugar: Cane sugar is a form of sucrose. Sucrose is a disaccharide composed of 50 percent glucose and 50 percent fructose bonded together.6 According to the Food and Agriculture Organization of the United Nations (FAO), cane sugar is a non-refined, crystallized material derived from the juices of sugar-cane stalk and consisting either wholly or essentially of sucrose.7

  • Beet sugar: Beet sugar is another form of sucrose. In technical terms, and although derived from a different source, beet sugar may be considered to be both chemically and functionally identical to cane sugar.8 The FAO defines beet sugar as a non-refined, crystallized material derived from the juices extracted from the root of the sugar beet and consisting either wholly or essentially of sucrose.9

  • High-Fructose Corn Syrup (HFCS): This is a corn-based liquid sweetener made using a multi-stage production process. It is high in fructose in relation to ordinary corn syrup. HFCS is a liquid, composed of a monosaccharide mixture of varying amounts of glucose and fructose, as well as small amounts of other saccharides. HFCS exists in the following three grades: HFCS-55 is the primary grade of HFCS used in soft drink production. HFCS-42, while used in soft drink and juice production, is also used in the production of bakery products, canned goods, dairy products and other foods. HFCS-90 is typically blended with HFCS-42 to make HFCS-55, but it is also used as a sweetener in juices, candies, bakeries, and food processing.10 According to the FAO, HFCS is part of the products known as isoglucose, a type of starch syrups where glucose has been isomerised to fructose by using one or more isomerising enzymes. Other syrups of this group are HFSS (high-fructose starch syrup) and HFGS (high-fructose glucose syrup). HFCS is manufactured from corn starch, and is widely used in the production of food and soft drinks.11

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMENDATIONS

3.1 The United States requests the Panel to find that the challenged tax measures are:

– inconsistent with GATT Article III:2, first sentence, as a tax applied on imported soft drinks and syrups "in excess of those applied to like domestic products" (soft drink tax and distribution tax);

– inconsistent with GATT Article III:2, second sentence, as a tax applied on imported soft drinks and syrups which are "not similarly taxed" to the "directly competitive or substitutable" Mexican products (soft drink tax and distribution tax);

– inconsistent with GATT Article III:2, first sentence, as a tax applied on imported beet sugar "in excess of those applied to like domestic products" (soft drink tax and distribution tax);

– inconsistent with GATT Article III:2, second sentence, as a tax applied on imported HFCS which is "not similarly taxed" to the "directly competitive or substitutable" Mexican cane sugar (soft drink tax and distribution tax);

– inconsistent with GATT Article III:4 as a law that affects the internal use of imported HFCS and accords HFCS "treatment ... less favourable than that accorded to like products of national origin" by:

(a) taxing soft drinks and syrups that use HFCS as a sweetener (soft drink tax),

(b) taxing the agency, representation, brokerage, consignment and distribution of soft drinks and syrups sweetened with HFCS (distribution tax), and

(c) subjecting soft drinks and syrups sweetened with HFCS to various bookkeeping and reporting requirements (bookkeeping requirements)

– inconsistent with GATT Article III:4 as a law that affects the internal use of imported beet sugar and accords beet sugar "treatment ... less favourable than that accorded to like products of national origin" by:

(a) taxing soft drinks and syrups that use beet sugar as a sweetener (soft drink tax),

(b) taxing the agency, representation, brokerage, consignment and distribution of soft drinks and syrups sweetened with beet sugar (distribution tax), and

(c) subjecting soft drinks and syrups sweetened with beet sugar to various bookkeeping and reporting requirements (bookkeeping requirements).

3.2 Mexico requests the Panel to:

– decline to exercise its jurisdiction and recommend to the parties that they submit their respective grievances to an Arbitral Panel, under Chapter Twenty of the NAFTA, which can address both Mexico's concern with respect to market access for Mexican cane sugar in the United States under the NAFTA and the United States' concern with respect to Mexico's tax measures.

– In the event that the Panel does decide to exercise its jurisdiction, Mexico requests it:

(a) to pay particular attention to the circumstances that gave rise to the measures at issue in this case to accord particular weight to Mexico's status as a developing country, especially in the context of the broader dispute concerning trade in sweeteners between Mexico and the United States, and to find that the Mexican measures are justified under Article XX of the GATT 1994.

(b) to employ particular care in terms of how it formulates its findings and recommendations. In particular, Mexico requests the Panel to record that whatever the parties' legal rights may be under other applicable rules of international law, its findings apply solely to the parties' respective rights and obligations under the WTO agreements and cannot be taken to pre-judge such other legal rights;

(c) to recommend that the parties take steps to resolve the sweeteners trade dispute within the NAFTA framework; and

(d) to make certain determinations of facts.12

IV. ARGUMENTS OF THE PARTIES

4.1 The arguments presented by the parties in their written submissions and oral statements are reflected below.13 The parties' answers to questions and comments on each other's responses are reproduced in Annex C.

A. REQUEST FOR PRELIMINARY RULING

4.2 In its first written submission, Mexico made a request that the Panel decline to exercise its jurisdiction in this case. Mexico asked that the Panel make this decision through a preliminary ruling. On 18 January 2005, the Chairman of the Panel wrote to the representatives of the parties giving the Panel's response to this request (see Annex B).

B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES

1. Introduction

4.3 Since 1 January 2002, Mexico has imposed discriminatory tax measures on soft drinks and syrups that favour its domestic cane sugar industry, in violation of its obligations under Articles III:2 and III:4 of the GATT 1994. Specifically, in December 2001, the Mexican Congress approved an amendment of the IEPS adding a 20 per cent tax on soft drinks and syrups that use HFCS or any sweetener other than cane sugar ("HFCS soft drink tax"), as well as a 20 per cent tax on the representation, brokerage, agency, consignment and distribution of such products ("distribution tax").

4.4 The HFCS soft drink and distribution tax is embodied in the following measures, which are the measures at issue in this dispute: (1) the IEPS, as amended effective 1 January 2002, and its subsequent amendments published on 30 December 2002, and 31 December 2003; and (2) related or implementing measures, contained in the Reglamento de la Ley del Impuesto Especial sobre Producción y Servicios, the Resolución Miscelánea Fiscal para 2003, and the Resolución Miscelánea Fiscal para 2004.

2. Legal argument

4.5 For purposes of sweetening soft drinks and syrups, cane sugar is directly competitive and substitutable with HFCS. In Mexico, cane sugar is the overwhelmingly dominant sweetener, with the vast majority of soft drinks and syrups produced in Mexico being sweetened with cane sugar. Conversely, in the United States the sweetener of choice for soft drink and syrup production is HFCS. Further, cane sugar comprises over 95 per cent of Mexican sweetener production; whereas HFCS before the discriminatory tax comprised nearly 100 per cent of Mexican sweetener imports from the United States. Because the tax exempts cane sugar and soft dinks and syrups sweetened with cane sugar, it clearly favours domestic cane sugar production over imports.

(a) The IEPS is an internal tax

4.6 The Ad Note to GATT Article III clarifies that an internal tax that applies to imported products at the time of importation is, nonetheless, an internal tax within the meaning of GATT Article III. The HFCS soft drink tax applies to imported soft drinks and syrups at the time of importation and like domestic products upon their internal transfer. The HFCS soft drink tax also applies to subsequent transfers of imported soft drinks and syrups in Mexico. The distribution tax taxes the agency, representation, brokerage, consignment and distribution of soft drinks and syrups sweetened with HFCS in Mexico. The HFCS soft drink tax and distribution tax are, thus, internal taxes within the meaning of GATT Article III.

(b) The HFCS soft drink tax and distribution tax are inconsistent with GATT Article III:2, first sentence

4.7 A determination of an internal tax's inconsistency with GATT Article III:2, first sentence, is a two step process: First, the imported and domestic products at issue must be "like". Second, the internal tax must be applied to imported products "in excess of" those applied to the like domestic products.

(i) Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are like products

4.8 "Like" products need not be identical in all respects. For example, vodka and shochu were found in a previous dispute to be like products within the meaning of GATT Article III:2, first sentence. Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are like products because they have virtually identical physical properties, end-uses and tariff classifications and are equally preferred by consumers.

Physical characteristics

4.9 Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are physically identical in virtually all respects. First, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are identical in physical appearance. Second, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are virtually indistinguishable by the human body as both contain the same number of calories and are digested and absorbed by the human body in the same manner.

4.10 Third, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar have nearly the same chemical composition. Cane sugar and HFCS are similarly mixtures of fructose and glucose. Thus, the only difference between an HFCS-sweetened and a cane sugar-sweetened soft drink or syrup is the exact ratio of the fructose-glucose mixture.

4.11 Fourth, per the Mexican regulation, a soft drink or syrup sweetened with HFCS and one sweetened with cane sugar bear the same ingredient on the label: "azúcares" ("sugars"). "Azúcares", per Mexico's regulation, is defined as all mono- or disaccharide sugars. This definition captures both the monosaccharide sugar, HFCS, and the disaccharide sugar, cane sugar.

End-uses and channels of distribution

4.12 Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar share identical end-uses and channels of distribution. A soft drink or syrup's sweetener does not affect its end-use. There is no evidence that, when Mexican bottlers, such as Coca-Cola Femsa, switched to a blend of HFCS and sugar (or when United States bottlers switched in the 1980s), these end-uses in any way changed.

4.13 For similar reasons, whether a soft drink or syrup is sweetened with HFCS or sugar does not affect its channels of distribution. Major bottlers do not mentioned a soft drink or syrup's sweetener as in any way affecting its channels of distribution. There is no evidence that channels of distribution for soft drinks or syrups in Mexico changed in the period from the late 1990s through 2001 when bottlers such as Coca-Cola Femsa had switched to a blend of HFCS and sugar for soft drink production, nor that they changed again when, because of the HFCS soft drink tax and distribution tax, bottlers switched back to 100 per cent cane sugar.

Consumer preferences

4.14 Prior to switching to use of HFCS, United States soft drink bottlers undertook extensive consumer surveys to determine the consumer acceptability of soft drinks sweetened with HFCS. These surveys revealed that overall HFCS-sweetened and sugar-sweetened soft drinks were equally acceptable to consumers. Other surveys conducted were based on head-to-head comparisons of HFCS- and sugar-sweetened soft drinks and showed no consistent pattern of preference for sugar-sweetened soft drinks versus HFCS-sweetened soft drinks. Today, Coca-Cola reports "there is no noticeable taste difference."

4.15 In the course of its anti-dumping determination on HFCS from the United States, the Mexican Government noted that a panel of 30 tasters did not detect any significant difference in sweetness or any pattern of preference. That same determination concluded overall: "These possible differences in products manufactured with the two sweeteners in question may prove that these sweeteners are not identical, but this does not mean that they do not have an extremely similar taste." As a result of positive consumer testing, United States manufacturers of soft drinks and syrups switched from sugar to 100 per cent HFCS by the mid-1980s. Similarly, in the late 1990s in Mexico, Mexican soft drink producers began increasingly to substitute HFCS for cane sugar.

4.16 In addition, with the exception of a handful of niche products, soft drinks are simply not marketed on the basis of whether they contain sugar or HFCS as a sweetener.

Tariff classification

4.17 The tariff classification system in Mexico does not separately break out soft drinks and syrups based on whether they are sweetened with sugar (whether cane or beet) or HFCS.

4.18 In sum, HFCS-sweetened and cane sugar-sweetened soft drinks are like products within the meaning of GATT Article III:2, first sentence.

(ii) Soft drinks and syrups sweetened with HFCS are taxed in excess of soft drinks and syrups sweetened with cane sugar

HFCS soft drink tax

4.19 The HFCS soft drink tax applies a 20 per cent tax on soft drinks and syrups. Only internal transfers of soft drinks and syrups sweetened exclusively with cane sugar are exempt from the IEPS. Thus, with respect to imports, the IEPS taxes (1) all soft drinks and syrups upon their importation – regardless of the sweetener used – and then (2) taxes their subsequent internal transfer if they use any sweetener other than cane sugar.

4.20 Virtually all regular soft drinks and syrups produced in the United States are sweetened with HFCS, while all regular soft drinks and syrups produced in Mexico are sweetened with cane sugar. Therefore, by exempting soft drinks and syrups sweetened with only cane sugar, the IEPS successfully exempts all regular soft drinks and syrups produced in Mexico from payment of the 20 per cent tax. A 20 per cent tax that applies to imported soft drinks and syrups but not to soft drinks and syrups produced domestically is a tax "in excess" of that applied to like domestic products. Therefore, as applied at the time of importation and upon internal transfers, the HFCS soft drink tax is inconsistent with GATT Article III:2, first sentence.

Distribution tax

4.21 The IEPS also applies a 20 per cent tax on the representation, brokerage, agency, consignment and distribution of soft drinks and syrups sweetened with HFCS. Soft drinks and syrups sweetened with cane sugar are exempt from the distribution tax. A tax applied on the representation, brokerage, agency, consignment and distribution of a good is, in effect, a tax on the good itself. Therefore, by taxing the representation, brokerage, agency, consignment and distribution of soft drinks and syrups sweetened with HFCS at 20 per cent while completely exempting soft drinks and syrups sweetened only with cane sugar, the IEPS subjects HFCS-sweetened soft drinks and syrups to taxes "in excess of" of those applied on like domestic products – soft drinks and syrups made with cane sugar. Accordingly, the distribution tax is also inconsistent with GATT Article III:2, first sentence.

(c) The IEPS is inconsistent with Article III:2, second sentence, of GATT 1994

4.22 A measure is inconsistent with GATT Article III:2, second sentence, if (1) the imported product and domestic product are "directly competitive or substitutable products;" (2) the directly competitive or substitutable imported and domestic products are "not similarly taxed;" and (3) the dissimilar taxation is applied "so as to afford protection to domestic production." The IEPS as a tax on soft drinks and syrups made with HFCS, as well as a tax on the use of HFCS itself, meets each of these elements such that the IEPS is inconsistent with Mexico's obligations under GATT Article III:2, second sentence.

(i) The HFCS soft drink tax as applied to HFCS is inconsistent with GATT Article III:2, second sentence

4.23 By imposing a 20 per cent tax on soft drinks and syrups sweetened with HFCS, Mexico has, in effect, imposed a prohibitive tax on the use of HFCS.

HFCS and cane sugar are directly competitive or substitutable products

4.24 HFCS and cane sugar are directly competitive or substitutable products. Whether two products are "directly competitive or substitutable" must be determined on a case-by-case basis and in light of all the relevant facts in the case. An assessment of whether there is a direct competitive relationship between two products or groups of products requires evidence that consumers consider or could consider the two products or groups of products as alternative ways of satisfying a particular need or taste. This requires evidence of the direct competitive relationship between the domestic and imported products, including comparisons of their physical characteristics, end-uses, channels of distribution and prices. Moreover, the category of directly competitive or substitutable products is broader than the category of "like products": even imperfectly substitutable products can fall under the second sentence of Article III:2. Products do not have to be substitutable for all purposes at all times to be considered competitive. It is sufficient that there is a pattern that they may be substituted for some purposes at some times by some consumers.

Physical characteristics

4.25 HFCS and cane sugar for use in soft drinks and syrups have substantially the same physical characteristics. This analysis should focus on the defining physical characteristics of HFCS and cane sugar for the purpose of competition in the marketplace. Because the HFCS soft drink tax applies on the use of HFCS in soft drinks and syrups, the relevant "marketplace" is the soft drink and syrup industry.

4.26 HFCS is a liquid sweetener that has substantially the same chemical characteristics as cane sugar. Both HFCS and cane sugar are composed of a combination of glucose and fructose molecules and, when in a soft drink or syrup, both exist as monosaccharides within three to four weeks of bottling. HFCS-55 contains just five per cent more fructose than cane sugar; HFCS-42 contains just eight per cent less. The similar chemical composition of HFCS and cane sugar is not accidental. In fact, when HFCS was developed, it was calibrated to be just as sweet as sugar as a sweetener for soft drinks. This was done by developing a fructose-glucose ratio that closely mimicked that of cane sugar.

4.27 Because the chemical constituents of sugar and HFCS are so similar, the taste perceptions in soft drink and syrup formulations are extremely similar. This is especially true after the sugar in a soft drink has inverted, or broken down to a monosaccharide solution of fructose and glucose molecules just as the molecules exist in HFCS. Testing conducted by the soft drink and HFCS industries found that HFCS-sweetened soft drinks and sugar-sweetened soft drinks were comparable and of equal acceptability to the consumer. HFCS and cane sugar are also physically similar when it comes to smell and colour. Both HFCS and cane sugar are odourless and, as liquids, both are colourless.

4.28 HFCS's form as a liquid sweetener does not distinguish it from cane sugar as a sweetener for soft drinks and syrups. First, some producers of soft drinks and syrups actually use cane sugar in its liquid form. Second, part of the bottling process when using cane sugar as a sweetener is mixing the cane sugar with water to produce a sugar syrup, which is then mixed with other ingredients to produce a soft drink.

4.29 In the context of the SECOFI anti-dumping investigation of HFCS in 1997-98, the Mexican Government has also determined that cane sugar and HFCS share the same essential physical characteristics and concluded that HFCS-55, HFCS-42 and sugar are "like products" for the purposes of Mexico's anti-dumping law and Article 2.6 of the Anti-Dumping Agreement.

4.30 When this anti-dumping determination was challenged in binational panel proceedings under NAFTA Chapter 19, the binational panel agreed with Mexico that sugar and HFCS are "like products."

End uses and consumer preferences

4.31 Overlap in end-use is important in determining direct competitiveness or substitutability. The existence of mixtures, and the use of two products in varying mixtures, also testifies to their overlap in uses and to their commercial interchangeability. Commonality of end-uses in foreign markets and consumer tastes are also relevant. For HFCS itself or sugar, the relevant consumers are sweetener users of HFCS in the bottling industry and elsewhere. The end-uses of HFCS and cane sugar, and consumer tastes for these products, demonstrate their competitiveness or substitutability.

4.32 The evidence submitted by the United States shows that HFCS was developed with the end-use of soft drink bottling as its major objective. Mexican soft drink producers have used varying mixtures of HFCS and cane sugar, and have converted from cane sugar to mixtures of HFCS and then back again. This free variation between sweeteners testifies to the commercial interchangeability of HFCS and cane sugar in Mexican soft drink production. When a soft drink bottler uses a blend of HFCS and sugar, the bottler is using both sweeteners for the same purpose, in the same plant, for the same brand of the same soft drink.

4.33 In addition, because the HFCS soft drink tax does not apply to fruit or vegetable juices, major juice bottlers can, and do, use as much HFCS in their sweetened juices as they wish – up to 100 per cent of sweetener in some cases. Mexican bottlers' reaction to the HFCS soft drink tax was to switch back to 100 per cent sugar. The former use of HFCS and sugar in mixtures, and the use of up to 100 per cent HFCS by bottlers who are not subject to a prohibitive tax, testify to the distortion of market choices created by the HFCS tax. In the United States and Canada, soft drink and syrup producers have shifted almost entirely from sugar to HFCS over time.

4.34 Switching between HFCS and sugar is not expensive or difficult. Switching from HFCS to sugar is more difficult and costly, and Mexican bottlers would not have done so if they had not been forced to by the 20 per cent tax. In the early 1980s in the United States when United States bottlers were using blends of HFCS and sugar, varying the HFCS-sugar ratio in a given batch of soft drinks could be done with relative ease.

4.35 Also, Mexican labelling regulations do not distinguish between "sugars" as a food or beverage ingredient. Thus, a bottler can move between different mixtures of HFCS and sugar without changing its labelling.

4.36 The Mexican Government has recognized the overlap in end-uses and consumer tastes between HFCS and cane sugar. As noted above, in the final anti-dumping determination of January 1998, SECOFI found that HFCS and sugar "fulfil the same functions and are commercially interchangeable in the marketplace." SECOFI noted the ample proofs presented that consumers "perceive no difference at all" between sugar, invert sugar and HFCS. The determination also notes that a panel of 30 tasters did not detect any significant difference in sweetness or any pattern of preference for HFCS-55, refined sugar or invert sugar and that an examination of a range of food and beverage industries showed a practice that substitution of HFCS for sugar was not promoted as a change in brand or a "new flavour."

4.37 During the review of this determination by the binational panel under Chapter 19, Mexico argued that "technical studies and testimonies of representatives of the [soft drink] industry show that HFCS and sugar are both used interchangeably in the industry without affecting the quality of soft drink products," and that "HFCS and sugar while not perfect substitutes possess characteristics and composition sufficiently similar that they serve a great number of similar functions. This allows them to be commercially interchangeable in such a great variety of sub-sectors of the beverages and food sectors." The Chapter 19 binational panel concluded that sugar and HFCS are commercially interchangeable.

4.38 Sugar and HFCS are therefore directly competitive or substitutable and in direct competition in the marketplace.

Channels of distribution

4.39 The channels of distribution for HFCS and cane sugar, and for soft drinks sweetened with them, provide additional evidence that these products are directly competitive or substitutable. HFCS and sugar are sold through similar channels from producers to industrial bottlers, and in some cases the same company sells both HFCS and sugar to similar customers.

4.40 HFCS of United States origin has been sold to Mexican customers through two channels: on an f.o.b. basis directly from the United States exporter and terminals built by HFCS exporters in Mexico. The latter received HFCS exports from plants in the United States and then sold the HFCS to customers in Mexico. Mexican bottlers buy Mexican cane sugar directly from the sugar mill or from a distributor. Any difference in distribution channels is, thus, attributable to the fact that HFCS is the imported sweetener and cane sugar is the domestic sweetener. Both sweeteners are sold directly from the sweetener producer to the end-user, which with respect to this dispute are soft drink and syrup bottlers.

4.41 In the anti-dumping investigation on HFCS from the United States, SECOFI examined distribution channels for HFCS and sugar and found that they were the same, and were targeted at the same customers.

Tariff classification

4.42 The classification of these products in the Mexican tariff schedule also supports the conclusion that these are directly competitive or substitutable products. Although cane sugar is generally classified under heading 1701 and HFCS under heading 1702, some cane sugar products (i.e., liquid cane sugar and invert cane sugar) are classified under heading 1702.

4.43 With respect to soft drinks and syrups sweetened with either HFCS or cane sugar, as recounted above, the tariff classification system in Mexico does not separately break out soft drinks and syrups based on whether they are sweetened with cane sugar or HFCS.

Price relationships and competition in the marketplace

4.44 The price relationships between HFCS and cane sugar in soft drink use also demonstrate that they are directly competitive or substitutable products. The connection between the price, or availability, of HFCS and the price of sugar has been amply demonstrated by the real-world economic experiment of the HFCS soft drink tax. In the three days following the enactment of the tax, for example, 30 Mexican bottlers cancelled all orders for HFCS. By mid-January 2002, the HFCS soft drink tax had resulted in a 8 per cent increase in Mexican sugar prices.

4.45 Because of the HFCS tax, and the collapse of demand for HFCS from bottlers, importers shuttered their terminals or otherwise virtually ceased imports of HFCS for soft drink and syrup production, and domestic HFCS producers partially or totally idled their production. Yet demand for sweeteners has remained constant or growing with annual growth in population and GDP. As sugar replaced HFCS in soft drink and syrup production, the additional demand for sugar artificially created a sugar shortage. The Secretariat of Economy explained its decision to provide an extraordinary cupo (market access quota) for sugar imports during the latter part of 2003: "This plan results from various complaints about shortage problems in sugar, presented to the Secretariat of Economy by producers who use sugar in their production processes. These concerns are fundamentally a consequence of the entry into force of the Impuesto Especial sobre Producción y Servicios (IEPS) for soft drinks made with fructose, which has generated a substitution of sugar for fructose ..."

4.46 The Mexican Government Comisión Federal de Competencia (CFC, or Federal Competition Commission) has also recognized that sugar and HFCS are directly competitive with each other in the marketplace, in two separate decisions regarding competition in the sugar industry. These decisions were based on an examination of the detailed facts of competition in the Mexican sweeteners market and found that HFCS is a close substitute for refined sugar in carbonated drinks. As the panel in Chile – Alcoholic Beverages noted: the question of competition from an anti-trust perspective generally utilizes narrower market definitions than used when analysing markets pursuant to Article III:2, second sentence and it seems logical that competitive conditions sufficient for defining an appropriate market with respect to anti-trust analysis would a fortiori suffice for an Article III analysis. The Panel in this dispute should read the findings of the CFC to confirm that cane sugar and HFCS are directly competitive or substitutable products in the Mexican market.

Summary on direct competition and substitutability

4.47 To set the HFCS-sugar comparison in perspective, the Panel might consider the WTO disputes regarding discrimination in taxation of distilled spirits. Each of these disputes concerned a situation of long-standing tax discrimination, in which tax barriers largely foreclosed the market to the imported product. The panel and the parties in each of these cases had to place a particular focus on potential competition and latent demand, since actual discrimination was so severe and so long-standing.

4.48 In the present case, there is not just potential competition between imported HFCS and domestic cane sugar: the Panel has available to it data on actual competition between these products including product switching before and just after the HFCS soft drink tax was imposed. HFCS itself was developed to mimic and improve on cane sugar in soft drink bottling operations, and its success in the marketplace of the bottling industry testifies to how close a substitute it is for sugar. Indeed, if HFCS were not quite so successful at competing with cane sugar, the Mexican Government might not have acted to protect the Mexican sugar industry by enacting the HFCS soft drink tax to expel imported HFCS from the soft drink and syrup market in Mexico.

4.49 For all these reasons, the Panel should find that for purposes of sweetening soft drinks, imported HFCS and Mexican cane sugar are directly competitive or substitutable products, and compete directly in the soft drink and syrups sweeteners marketplace in Mexico.

HFCS and cane sugar are not similarly taxed

4.50 There can be no question that the HFCS soft drink tax taxes HFCS and cane sugar dissimilarly. When contained in a soft drink or syrup, HFCS results in a 20 per cent tax on the value of the finished soft drink or syrup. Use of exclusively cane sugar in that same soft drink or syrup results in no tax at all. As applied to HFCS, however, the impact of the tax differential actually far exceeds a 20 percentage point difference. This is because the HFCS soft drink tax is calculated on the value of the finished soft drink or syrup such that the tax results in a tax that is four times the value of the HFCS – or in other words, a 400 per cent tax on HFCS. With a tax liability of 400 percent, the HFCS producer cannot even provide HFCS to its customer for free: the producer would have to pay the customer to take it. The HFCS soft drink tax is essentially a prohibitive tax on the use of HFCS in soft drinks and syrups. Needless to say, a prohibitive tax applied to the imported product that is not applied to the directly competitive or substitutable domestic product is a dissimilar tax within the meaning of GATT Article III:2, second sentence.

HFCS soft drink tax is applied so as to afford protection to domestic production

4.51 The protective application of a measure is to be discerned from the structure of the measure itself, including the very magnitude of the dissimilar taxation involved. A measure's purpose, to the extent it is "objectively manifested in the design, architecture and structure of the measure" may also be "intensely pertinent to the task of evaluating whether or not that measure is applied so as to afford protection to domestic production."

4.52 Mexico's tax on the use of HFCS is applied "so as to afford protection" to Mexican cane sugar production. The HFCS soft drink tax is structured such that all soft drinks and syrups are taxed 20 percent, except those sweetened exclusively with cane sugar. Cane sugar is a domestically-produced sweetener in Mexico. Since Mexico does not import sugar – or does so in only very small amounts – this is a benefit bestowed nearly exclusively on domestic producers. Domestic producers have, thus, benefited from being placed in an un-taxed category, while their greatest commercial rival, the imports of HFCS, remain subjected to taxation.

4.53 Moreover, as indicated above, HFCS remains not only subject to taxation but taxation at a prohibitive rate. As stated, a 20 per cent tax on the value of the finished soft drink or syrup results in a 400 per cent tax on the use of HFCS itself. The enormity of this dissimilar taxation has effectively excluded imported HFCS from the Mexican sweeteners market. Dissimilar taxation of this magnitude and nature objectively manifests the intention of the tax to protect Mexican cane sugar production.

4.54 Further, the structure of the HFCS soft drink tax is such that the low-taxed product is almost exclusively domestically-produced, while the high-taxed product, prior to imposition of the discriminatory tax, comprised virtually all directly competitive or substitutable imports. Indeed, in 2001 HFCS accounted for 99.7 per cent of Mexican nutritive sweetener imports. By contrast, in 2001 cane sugar comprised somewhere between 90 and 95 per cent of domestically produced sweeteners in Mexico. Thus, at the time of its imposition, the HFCS soft drink tax applied to nearly 100 per cent of sweetener imports but less than ten per cent of Mexican production. The Appellate Body addressed a similar situation in Chile – Alcoholic Beverages.

4.55 The protectionist structure of the IEPS is confirmed by a remarkable series of judicial and political pronouncements that the purpose of the tax is to "protect the sugar industry." For example, the highest interpretative authority in Mexico, the Supreme Court, has definitively and conclusively characterized Mexico's tax scheme as designed to protect Mexican domestic production of cane sugar.

4.56 In sum, the HFCS soft drink tax, as a tax on HFCS but not the directly competitive or substitutable domestic product cane sugar, is applied in a manner so as to afford protection to domestic production, and, therefore, is inconsistent with Mexico's obligations under GATT Article III:2, second sentence.

(ii) The HFCS soft drink tax and distribution tax as applied to soft drinks and syrups is inconsistent with GATT Article III:2, second sentence

Soft drinks and syrups sweetened with cane sugar are directly competitive or substitutable with soft drinks and syrups sweetened with HFCS

4.57 The category of "like" products is a subset of those products which are directly competitive or substitutable. Therefore, as soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are like products they are necessarily directly competitive or substitutable products.

4.58 Moreover, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are directly competitive or substitutable products for many of the same reasons they are "like". First, with respect to physical appearance, end-uses and channels of distribution, consumer preferences and tariff classification, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are virtually the same. Second, HFCS-sweetened and sugar-sweetened soft drinks and syrups compete in the same market and for the same customers. For these reasons, as well as others examined in more detail above, soft drinks and syrups sweetened with HFCS and soft drinks sweetened with cane sugar are directly competitive or substitutable products within the meaning of GATT Article III:2, second sentence.

Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are not similarly taxed

4.59 As stated above, the HFCS soft drink tax imposes a tax at a rate of 20 per cent on (1) all importations of soft drinks and syrups from the United States and (2) subsequent internal transfers of such soft drinks and syrups if they are sweetened with HFCS. The IEPS exempts from the latter soft drinks and syrups sweetened with cane sugar. As also stated, all regular soft drinks and syrups produced in Mexico are sweetened with cane sugar, such that the exemption successfully excludes all regular soft drinks and syrups produced in Mexico from payment of the tax. Consequently, the HFCS soft drink tax results in a 20 per cent tax on imported soft drinks and syrups, and their subsequent internal transfer if sweetened with HFCS, that is not similarly applied to directly competitive or substitutable products. Imposing a 20-percentage point differential between the tax on the imported product and the tax on the directly competitive or substitutable product clearly means that the products are not "similarly taxed". Accordingly, the HFCS soft drink tax as applied to soft drinks and syrups – both at the time of importation and on subsequent transfers – results in the type of dissimilar taxation captured under GATT Article III:2, second sentence.

4.60 In addition, the distribution tax also results in dissimilar taxation of imported soft drinks and syrups. Like the tax on internal transfers, the IEPS exemption for soft drinks and syrups sweetened with cane sugar, also successfully excludes all regular soft drinks and syrups produced in Mexico from payment of the distribution tax. Because virtually all regular soft drinks and syrups produced in the United States are sweetened with HFCS, imported soft drinks and syrups do not enjoy the same exemption. As a consequence, the distribution tax taxes the representation, brokerage, agency, consignment and distribution of imported soft drinks and syrups but not the representation, brokerage, agency, consignment and distribution of soft drinks and syrups produced in Mexico. A tax on the representation, brokerage, agency, consignment and distribution of a good, is in effect, a tax on the good itself. Therefore, the distribution tax constitutes a tax applied on imported soft drinks and syrups that is not similarly applied to directly competitive or substitutable products produced in Mexico.

The HFCS soft drink and distribution tax is applied so as to afford protection to domestic production

4.61 As stated above, whether a measure is "applied so as to afford protection to domestic production" is "an issue of how the measure in question is applied." The IEPS – both its HFCS soft drink tax and its distribution tax – is applied such that it affords protection to domestic production. Under the IEPS, soft drinks and syrups sweetened with HFCS are taxed at 20 per cent (whether on their importation, internal transfer or in connection with their representation, brokerage, agency, consignment or distribution), whereas soft drinks and syrups sweetened with cane sugar are not. As discussed above, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are directly competitive or substitutable products. Moreover, as also explained above, all regular soft drinks and syrups produced in Mexico are sweetened with cane sugar, whereas virtually all soft drinks and syrups produced in the United States are sweetened with HFCS. Therefore, the structure of the IEPS, is to apply a 20 per cent tax on soft drinks and syrups imported from the United States and no tax on directly competitive or substitutable soft drinks and syrups produced in Mexico.

4.62 The structure of the IEPS is precisely the type of structure that has been found on prior occasions to constitute persuasive evidence that a measure is applied "so as to afford protection." Furthermore, if viewed on an order of magnitude basis the 20-percentage point difference in this dispute far exceeds the tax differential examined in the other WTO alcoholic beverages disputes. Moreover, the IEPS applies not only on the importation and internal transfer(s) of soft drinks and syrups themselves but also on their representation, brokerage, agency, consignment and distribution. Thus, the tax differential is not just 20 per cent on the value of the soft drink or syrup but an additional 20 per cent on the value of any representation, brokerage, agency, consignment or distribution used to effectuate that soft drink or syrup's transfer.

4.63 As a tax on imported soft drinks and syrups that is not similarly applied to directly competitive or substitutable soft drinks and syrups produced in Mexico, the IEPS (HFCS soft drink tax and distribution tax) is inconsistent with Mexico's obligations under GATT Article III:2, second sentence.

(d) The HFCS soft drink tax, distribution tax and reporting requirements applied on the use of HFCS are inconsistent with GATT Article III:4

4.64 In examining a claim under GATT Article III:4, the Appellate Body has identified three distinct elements required to establish a violation: (1) the imported and domestic products are "like products;" (2) the measure is a law, regulation, or requirement affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of the imported and domestic like products; and (3) the imported product is accorded less favourable treatment than the domestic like product. The IEPS meets each of these criteria as a tax on the use of HFCS by (1) taxing the transfer of soft drinks and syrups made with HFCS at 20 per cent (HFCS soft drink tax); (2) taxing the representation, brokerage, agency, consignment and distribution of soft drinks and syrups made with HFCS (distribution tax); and (3) subjecting soft drinks and syrups made with HFCS to numerous bookkeeping and reporting requirements (reporting requirements). These measures are not imposed on cane sugar or soft drinks and syrups made only with cane sugar.

(i) HFCS and cane sugar are like products

4.65 As the details provided above reveal, HFCS and cane sugar compete head-to-head as sweeteners for soft drinks and syrups. Indeed, as a sweetener in soft drinks and syrups, HFCS and cane sugar are near perfect substitutes. This is demonstrated by the facts reviewed above and, in particular, by the fact that prior to imposition of the IEPS, soft drink and syrup producers were, in rapidly increasing amounts, actually substituting HFCS for cane sugar. These facts overwhelmingly support a finding that HFCS and cane sugar are "directly competitive or substitutable" products for purposes of sweetening soft drinks and syrups within the meaning of GATT Article III:2. They are also more than adequate to support a finding that HFCS and cane sugar are "like" products within the meaning of GATT Article III:4.

4.66 First, the analysis provided with respect to the GATT Article III:2, second sentence claim thoroughly establishes that, prior to the discriminatory tax, HFCS competed directly with cane sugar as a sweetener for soft drinks and syrups in Mexico. Second, HFCS and cane sugar overlap in the ways deemed relevant to the like product inquiry: (i) the physical properties of the products; (ii) the extent to which the products are capable of serving the same or similar end uses; (iii) the extent to which consumers perceive and treat the products as alternative means of performing particular functions in order to satisfy a particular want or demand; and (iv) the international classification of the products for tariff purposes. Each of these elements was addressed in relation to the claim under GATT Article III:2, second sentence, and support a determination that, for purposes of GATT Article III:4, HFCS and cane sugar are "like" products as sweeteners for soft drinks and syrups.

(ii) IEPS is a law affecting the use of HFCS

4.67 The term "affecting" in GATT Article III:4 is broad in scope. This broad scope, as articulated by several panels and affirmed by the Appellate Body, "cover[s] not only laws and regulations which directly govern the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between domestic and imported products."

4.68 The IEPS "affects" the use of HFCS by conditioning access to an advantage on use of the domestic sweetener, cane sugar. Specifically, under the IEPS, soft drink and syrup producers who use exclusively cane sugar to sweeten their products are wholly exempt from the HFCS soft drink tax, the distribution tax and the reporting requirements. Soft drink and syrup producers who use HFCS to sweeten their products do not enjoy the same advantage. Instead, soft drink and syrup producers who use HFCS to sweeten their products must (1) pay a 20 per cent tax on the transfer of their products (HFCS soft drink tax); (2) pay a 20 per cent tax on representation, brokerage, agency, consignment or distribution of their products; and (3) track and report commercially sensitive information, including their products' top 50 customers and suppliers, to the Mexican authorities (reporting requirements). The added burdens imposed on the use of HFCS not only "influence" producers' choice of sweeteners but, because of the prohibitive nature of the tax (four times the value of the sweetener itself), economically compel producers to use domestically-produced cane sugar over HFCS. It is difficult to imagine evidence more telling of this, than the fact after imposition of the IEPS every Mexican bottler using HFCS reverted to a 100 per cent use of cane sugar. The IEPS is, thus, a law "affecting" the "internal ... use" of HFCS.

(iii) IEPS accords less favourable treatment to HFCS

4.69 The IEPS undoubtedly affords "less favourable treatment" to imports than "accorded like products of national origin." In Mexico cane sugar is almost exclusively a domestically-produced sweetener. The IEPS bestows a real and substantive advantage on the use of cane sugar that is not accorded to HFCS – a product which prior to application of the IEPS to soft drinks and syrups accounted for nearly 100 per cent of United States sweetener imports. While soft drinks and syrups using exclusively cane sugar as a sweetener are wholly exempt from the IEPS, those sweetened, even partially, with HFCS are subject by virtue of the IEPS to (1) a 20 per cent tax on their transfer (HFCS soft drink tax); (2) a 20 per cent tax on their representation, brokerage, agency, consignment and distribution (distribution tax); and (3) bookkeeping and reporting requirements concerning commercially sensitive information (reporting requirements). The first of these alone – as a tax four times the value of the input – is sufficient to work as a prohibition on the use of HFCS. In sum, the IEPS by virtue of its HFCS soft drink tax, distribution tax and reporting requirements is inconsistent with GATT Article III:4 as a law affecting the internal use of HFCS and affording imported HFCS less favourable treatment than the like product of national origin.

3. Conclusion

4.70 For the reasons set out above, the United States respectfully requests the Panel to find that the IEPS is:

– inconsistent with GATT Article III:2, first sentence, as a tax applied on imported soft drinks and syrups "in excess of those applied to like domestic products" (HFCS soft drink tax);

– inconsistent with GATT Article III:2, first sentence, as a tax applied on the agency, representation, brokerage, consignment and distribution of soft drinks and syrups sweetened with HFCS "in excess of those applied to like domestic products" (distribution tax);

– inconsistent with GATT Article III:2, second sentence, as a tax applied on imported HFCS which is "directly competitive or substitutable" with Mexican cane sugar which is "not similarly taxed" (HFCS soft drink tax);

– inconsistent with GATT Article III:2, second sentence, as a tax applied on imported soft drinks and syrups which are directly competitive or substitutable with domestic soft drinks and syrups which are "not similarly taxed" (HFCS soft drink tax);14

– inconsistent with GATT Article III:2, second sentence, as a tax applied on the agency, representation, brokerage, consignment and distribution of soft drinks and syrups sweetened with HFCS which are directly competitive or substitutable with domestic soft drinks and syrups which are "not similarly taxed" (distribution tax); and

– inconsistent with GATT Article III:4 as a law that affects the internal use of imported HFCS and accords HFCS "treatment ... less favourable than that accorded to like products of national origin" by:

(a) taxing soft drinks and syrups that use HFCS as a sweetener (HFCS soft drink tax),

(b) taxing the agency, representation, brokerage, consignment and distribution of soft drinks and syrups sweetened with HFCS (distribution tax), and

(c) subjecting soft drinks and syrups sweetened with HFCS to various bookkeeping and reporting requirements (reporting requirements).15

C. FIRST WRITTEN SUBMISSION OF MEXICO

1. Introduction

4.71 The United States' first submission presents an incomplete and one-sided account of the factual context in which the Mexican fiscal measures at issue in this proceeding arose. Viewed in the light of all relevant facts, this is a dispute arising under a regional free trade agreement and it would be inappropriate for this Panel to hear it. Mexico maintains that the Panel should decline to exercise its jurisdiction to resolve the present dispute and should recommend that the parties resort to the NAFTA dispute settlement mechanism to resolve in an integral manner the broader sweeteners trade dispute. Should the Panel elect to proceed with the examination of the merits of this dispute, it should pay particular attention to certain novel issues concerning the legal relationship between the WTO agreements and efforts to liberalize trade at the regional level.

4.72 Mexico and the United States negotiated under the NAFTA a balanced sweetener trade regime that mainly includes sugar and HFCS, which compete with each other in certain market segments in both countries. The Mexican Congress introduced the tax in response to: (i) the United States' continued refusal to address Mexico's repeatedly stated concern that the United States had breached its NAFTA market access commitments regarding trade in sugar, negotiated as part of the NAFTA, while HFCS continued to enjoy preferential access to the Mexican market, severely affecting the sugar sector in Mexico; (ii) the United States' continued refusal to submit to NAFTA dispute settlement to resolve the dispute; and (iii) the ineffectiveness of bilateral negotiations that the parties have conducted over several years.

4.73 The United States' first submission has omitted all reference to the complex history of the bilateral sweetener dispute under the NAFTA. Nonetheless, there does exist a genuine dispute between the States over the meaning and scope of the NAFTA provisions governing the trade in sweeteners, as recognized by the United States Department of Agriculture (USDA).

4.74 Mexico has duly submitted to the jurisdiction of multiple international panels and international tribunals convened at the behest of the United States or its nationals. Meanwhile, no forum is presently available in which Mexico's grievance can be heard.

4.75 Accordingly, Mexico will request this Panel to decline to exercise its jurisdiction and recommend to the parties that, as a matter of urgency, they submit their respective grievances to a NAFTA Chapter Twenty Panel which can address the dispute as a whole.

4.76 If the Panel refuses Mexico's request that it decline to exercise its jurisdiction, in view of the fact that there are parallel international proceedings in which substantial monetary damages are being claimed against it, Mexico will request the Panel to refrain from making certain findings that could jeopardize its ability to mount a proper defence in such proceedings. This is of fundamental importance.

2. Facts

(a) The importance of the Mexican sugar industry

4.77 The sugar sector spans 15 of Mexico's 32 states and is a key component of economic and social development in many rural areas of the country. The Mexican sugar industry is smaller and more fragmented in comparison to international standards and in particular to the United States' sugar and HFCS industries. It is characterized by a relatively large number of small and medium-sized sugar mills. However, it must be recognized that in addition to the fact that Mexico is a developing country facing a significant and profound structural lag in comparison to the United States, the existing Mexican sugar industry, in particular, is an emerging private industry rooted in an agricultural system that has a peculiar land tenure regime that itself resulted from significant structural changes made after the Mexican Revolution. Successive governments' efforts to provide social benefits and rural employment to some of Mexico's poorest citizens through this crop must also be recognized. These characteristics of the sugarcane industry long pre-dated Mexico's accession to the GATT as well as its accession to NAFTA.

(b) The NAFTA negotiations

4.78 During the NAFTA negotiations (1991-92), the three Parties initially sought to negotiate a trilateral agriculture chapter. The Uruguay Round of Multilateral Trade Negotiations was then under way and trade in agricultural products was being addressed there. Ultimately, the Parties recognized that most agricultural issues would be addressed in the multilateral negotiations. Accordingly, only certain general rules were established at a trilateral level and the specific commitments were established by means of bilateral negotiations.

4.79 In Section A of Annex 703.2 of the NAFTA, the United States and Mexico agreed on the rules dealing with trade in sugar and sugar syrups.16 They agreed to move towards a common regional market by establishing a common external tariff and removing all tariffs and other barriers to bilateral trade as between each other.

4.80 A key issue during the transition period was the definition of "net production surplus", which was defined by Annex 703.2(26) to mean "the quantity by which a Party's domestic production of sugar exceeds its total consumption of sugar during a marketing year…"

4.81 The effect of this agreement was that Mexico would have a guaranteed minimum duty-free access; above this minimum level it would be able to export its net production surpluses duty-free within certain limits, until free trade was reached in 2008. However, if Mexico achieved net production surplus status for two consecutive marketing years, it would be able to export the total amount of its net surplus to the United States.

4.82 Although HFCS is a sugar substitute in certain industrial applications, it was not addressed in Annex 703.2. However, the parties were well aware that sugar and HFCS were part of the same market, the sweeteners market.

(i) The United States requests changes

4.83 The United States' sugar industry believed that the Mexican sugar industry's ability to export its surpluses to the United States would put pressure on the domestic price of sugar and thereby reduce its profitability. Therefore, it commenced strenuous lobbying efforts in Washington, D.C. in opposition to the NAFTA.

4.84 There was a recognition that the Mexican soft drink industry had used sugar exclusively, but that there was a potential for it to shift to lower-cost HFCS and that a displacement of sugar by HFCS could increase Mexico's net production surplus. Accordingly, the United States proposed the exchange of letters.

4.85 The meeting resulted in two draft letters (in English and Spanish) that were initialled by the lead negotiators from both countries, but not signed by Ministers who were the intended signatories.17 The United States submitted both letters to its Congress as part of the NAFTA implementing package.

4.86 Mexico advised the United States that the draft letters did not reflect the agreement reached. In particular, Mexico stated that the drafts included a phrase providing that paragraph 16 of Annex 703.2 – the paragraph of the NAFTA that provides that Mexico had the right to export all of its surpluses if it became a net surplus producer for two consecutive years – would not apply, and that had not been part of the agreement.18

4.87 The United States responded that inclusion of that phrase had been agreed and requested that the exchange of letters be formalized. For that purpose, the United States attached a letter signed by its Minister that reflected its understanding of the agreement.19 Mexico replied with a letter signed by its Minister that contained its own understanding.20 In particular, it did not include the phrase that provided that paragraph 16 of Annex 703.2 would not apply. Thus, there was no meeting of the minds. Mexico has maintained that the text of the NAFTA as originally signed by the leaders of the three countries prevails.

(ii) Subsequent developments

4.88 Mexico moved from being a net importer of sugar to being a surplus producer.21 First, the privatization of the sugar mills led to new investment in the mills' physical plant and consequent improvements in productivity.22 Second, encouraged by new mill owners, the cane growers sought to increase their own productivity and also increased the number of hectares cultivated.23 Third, growing imports of United States-originating HFCS into Mexico began to undercut higher-priced Mexican sugar and to displace it in certain market segments, particularly the soft drinks segment.24 Fourth, there was a general expectation in the Mexican industry that it would be able to export the full surpluses to the United States market. This did not occur because the United States applied its own understanding of the sweetener agreement, based on the English version of the initialled draft letter that it had submitted to the Congress on 4 November 1993.

4.89 The rapid emergence and growth of the sugar surplus exacerbated the financial condition of the industry in Mexico. Even before the NAFTA entered into force, the government had found it necessary to restructure the debt of the privatized mills and extend new credit to them. In such circumstances, the terms of Mexico's negotiated access to the United States' sugar market took on particular significance.

(iii) Throughout this time, the United States recognized the existence of a genuine dispute

4.90 It is important to note that throughout this time, the USDA, an agency of the United States' Executive Branch, repeatedly acknowledged in its publications that there was a dispute between the two States over their bilateral trade in sweeteners. In October 2000, the USDA commented in its report entitled "Mexico: Sugar Semi-Annual 2000":

"According to NAFTA, the duty-free access quantity for sugar for MY 2000 will increase. The United States and the Mexican governments went through difficult negotiations because of the confusion between the original NAFTA document and a 'side letter' allowing different quantities of Mexican sugar to be exported to the United States As of the writing of this report, no agreement has been reached and Mexico has already filed for a NAFTA dispute resolution panel under Chapter XX of NAFTA. The Undersecretary of SECOFI, Luis de la Calle, stated that if the NAFTA Agreement conditions are not respected there will be no other solution than to appeal to the dispute resolution panel. On the other hand, the Mexican sugar producers have repeatedly mentioned that if NAFTA is not respected, they will request the Mexican government to apply safeguards to close the border to United States HFCS. On September 19, 2000, however, USDA announced the Fiscal 2001 tariff-rate quotas for sugar, where Mexico was allocated 105,788 MT of quota to comply with the United States' NAFTA obligation. The Mexican government will have to wait for the NAFTA dispute resolution panel decision. Mexico still believes it should have complete access for all of its excess sugar, which it estimates at over 500,000 MT."25 (emphasis added)

(iv) The United States' refusal to submit to dispute settlement

4.91 Mexico and the United States disagreed over the letters exchanged in 1993. Mexico had generated a surplus and believed that it had a right to export larger amounts of sugar to the United States' market than the United States was prepared to admit. Mexico therefore took steps during the late 1990s to resolve the dispute through the NAFTA general dispute settlement mechanism stipulated in Chapter XX. Unfortunately, the critical element of automaticity that differentiates the WTO's dispute settlement process from that of the GATT 1947 was not present in the NAFTA. Mexico therefore requested that the United States give its consent for the establishment of an arbitral panel.

4.92 Mexico submitted a formal request for consultations, which took place but did not lead to a resolution of the dispute. Mexico then requested a meeting of the Free Trade Commission, the second step of the proceeding, which took place as well, but it too failed to resolve the dispute. Finally, Mexico formally requested the establishment of an arbitral panel, but the United States refused its establishment. To date, the United States has blocked Mexico's efforts to resolve the dispute through the NAFTA institutional mechanisms.

4.93 Mexico and the United States have also held consultations and negotiations at various times over the past decade. However, they have been unable to reach an agreement through that channel either. It warrants noting that it was in the interests of certain parties to prolong the dispute. As long as the Mexican market remained in a state of disequilibrium, the Mexican industry would be subject to greater financial stress and exits from the Mexican sugar industry would be that much more likely. This in turn could be expected to reduce Mexico's ability to generate a surplus. Thus, the longer it would take to resolve this dispute, the better for certain United States interests.

(c) The decision to impose the IEPS on certain beverages

4.94 On 3 September 2001, the Government was confronted with an urgent need to respond to the prospect that, due to depressed market conditions, many mills would be unable to finance the planting of the next year's crop. The Government therefore deemed it necessary to expropriate 27 of the nation's 61 sugar mills.

4.95 Although the government intervention assisted in resolving some of the financial problems caused by the domestic surplus, Mexico still faced the fact that HFCS was displacing Mexican sugar from the soft drinks segment and Mexico was unable to export the displaced surplus sugar to the United States.

4.96 The Congress' action therefore was intended to rebalance the situation so that surplus sugar that should have been exportable to the United States could be sold in the domestic market. The tax, which is a temporary and proportionate measure, is intended to return the Mexican market to the status quo ante pending a resolution of the dispute on the bilateral agreement governing trade in sweeteners.

4.97 Mexico respectfully requests the Panel to bear these facts in mind as it considers the United States' complaint.

3. Legal arguments

(a) This dispute arises out of a dispute under the NAFTA regarding bilateral trade in sweeteners

4.98 There is a genuine dispute concerning the volume of sugar that can be exported to the United States duty-free. According to the NAFTA, Mexico has the right to dispose of its total net sugar production surplus, which is particularly important given the displacement of sugar by HFCS in the Mexican market.

4.99 Insofar as the United States' complaint about the IEPS tax is concerned, it is important for this Panel to understand that the NAFTA's chapter on trade in goods is derived from the GATT. Indeed, the NAFTA obligation that deals with internal taxes is precisely Article III of the GATT 1994.

4.100 The United States claims that the measures adopted by Mexico violate only Article III of the GATT 1994. This has been explicitly incorporated in the NAFTA's rules governing trade in goods.

4.101 There is, therefore, a forum available to hear all of the parties' claims together.

(b) Mexico requests a preliminary ruling: the Panel should decline to exercise its jurisdiction

4.102 Mexico recognizes that the Panel has prima facie jurisdiction to hear and decide the United States' claims even though they are inextricably linked to a larger dispute concerning compliance with its own obligations under the NAFTA.26 Mexico submits, however, that the Panel also has jurisdiction to decide whether to exercise its substantive jurisdiction in the circumstances of a dispute such as the instant case.

4.103 Like any other international court or tribunal, this Panel has certain implied jurisdictional powers that derive from its nature as an adjudicative body. This implied or incidental jurisdiction includes the jurisdiction to decide whether it should refrain from exercising substantive jurisdiction that has been validly established.

4.104 The power to refrain from exercising jurisdiction should be used sparingly and only in the most extraordinary circumstances; but it can be employed when the underlying or predominant elements of a dispute derive from rules of international law under which claims cannot be judicially enforced in the WTO, such as the NAFTA provisions. It warrants noting that in the GATT 1947 dispute on US – Sugar Quota, the United States argued against the Panel taking jurisdiction because its measures concerning sugar imports from Nicaragua were only one aspect of a larger State-to-State dispute. The United States stated that "it was neither invoking any exceptions under the provision of the General Agreement nor intending to defend its actions in GATT terms". It also stressed that its reduction in Nicaragua's sugar import quota "was fully justified in the context in which it was taken" and concluded:

"The United States was of the view that attempting to discuss this issue in purely trade terms within the GATT, divorced from the broader context of the dispute, would be disingenuous. The resolution of that dispute was certainly desirable, and would also result in the lifting of the action which Nicaragua had challenged before the Panel, but the United States did not believe that the review and resolution of that broader dispute was within the ambit of the GATT."27

4.105 A WTO panel should also refrain from exercising its jurisdiction when one of the disputing parties refuses to take the matter to the appropriate forum.

4.106 The history, prior procedures, and substantive content of the bilateral sweeteners trade dispute demonstrate that the measures challenged by the United States before the WTO are inseparable from the non-WTO claims over which the Panel has no jurisdiction. There is a forum available that could be seized with both disputing parties' claims and which could consider all the relevant facts. But this Panel will only be presented with a slice of the facts and legal issues at dispute in the NAFTA context.

4.107 The United States would suffer no prejudice from having its GATT Article III claim heard as NAFTA Article 301 claims. On the other hand, Mexico suffers prejudice from having its measure examined by the Panel alone:

– The United States is rewarded for its obstructionism which undermines the regional free trade agreement's dispute settlement process and undermines the international legal system;

– Mexico continues to be unable to have its legitimate grievance considered; and

– defences and exceptions that are available to Mexico in the other forum may not be available to it here.

4.108 In these circumstances, addressing the United States' claims would be inconsistent with the basic aim of WTO dispute settlement, namely, to "secure a positive solution to a dispute"28 Since this Panel cannot resolve all the matters at issue in this dispute, this important objective cannot be achieved.

(c) Request for specific recommendation

4.109 If the Panel decides to take jurisdiction over this complaint, Mexico will request that it give special consideration to the formulation of its recommendations. In particular, Mexico will request that the Panel recommend that the parties take steps to resolve the sweeteners trade dispute within the NAFTA framework.

4.110 Mexico would also request the Panel, in the course of its deliberations, to give the fullest weight to Mexico's status as a developing country and to the fact that agrarian reform entails a lengthy process of adjustment, the social consequences of which are ignored by governments at their peril. Although Mexico has made great progress over the last two decades, it remains a developing nation and its long-standing structural problems of poverty in the rural economy cannot be brushed aside. There are very real social consequences to this dispute for Mexico's agrarian society. The WTO agreements contain principles and rules that are intended to accord more favourable treatment to developing countries and the necessary latitude needed to advance economically without provoking social crises.

4.111 Finally, Mexico also requests the Panel, if it takes jurisdiction, to employ particular care in terms of how it formulates its findings and recommendations. In particular, the Panel should take special care to record that whatever the respective States' legal rights may be under applicable rules of international law, its findings apply solely to the parties' respective rights and obligations under the WTO agreements and cannot be taken to pre-judge such other legal rights.

(d) The measure was not intended to afford protection to domestic production within the meaning of Article III of the GATT 1994

4.112 The parties are in agreement that the measures at issue are tax measures that apply to specific goods. The parties also agree that they were imposed to "stop the displacement of domestic cane sugar by imported HFCS and soft drinks and syrups sweetened with HFCS".29

4.113 Mexico concedes that HFCS and cane sugar are substitutable products in certain applications. It was because of their substitutability that Mexico sought to protect its interests by ensuring that if HFCS displaced sugar in a market segment such as the soft drinks segment, Mexico would be able to export the displaced surplus sugar to the United States, so as to avoid an adverse effect on its sugar market. When the United States blocked this possibility, Mexico took action to protect its interests and to return to the status quo ante.

4.114 In assessing the matter before it, Mexico submits that the Panel must consider the legitimate objective that the Mexican Congress was pursuing in introducing the tax at issue.

4.115 In light of the unique circumstances of this dispute and the arguments discussed above, Mexico will not respond to the United States' claims that the measures at issue are inconsistent with GATT 1994 Article III.

(e) In the event of any inconsistency, the measure is justifiable under Article XX(d)

4.116 Even if the IEPS tax were found prima facie to violate Article III, the measure is justifiable under Article XX of GATT 1994, which provides:

"Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by the contracting party of measures:

...

(d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement … "

4.117 It is established that in order to demonstrate that a measure is justified under Article XX, the following sequence of steps applies: first, provisional justification by the characterization of the measure as being covered under one of the paragraphs of GATT Article XX; and second, appraisal of the measure under the chapeau of GATT Article XX.30 Mexico will address each in turn. The measures at issue can be justified under Article XX(d) for the following reasons.

4.118 The measures are "necessary to secure compliance with laws and regulations which are not inconsistent with the provisions" of the GATT 1994. In Korea – Various Measures on Beef, referring to its Report on US – Gasoline, the Appellate Body set forth the following two elements for paragraph (d) of Article XX:

"For a measure, otherwise inconsistent with GATT 1994, to be justified provisionally under paragraph (d) of Article XX, two elements must be shown. First, the measure must be one designed to 'secure compliance' with laws or regulations that are not themselves inconsistent with some provision of the GATT 1994. Second, the measure must be 'necessary' to secure such compliance."31

4.119 For the reasons set out in the factual section of this submission, the measures are "designed to" secure the United States' compliance with the NAFTA. The NAFTA, an international agreement, is a law that is not inconsistent with the provisions of the GATT 1994.

4.120 GATT Article XXIV expressly permits contracting parties to establish free trade areas and customs unions. Far from being "inconsistent with the provisions" of the GATT 1994, agreements that establish free trade areas are expressly contemplated and authorized by the GATT 1994.

4.121 Such agreements routinely include mechanisms to resolve disputes concerning the rights and obligations provided for therein. The NAFTA contains detailed dispute settlement procedures.

4.122 The measure at issue was also 'necessary' to secure the United States' compliance with the NAFTA. It is important to note that in order to be deemed 'necessary' within the meaning of Article XX(d) of the GATT 1994, a measure need not be the only alternative available to attain a Member's legitimate objective to secure compliance with laws or regulations which are not inconsistent with the provisions of the GATT. The Appellate Body made this clear in Korea – Various Measures on Beef:

"We believe that, as used in the context of Article XX(d), the reach of the word 'necessary' is not limited to that which is 'indispensable' or 'of absolute necessity' or 'inevitable'. Measures which are indispensable or of absolute necessity or inevitable to secure compliance certainly fulfil the requirements of Article XX(d). But other measures, too, may fall within the ambit of this exception. As used in Article XX(d), the term 'necessary' refers, in our view, to a range of degrees of necessity. At one end of this continuum lies 'necessary' understood as 'indispensable'; at the other end, is 'necessary' taken to mean as 'making a contribution to'. We consider that a 'necessary' measure is, in this continuum, located significantly closer to the pole of 'indispensable' than to the opposite pole of simply 'making a contribution to' taken to mean as 'making a contribution to'.

In appraising the 'necessity' of a measure in these terms, it is useful to bear in mind the context in which 'necessary' is found in Article XX(d). The measure at stake has to be 'necessary to ensure compliance with laws and regulations … , including those relating to customs enforcement, the enforcement of [lawful] monopolies … , the protection of patents, trade marks and copyrights, and the prevention of deceptive practices'. (Emphasis added) Clearly, Article XX(d) is susceptible of application in respect of a wide variety of 'laws and regulations' to be enforced. It seems to us that a treaty interpreter assessing a measure claimed to be necessary to secure compliance of a WTO-consistent law or regulation may, in appropriate cases, take into account the relative importance of the common interests or values that the law or regulation to be enforced is intended to protect. The more vital or important those common interests or values are, the easier it would be to accept as 'necessary' a measure designed as an enforcement instrument."32

4.123 The measure at issue was "necessary" within the meaning of the review conducted by the Appellate Body.

(a) First, owing to the nature of the trade, it was deemed necessary that an internal tax be imposed;

(b) Second, ensuring that NAFTA obligations be correctly interpreted and applied is a vital interest of Mexico;

(c) Third, notwithstanding Mexico's repeated attempts to resolve its grievance, the United States has refused to submit to dispute settlement in compliance with its NAFTA obligations, and has preferred to drag on bilateral discussions that therefore have not resulted in an alternative solution . At the same time, HFCS has enjoyed the benefits of market access in Mexico, while the Mexican sugar industry is unable to exercise what Mexico believes to be its right to export significant sugar surpluses to the United States. The economic damage caused by the United States' continued refusal is manifest and, in the circumstances, it was necessary to take action to protect Mexico's legal interests and secure the United States' compliance, not only with its market access commitments, but more importantly, with the institutional mechanisms that are fundamental to the NAFTA's proper operation;

(d) Fourth, if the United States is able to successfully challenge Mexico's measures in this proceeding, while simultaneously refusing to have its own measures examined by a NAFTA Panel, an important object of the measures, i.e., creating a dynamic that has the possibility of inducing the United States to submit to NAFTA dispute settlement or otherwise resolving the dispute, will be defeated.

4.124 In Mexico's view, therefore, even if the IEPS tax contravened Article III, it is necessary to secure United States' compliance with its NAFTA obligations, in circumstances in which the ordinary means to accomplish that are not available, precisely because the United States has blocked recourse to such means.

4.125 Mexico notes that the United States has long insisted on its legal right to take action when another State impedes the operation of a treaty's dispute settlement mechanism:

"Wherever it could, the United States would challenge unfair practices under the dispute settlement provisions of the General Agreement or the Tokyo Round Codes, but where other contracting parties prevented or impeded that process or blocked efforts to ensure that their practices were covered by multilateral disciplines, the United States would act to protect its interests. If such action was considered unilateral, it should be nevertheless recognized as perfectly justifiable, responsive action necessitated by the failure of bilateral or multilateral efforts to address a problem."33 (emphasis added)

4.126 Since the measure is provisionally justified under paragraph (d) of Article XX, Mexico will now establish that it also meets the requirements of the chapeau of that provision.

(i) There was no "arbitrary or unjustifiable discrimination between countries where the same conditions prevail"

4.127 The Mexican market for HFCS has been dominated almost exclusively by HFCS imported from the United States or produced domestically from corn imported from the United States. The Appellate Body has had occasion to consider when the General Agreement will permit a Member to take unilateral action that might otherwise be contrary to the GATT under the chapeau of Article XX. The Appellate Body's Report on US – Shrimp (Article 21.5 – Malaysia34 ) concerned the United States' attempt to justify otherwise GATT-inconsistent extra-territorial measures under Article XX of the GATT 1994. The United States conditioned certain trade advantages to exporting developing countries to the adoption of certain domestic policies and restrictions on imports of goods from countries that did not adopt such policies.

4.128 US – Shrimp originally produced a decision against the United States, but then, after changes in United States' policy, the Appellate Body upheld the United States' restrictions, ordinarily contrary to GATT Article XI, on imports of shrimp imposed to save turtles.

4.129 The key issue before the Appellate Body, when considering the revised measure, was whether the new United States' policy was applied in a manner that no longer constituted a means of "arbitrary or unjustifiable discrimination" between "countries where the same conditions prevail" in the sense of the Article XX chapeau. The Appellate Body confirmed that unilateral measures may, in certain circumstances, withstand scrutiny under Article XX.

4.130 In doing so, the Appellate Body rejected Malaysia's argument that demonstrating serious, good faith efforts to negotiate an international agreement for the protection and conservation of sea turtles was not sufficient to meet the requirements of the chapeau of Article XX. Malaysia maintained that the chapeau actually required that such an international agreement be concluded. On this issue, the Appellate Body stated:

"Under the chapeau of Article XX, an importing Member may not treat its trading partners in a manner that would constitute 'arbitrary or unjustifiable discrimination'. With respect to this measure, the United States could conceivably respect this obligation, and the conclusion of an international agreement might nevertheless not be possible despite the serious, good faith efforts of the United States. Requiring that a multilateral agreement be concluded by the United States in order to avoid 'arbitrary or unjustifiable discrimination' in applying its measure would mean that any country party to the negotiations with the United States, whether a WTO Member or not, would have, in effect, a veto over whether the United States could fulfil its WTO obligations. Such a requirement would not be reasonable. For a variety of reasons, it may be possible to conclude an agreement with one group of countries but not another. The conclusion of a multilateral agreement requires the cooperation and commitment of many countries. In our view, the United States cannot be held to have engaged in 'arbitrary or unjustifiable discrimination' under Article XX solely because one international negotiation resulted in an agreement while another did not.

As we stated in US – Shrimp [the original dispute], 'the protection and conservation of highly migratory species of sea turtles […] demands concerted and cooperative efforts on the part of the many countries whose waters are traversed in the course of recurrent sea turtle migrations'. [Footnote omitted] Further, the 'need for, and the appropriateness of, such efforts have been recognized in the WTO itself as well as in a significant number of other international instruments and declarations'. [Footnote omitted] For example, Principle 12 of the Rio Declaration on Environment and Development states, in part, that '[e]nvironmental measures addressing transboundary or global environmental problems should, as far as possible, be based on international consensus'. [Footnote omitted] Clearly, and 'as far as possible', a multilateral approach is strongly preferred. Yet it is one thing to prefer a multilateral approach in the application of a measure that is provisionally justified under one of the subparagraphs of Article XX of the GATT 1994; it is another to require the conclusion of a multilateral agreement as a condition of avoiding 'arbitrary or unjustifiable discrimination' under the chapeau of Article XX. We see, in this case, no such requirement."35 (emphasis added)

4.131 The Appellate Body then upheld the Article 21.5 panel's reliance on a non-WTO treaty, the Inter-American Convention for the Protection and Conservation of Marine Turtles, as a factual reference or point of comparison when deciding that the new United States' policy was no longer discriminatory in the sense of the chapeau of GATT Article XX:

"Thus, in the previous case, in examining the original measure, we relied on the Inter-American Convention in two ways. First, we used the Inter-American Convention to show that 'consensual and multilateral procedures are available and feasible for the establishment of programmes for the conservation of sea turtles.' [Footnote omitted]. In other words, we saw the Inter-American Convention as evidence that an alternative course of action based on cooperation and consensus was reasonably open to the United States. Second, we used the Inter-American Convention to show the existence of 'unjustifiable discrimination'. The Inter-American Convention was the result of serious, good faith efforts to negotiate a regional agreement on the protection and conservation of turtles, including efforts made by the United States. In the original proceedings, we saw a clear contrast between the efforts made by the United States to conclude the Inter-American Convention and the absence of serious efforts on the part of the United States to negotiate other similar agreements with other WTO Members. We concluded there that such a disparity in efforts to negotiate an international agreement amounted to 'unjustifiable discrimination'. [Footnote omitted.]

With this in mind, we examine what the Panel did here. In its analysis of the Inter-American Convention in the context of Malaysia's argument on 'unjustifiable discrimination', the Panel relied on our original Report to state that 'the Inter-American Convention is evidence that the efforts made by the United States to negotiate with the complainants before imposing the original measure were largely insufficient'. [Footnote omitted.] The Panel went on to say that 'the Inter-American Convention can reasonably be considered as a benchmark of what can be achieved through multilateral negotiations in the field of protection and conservation.' [Footnote omitted.]

At no time in US – Shrimp did we refer to the Inter-American Convention as a 'benchmark'. The Panel might have chosen another and better word – perhaps, as suggested by Malaysia, 'example'. [Footnote omitted.] Yet it seems to us that the Panel did all that it should have done with respect to the Inter-American Convention, and did so consistently with our approach in United States – Shrimp. The Panel compared the efforts of the United States to negotiate the Inter-American Convention with one group of exporting WTO Members with the efforts made by the United States to negotiate a similar agreement with another group of exporting WTO Members. The Panel rightly used the Inter-American Convention as a factual reference in this exercise of comparison. It was all the more relevant to do so given that the Inter-American Convention was the only international agreement that the Panel could have used in such a comparison. As we read the Panel Report, it is clear to us that the Panel attached a relative value to the Inter-American Convention in making this comparison, but did not view the Inter-American Convention in any way as an absolute standard. Thus, we disagree with Malaysia's submission that the Panel raised the Inter-American Convention to the rank of a 'legal standard'. The mere use by the Panel of the Inter-American Convention as a basis for a comparison did not transform the Inter-American Convention into a 'legal standard'. Furthermore, although the Panel could have chosen a more appropriate word than 'benchmark' to express its views, Malaysia is mistaken in equating the mere use of the word 'benchmark', as it was used by the Panel, with the establishment of a legal standard".36

4.132 The Appellate Body's analysis is of assistance in this proceeding. It examined actions taken by the respondent in relation to a subject falling outside of the WTO Agreements. It did not require the United States to conclude an international agreement in that subject area, but rather required it to demonstrate that it had used serious, good faith efforts to do so. That was sufficient because if, for reasons outside of the United States' control, such an agreement could not be reached, another State would have a veto over the United States' compliance with its WTO obligations.

4.133 The parallels with the present case are obvious:

– the United States made market access commitments for Mexican sugar in the NAFTA, a subject that falls outside of the WTO agreements (although expressly permitted by Article XXIV of the GATT 1994);

– a disagreement arose as to the nature of those commitments;

– Mexico has constantly sought a resolution of the disagreement, including through its request for the establishment of a NAFTA dispute settlement panel and numerous efforts to achieve a negotiated solution;

– the United States has refused to consent to submit to dispute settlement proceedings and bilateral negotiations have proved fruitless; and

– therefore, the United States has essentially vetoed Mexico's ability to have its grievance resolved.

4.134 In such circumstances, Mexico exercised its international law rights to rebalance the situation in a proportionate fashion.

(ii) The measure is not a "disguised restriction on international trade"

4.135 As the United States' first submission repeatedly points out, the purpose of the measure has been stated by members of Congress and analysed by the Supreme Court of Justice. The United States omitted to inform this Panel of the long-standing bilateral dispute and Mexico's continued efforts to resolve it, of its refusal to submit to dispute settlement under the NAFTA, and of the ineffectiveness of bilateral negotiations. The United States also failed to inform the Panel of the social and economic context of sugar production in Mexico, the crisis that the industry underwent, due, in large part, to a lopsided situation generated unilaterally by the United States, given the Mexican industry's inability to export sugar surpluses to its market, while at the same time imports of United States' HFCS and domestically produced HFCS from corn imported from the United States contributed greatly to generate such surpluses.

4.136 Thus, the United States failed to explain precisely why the Congress acted as it did. There has been no disguised restriction on trade. Mexico's measures constitute a proportionate, legitimate, and legally justified response to actions and omissions of the United States. The Panel should also not lose sight that this is a particularly sensitive sector, the social and economic implications of which cannot be ignored, especially given Mexico's status as a developing nation, and thus the greater difficulties that Mexico faces in addressing problems that arise in ordinary circumstances, let alone in the extraordinary circumstances arising out of the dispute concerning bilateral trade in sugar.

4.137 In Mexico's view, therefore, even if the IEPS tax contravened Article III, it is necessary to secure the United States' compliance with its NAFTA obligations and does not constitute a "disguised restriction on international trade".

4. Conclusion

4.138 Mexico respectfully requests the Panel to decline to exercise its jurisdiction for the reasons set out in this Submission. In the event that the Panel does decide to exercise its jurisdiction, Mexico respectfully requests it to pay particular attention to the circumstances that gave rise to the measures at issue in this case, in light of the complex social and economic problems of the sugar sector in Mexico, which were aggravated precisely by acts and omissions of the United States. The Panel should also accord particular weight to Mexico's status as a developing country, especially in the context of the broader dispute concerning trade in sweeteners between Mexico and the United States, and should take note of the singular importance that sugar production plays in supporting a significant number of Mexican farmers and their families. Finally, the Panel should recognize the United States' intransigence in resolving this matter of crucial importance to Mexico. Mexico requests the Panel to find that, in the extraordinary circumstances of this case, where in the face of an acknowledged dispute, the United States has refused to submit to NAFTA dispute settlement, having exhausted all possibilities for third party dispute resolution, and where years of seeking a negotiated settlement have been unsuccessful, the Mexican measures are justified under Article XX of the GATT 1994.

D. OPENING STATEMENT OF THE UNITED STATES AT THE FIRST MEETING OF THE PANEL

4.139 This dispute is about a 20 per cent tax Mexico enacted, effective 1 January 2002, on soft drinks and syrups other than those sweetened exclusively with cane sugar. This tax – which is embodied in the IEPS – was imposed to stop the displacement of Mexican cane sugar by imported HFCS in Mexican soft drink production. That is what the Mexican Supreme Court has said, and what Mexico concedes in its first submission.37 This tax has had the desired effect. Today, despite the fact that Mexico is the second largest consumer of soft drinks in the world, imports of HFCS for soft drink use have ceased; total HFCS exports from the United States are just barely four per cent of their pre-tax levels.

4.140 HFCS and cane sugar are directly competitive and substitutable products as sweeteners for soft drink and syrup production: Mexico concedes this point in its first submission.38 Cane sugar and HFCS are not similarly taxed: the tax is not imposed on soft drinks and syrups sweetened only with cane sugar, and it is prohibitively high, over four times the cost of the HFCS used in a typical soft drink.39 Mexico's tax is inconsistent with Mexico's obligations under the second sentence of Article III:2 as a tax on HFCS and soft drinks and syrups sweetened with HFCS. Similarly, Mexico's tax discriminates in favour of Mexican soft drinks and syrups sweetened with cane sugar, and against soft drinks and syrups sweetened with HFCS, in breach of the first sentence of Article III:2. In addition, the tax rewards Mexican soft drink producers for using domestic cane sugar and punishes them for using HFCS, in breach of Article III:4.

4.141 The United States first submission presents a complete and documented prima facie case, including evidence and argument sufficient to establish a presumption that Mexico has infringed its Article III obligations. The United States has met its burden of proof.

4.142 In its first submission, rather than contesting the United States prima facie case under Article III, Mexico attempts to change the subject by raising issues that are irrelevant or otherwise outside the Panel's terms of reference – including the economic importance of the Mexican sugar industry, bilateral negotiations on sugar trade, and bilateral obligations under the NAFTA. The Panel need not and should not engage itself on these issues. These issues are outside the Panel's terms of reference.

4.143 In light of its extended discussion of issues irrelevant to this dispute, Mexico's first submission, while lengthy, appears actually to narrow the issues before the Panel. In fact, Mexico affirmatively states that it "will not respond" to the United States' Article III claims.40 That in effect leaves Mexico's so-called request for a "preliminary ruling" and its Article XX(d) defence as the only contested issues before the Panel today. For that reason, the United States will not repeat in its statement the extensive arguments in its first submission detailing Mexico's breach of its obligations under Articles III:2 and III:4 of the GATT 1994. Instead, having established a prima facie case, the United States will operate on the assumption – as Mexico does in its first submission – that Mexico's tax is in breach of Article III and proceed to address Mexico's Article XX(d) defence of that breach and its preliminary ruling request.

1. Article XX(d)

4.144 Turning first to Article XX(d), Mexico asserts that alleged United States non-compliance with NAFTA obligations can justify action by Mexico in violation of its WTO obligations. There is absolutely no basis in Article XX(d), the DSU, or elsewhere in the WTO Agreement for Mexico's proposition. Simply nothing in those agreements supports the contention that a WTO Member may violate its WTO obligations in order to punish another Member because it thinks that Member has not complied with its obligations under another international agreement.

4.145 Accordingly, Mexico cannot possibly satisfy the burden of demonstrating that its tax satisfies the conditions for justification under Article XX(d). While Article XX(d) permits a Member to maintain measures that are "necessary to secure compliance with laws or regulations which are not inconsistent" with the provisions of the GATT 1994, NAFTA is not a "law or regulation," and Mexico's tax is not "necessary to secure compliance."

4.146 In the first instance, international obligations owed Mexico by other countries under the NAFTA and other international agreements are not "laws" or "regulations" within the meaning of Article XX(d). Rather, Article XX(d) allows a Member, under certain conditions, to adopt or enforce measures necessary to secure compliance with that Member's own laws and regulations – for example, those laws and regulations Mexico may have in place to implement its own NAFTA obligations. It does not, however, permit a Member to claim an Article XX(d) exception for measures to secure compliance by another Member with its obligations under an international agreement. It should go without saying that an "international agreement" is distinct from a "law" or "regulation."

4.147 For these reasons and others which the United States can elaborate further in subsequent submissions, Mexico has wholly failed to meet its burden of establishing a prima facie basis for its Article XX(d) defence. There is simply nothing in the WTO Agreement to support its claim.

2. Developing countries

4.148 Separately, Mexico asserts that the Panel must take into account that the "WTO Agreement contains principles and provisions the purpose of which is to grant more favourable treatment to developing countries." While the covered agreements do in fact contain certain provisions that accord special and differential treatment to developing countries, Mexico has not identified any provision that might permit Mexico to accord less favourable treatment to products of another WTO Member than it accords to its own like products or to discriminate against directly competitive or substitutable products of another Member in favour of domestic production.

3. Recommendations

4.149 Mexico also asks the Panel to make a specific recommendation that "the parties in this dispute take steps under NAFTA to resolve the entire dispute relating to trade in sweeteners." It is unclear in what context Mexico proposes the Panel make such a recommendation. As the DSU makes clear under Article 19.1, a panel only makes a recommendation after having found a Member's measure inconsistent with that Member's WTO obligations and, even then, may only recommend that the Member bring its WTO-inconsistent measure into conformity.41 Panel suggestions under Article 19.1 are likewise limited to being directed at the Member whose measure was found to be WTO-inconsistent. The Panel should reject Mexico's request.

4. Preliminary ruling request

4.150 Turning to Mexico's so-called "preliminary ruling" request, first this is not a request for a "preliminary ruling." If anything, it is a request for a "non-ruling" and there would be nothing "preliminary" about it. Mexico seeks to resolve the entire dispute on a definitive basis in this manner. It is not that Mexico questions the Panel's jurisdiction and seeks a preliminary ruling in order to clarify that jurisdiction for purposes of this proceeding. Rather, Mexico admits that the Panel has jurisdiction to hear and decide the United States claims, but asks the Panel to refrain from exercising that jurisdiction.42 Let the United States present the situation plainly and clearly: Mexico admits that it imposed the IEPS – a measure it does not contest is in breach of Article III – to stop the displacement of Mexican cane sugar by imported HFCS. Mexico then claims that it has done so to coerce its desired solution to a bilateral dispute. And now Mexico wishes the Panel to assist it in this WTO-inconsistent action by denying the United States its right to WTO dispute settlement.

4.151 There is absolutely no basis for Mexico's request. In fact, the DSU and the Panel's terms of reference in this dispute specifically preclude it. Article 7.2 of the DSU states that panels "shall address the relevant provisions in any covered agreement or agreements cited by the parties" to a dispute. The DSU further instructs panels in Article 11 to make an "objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements."43 In this respect, the Dispute Settlement Body ("DSB") has defined the Panel's terms of reference in this dispute as follows:

"To examine, in the light of the relevant provisions of the covered agreements cited by the United States in document WT/DS308/4, the matter referred to the DSB by the United States in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements."44

4.152 The "matter referred to the DSB by the United States" in its panel request covers Mexico's tax on HFCS and soft drinks and syrups sweetened with HFCS, and the consistency of that tax with Mexico's obligations under Article III of the GATT 1994. Given the explicit instructions set forth in the DSU and the Panel's terms of reference, Mexico's argument that the Panel should simply decline to exercise jurisdiction over this dispute is untenable.

4.153 Mexico's attempt to liken its request for the Panel to decline jurisdiction to past panels' use of "judicial economy" is misplaced.45 Judicial economy is a concept under which panels have declined to address certain claims raised by a party when resolution of such claims is not needed for the Panel to resolve the matter at issue in the dispute. Judicial economy is typically used by panels when a complaining party alleges that a measure breaches several provisions of the WTO Agreement, but a finding of breach with respect to some, but not all, of the provisions is sufficient for the DSB to recommend that the measure be brought into conformity with the WTO Agreement.46 It is not a concept a panel may draw upon as a basis for declining to exercise jurisdiction over each and every claim raised by the complaining party. For a panel to decline jurisdiction over each and every claim raised would, of course, leave the DSB unable to make any recommendations or rulings with respect to the matter. Such an outcome is clearly incompatible with the function of panels to "assist the DSB in making the recommendations and . . . rulings provided for in the covered agreements." As the Appellate Body found in Australia – Salmon, under the DSU panels are obligated "to address those claims on which a finding is necessary in order to enable the DSB to make sufficiently precise recommendations and rulings so as to allow for prompt compliance by a Member with those recommendations and rulings."47

4.154 Equally unsupported by the DSU is Mexico's argument that the Panel's exercise of jurisdiction would be incompatible with the "aim of the dispute settlement mechanism to secure a positive solution to a dispute." In Mexico's view, "a positive solution" to the dispute can only be found before a NAFTA panel. However, this "dispute" is a WTO dispute that has been brought before this WTO dispute settlement Panel to resolve a dispute over Mexico's obligations under the covered agreements. Although Mexico attempts to recast this dispute as involving United States' obligations under the NAFTA, it is Mexico's WTO obligations that comprise the matter in dispute. The NAFTA is not a covered agreement, nor is it within this Panel's terms of reference. Accordingly, the United States has not cited to the NAFTA. The United States notes, however, that it has a markedly different view than Mexico of the relevant NAFTA provisions and the series of events transpiring under the NAFTA. And that is just the point – this Panel is not in a position to make findings on those NAFTA issues, so there is no reason to elaborate on the parties' differing positions on those issues. Moreover, although not relevant to this dispute, the United States notes that neither Mexico nor the United States have agreed in the NAFTA to prejudice their WTO rights. Indeed, under the NAFTA the parties begin by affirming their GATT rights and obligations.

4.155 Mexico also argues that although the Panel has prima facie jurisdiction over the present dispute, the more "appropriate" forum for its resolution is before a NAFTA panel.48 Again, Mexico's proposition finds no basis in the DSU or elsewhere in the WTO Agreement. That WTO Members may choose to settle disputes involving a mixture of WTO and non-WTO rules in other fora, as Mexico observes, hardly justifies a WTO panel refusing to exercise jurisdiction over the dispute for which it was established.

4.156 One party's determination that another forum is more "appropriate" similarly does not justify such a refusal to exercise jurisdiction.49 In fact, in India – Quantitative Restrictions, the Appellate Body dismissed India's arguments that the panel lacked jurisdiction to decide claims that India thought more appropriately resolved before the WTO Balance of Payments Committee. The Appellate Body stated:

"According to Article XXIII, any Member which considers that a benefit accruing to it directly or indirectly under the GATT 1994 is being nullified or impaired as a result of the failure of another Member to carry out its obligations, may resort to the dispute settlement procedures of Article XXIII. The United States considers that a benefit accruing to it under GATT 1994 was nullified or impaired as a result of India's alleged failure to carry out its obligations regarding balance of payments restrictions under Article XVIII:B of the GATT 1994. Therefore, the United States was entitled to have recourse to the dispute settlement procedures of Article XXIII with regard to the dispute."

4.157 Likewise, the United States is entitled to have recourse to the dispute settlement procedures of Article XXIII and the DSU with respect to Mexico's failure to carry out its obligations under Article III of the GATT. For this reason, and others mentioned, the Panel should deny Mexico's request for it to decline jurisdiction in this dispute.

E. OPENING STATEMENT OF MEXICO AT THE FIRST MEETING OF THE PANEL

1. Introduction

4.158 The United States' claims raise a question of singular complexity and significance:

(a) Mexico and the United States established a particular regime for bilateral trade in sweeteners, mainly sugar and HFCS.

(b) These products are substitutes for each other in certain uses and, thus, compete in an important segment of the Mexican market.

(c) A dispute exists between the two countries with regard to the access of Mexican sugar to the United States market. Mexico considers that, in accordance with NAFTA, it has the right to export all of its sugar surpluses; the United States considers that Mexico has the right to export a lesser amount and, since the United States controls imports of Mexican sugar into its market, it has limited the amount of sugar that can gain access to that market through the allocation of import quotas.

(d) Mexican sugar surpluses depend on sugar and HFCS production in Mexico as well as Mexican HFCS imports from the United States, so with regard to the consumption of both products, the generation of sugar surpluses is, in part, dependent on HFCS production and importation.

(e) Consequently, Mexican HFCS production and imports, in addition to the United States' restrictions on imports of Mexican sugar, has had a significant economic impact on Mexico's sugar industry.

(f) The NAFTA establishes a mechanism for resolving disputes related to the interpretation and application of the treaty or in circumstances in which one of the Parties considers that a measure of the other Party is or could be inconsistent with the Treaty's provisions.

(g) Mexico activated the dispute settlement mechanism and requested the establishment of an arbitral panel to resolve the dispute relating to Mexican sugar exports. The United States has refused to submit to this mechanism.

(h) Mexico has also been seeking a negotiated solution of the dispute, but these efforts have been fruitless as well.

4.159 Mexico considers that in these extraordinary circumstances it has the right to protect its interests. Indeed, the Mexican measures at issue in this dispute cannot be understood without bearing in mind that they were implemented in response to unilateral restrictions imposed by the United States on Mexican sugar imports, in addition to its refusal to submit to the NAFTA dispute settlement mechanism, and the inability to achieve a solution through other means.

4.160 In submitting this claim in the framework of the WTO, the United States apparently believes that a WTO Member must simply suffer the economic and social distress caused by another Member's intransigence; this appears to constitute a departure from the United States' long-held position. As discussed in Mexico's first written submission, the United States has in the past claimed the right to take unilateral action when another State impedes the operation of a treaty's dispute settlement mechanism.

4.161 In the light of the United States' previously stated position, let us consider what the United States would have done if it was Mexico that had vetoed the United States' attempt to have a legitimate NAFTA grievance resolved. Would it have stood idly by if its most important agricultural sector experienced a crisis as a result of Mexico's refusal to liberalize its import restrictions? It does not seem likely. Likewise, Mexico could not afford not to respond to unilateral measures and simply let its agriculture suffer the consequences of United States restrictions.

4.162 Mexico had to act to rebalance the situation, to return to the status quo ante.

4.163 Article 3.7 of the Dispute Settlement Understanding (DSU) stresses two key points: "Before bringing a case, a Member shall exercise its judgement as to whether action under these procedures would be fruitful". In addition, the "aim of the dispute settlement mechanism is to secure a positive solution to a dispute". In Mexico's view, the United States' complaint clearly fails to meet both of these requirements. It is obvious that by any objective standard, the United States' claim is aimed at forcing all of the adjustments in NAFTA sweeteners trade onto Mexico. Now that the Panel is more fully informed of the history of this dispute, it can see for itself that by presenting a "slice" of the dispute to the WTO, it is evident that the United States has not exercised the judgement required by Article 3.7 of the DSU.

4.164 Nor for that matter will this proceeding "secure a positive solution to the dispute". Mexico attaches the greatest importance to the WTO and to the DSU, but it would like to state, with the utmost respect that, whether or not the Panel determines that the IEPS tax is inconsistent with Article III of GATT 1994 or is not covered by the Article XX exceptions, there will be no positive solution to this dispute, and there cannot be one until all the issues of importance to both sides are comprehensively resolved.

4.165 It is for that reason that Mexico urges the Panel to decline to exercise jurisdiction since there is another forum available to both parties where the dispute can be heard in its entirety in light of all of the facts and all of the relevant legal rights and obligations. Rather than seeking to avoid submission to the settlement of the complaint filed by the United States, Mexico is looking for the appropriate forum to resolve the existing dispute between the two countries in a comprehensive manner.

4.166 Mexico also again invites the Panel to consider its status as a developing country and, since the sugar industry is a key element of its rural economy, to take into account the real economic and social consequences of this dispute for the Mexican rural sector.

4.167 In this submission, Mexico will address four points. First, it will begin by demonstrating that the IEPS tax is part of, and inseparable from, a long-standing dispute arising under the NAFTA. This is particularly important given that the United States' first written submission does not contain a single word in this regard.

4.168 The United States has also ignored other crucial facts, including its own acts and omissions in the events that gave rise to the measures at issue and the adverse impact of its restrictions on imports of Mexican sugar on a particularly sensitive sector of the Mexican economy. The serious problems of the Mexican sugar industry are real and have been aggravated by the United States' unilateral decision to limit Mexico's ability to export sugar surpluses to its market.

4.169 Mexico insists that the Panel must take these important facts into consideration. In the light of all the relevant facts, it is clear that Mexico enacted the IEPS tax as an absolutely last resort.

4.170 Second, Mexico will address the basis for its request that the Panel decline to exercise its jurisdiction. Mexico recognizes that its request for a preliminary ruling is unusual, but submits that this Panel has the authority to accept it, and should do so given the exceptional nature of this dispute.

4.171 Third, Mexico will refer to its arguments to the effect that, if the Panel decides to make findings on the merits of the dispute, it should find that the measures at issue are justified under Article XX(d) of the GATT 1994.

4.172 Finally, Mexico will offer some brief preliminary remarks on certain issues raised by the European Communities in its third party submission.

2. The origin of the IEPS tax and the importance for providing relief for the Mexican sugar industry

4.173 Mexico describes the sugar industry's importance in paragraphs 15 to 26 of its first written submission, where Mexico also explains that the viability of the sugar industry constitutes a political and social imperative. The Mexican industry is characterized by certain structural problems which the government cannot ignore. For example, sugarcane is grown on thousands of small plots and the farmers depend on the proximity of a sugar mill to sell their crop. The sugar milling companies have typically encountered financial problems as a result of the substantial debts incurred when they acquired the mills in Mexico's privatization process during the 1990s as well due to low sales margins. This situation has forced the Mexican government to intervene in different ways to prevent bankruptcies which would have had immediate adverse consequences for the sugarcane growers that supply the mills.

4.174 Simply put, it remains a great challenge for Mexico to ensure the viability of the sugar milling companies and to promote a higher living standard for the sugarcane growers, one of the poorest sectors in the country. For obvious reasons, the financial situation of the sugar industry is a major concern for the Mexican government.

4.175 Moreover, it is no secret that the world sugar industry is one of the most economically distorted and that government intervention is widespread in this sector. Governments frequently intervene to support the prices of agricultural producers (i.e. of the producers of sugarcane or sugar beet). This automatically makes substitute products, for example HFCS, more competitive in certain market segments.

4.176 Countries that are net importers of sweeteners can support domestic prices by, inter alia, limiting imports. However, in the six years leading up to the imposition of the IEPS tax, Mexico was a net surplus producer: the production of sugar exceeded its consumption.

4.177 Low world market prices, the surplus on the Mexican market aggravated by the displacement of sugar by HFCS and the lack of access to the United States market have made things difficult for the industry. While the Mexican Government has made great efforts to improve the situation, it has encountered considerable difficulties.

4.178 In the recent final award made by the arbitral panel established under NAFTA Chapter Eleven in GAMI Investments, Inc. v. The Government of the United Mexican States50 these facts were discussed. The members of the tribunal were Jan Paulsson, Michael Reisman, and Julio Lacarte Muró, whom the Panel will know for his long-standing and distinguished work in the GATT and the WTO, including his membership of the Appellate Body. The award, dated 15 November 2004, contains findings of fact as to the very serious market conditions faced by the sugar mills from the mid-1990s through 2002.

4.179 When the Panel reviews the award, it will see that the tribunal accepted many of the facts that Mexico has asserted in its first written submission in this proceeding: the special historical significance of sugar growing in Mexico, the large number of Mexican people who depend upon the industry, the distortions in the world market, Mexico's efforts to assist the industry in its distress, the lack of access to the United States market, and Mexico's attempt to resolve the matter under NAFTA's general dispute settlement procedures (see in this regard, paragraphs 45-52, 67, 77, and 78). The Panel will also see that the tribunal found that Mexico's rebalancing of market conditions dramatically improved its sugar industry's situation.

4.180 There is no question that the fact that Mexico was prevented from exporting its surplus sugar to the United States exacerbated the serious problems that the Mexican sugar industry faced throughout the relevant period. The Government of Mexico could not ignore the substantial economic damage caused as a result of the United States' failure to open up its market as expected.

4.181 In presenting its case, the United States also creates a false impression regarding the intent behind Mexico's measures. It is important that the record be set straight. To cite just a few examples:

– At the outset of its first written submission, the United States asserts that the Mexican sugar industry and its supporters in Congress wished to prevent the displacement of sugar by HFCS in its soft drink market and implies that they were motivated merely by a protectionist intent. This gives the impression that the Mexican government is against the use of HFCS under any circumstances, which is simply incorrect. The Mexican government's real and urgent concern is not that substantial quantities of HFCS might displace Mexican sugar from a traditionally important segment of the domestic sugar market; rather it is that such a displacement would greatly contribute to the generation and growth of sugar surpluses in Mexico, as long as the United States maintained restrictions on those surpluses' entry into its market to protect its own industry, leaving the impact to be absorbed entirely by the Mexican sugar market. It should not be forgotten that this was precisely the original concern of the United States after the signature of the NAFTA and that motivated its request for clarification through an exchange of letters between the two governments: the United States' concern then was that HFCS imports from the United States would generate surpluses which, if exported to the United States, would unbalance its market. The enactment of the measure at issue was intended to restore equilibrium. Regarding the United States' argument that the measure has a solely protectionist intent, Mexico will refer the Panel to the statement by the United States Department of Agriculture quoted in paragraph 61 of Mexico's first submission: "…Basically, the Mexican sugar industry is not against United States HFCS imports into Mexico; what they want is to gain access for more than the 25,000 MT of sugar currently allowed under the TRQ for Mexico. With the high levels of imported HFCS and higher levels of sugar production, the sugar industry claims there is a danger of closing of 15 to 20 mills, resulting in layoff of about 100,000 workers." These are the words of the United States, not Mexico.

– The United States also implies in its written submission that Mexico's decision to impose the IEPS tax is permanent, motivated by a firm desire to stop imports of HFCS and to terminate the use of HFCS in soft drinks and syrups. This is not so. Mexico's measure is a temporary response to the acts and omissions of the United States and, as Mexico has explained, the aim is to rebalance the situation between Mexico and the United States pending a comprehensive resolution.

– According to the United States, the purpose of the IEPS tax is simply to protect the Mexican sugar producers from import competition. Again, this characterization is also inaccurate because it ignores the legitimate objective behind the measure at issue. The United States knows perfectly well why the Mexican Congress acted as it did.

4.182 Before turning to its legal arguments, Mexico urges the Panel not to lose sight of the great difficulties that Mexico faces in addressing the problems of its sugar industry because of the extraordinary circumstances resulting from the United States' refusal to address Mexico's market access complaints under the NAFTA. It would simply not be equitable to reward the United States for actions that undermine the NAFTA's dispute settlement process.

3. Mexico's request for a preliminary ruling

4.183 Mexico set out the legal basis for its request that the Panel decline to exercise its jurisdiction in paragraphs 93 to 103 of its first written submission. In this statement, it will emphasize a few key points.

4.184 First, Mexico wishes to make clear that it does not contest that the Panel has prima facie jurisdiction to examine the United States' claims under Article III of the GATT 1994. However, the mere conclusion that the Panel has substantive jurisdiction to hear the case brought by the United States does not exhaust all issues relevant to the Panel's competence in this dispute.

4.185 The reason is that even though the substantive jurisdiction of any international court or tribunal may be granted explicitly by treaty, once such a forum has been seized of a specific matter, it has certain implied jurisdictional powers that derive from its nature as an adjudicative body. Some elements of this incidental jurisdiction include the power to:

– Interpret the parties' submissions to "isolate the real issue in the case and to identify the object of the claim"51;

– determine whether it has substantive jurisdiction to settle a claim or any aspect of it (this is sometimes referred to as the principle of jurisdiction over jurisdiction);

– decide all matters linked to the exercise of substantive jurisdiction that are inherent in the adjudicative function (i.e., decide claims under rules on the burden of proof, good faith, estoppel, due process, treatment of confidential information, etc.);

– apply the principle of "judicial economy", referred to by Mexico in its first written submission;

– and, crucially in this case, the power to decide whether it should refrain from exercising its validly established substantive jurisdiction.

4.186 A review of WTO jurisprudence also indicates that WTO panels and the Appellate Body have implied or incidental jurisdictional powers. For example, in US – 1916 Act, the Appellate Body explicitly confirmed that a WTO panel can determine whether it has substantive jurisdiction to decide a matter. Specifically, the Appellate Body referred to the "widely accepted rule that an international tribunal is entitled to consider the issue of its own jurisdiction on its own initiative, and to satisfy itself that it has jurisdiction in any case that comes before it".52

4.187 In other instances, WTO panels have relied on the implied jurisdiction to rule on matters inherent in the adjudicative function on which the DSU or other WTO covered agreements are silent. In US – Wool Shirts and Blouses, the Appellate Body found that "the party who asserts a fact, whether the claimant or the respondent, is responsible for providing proof thereof" and the "burden of proof rests upon the party, whether complaining or defending, who asserts the affirmative of a particular claim or defence".53 The Appellate Body did so largely because these rules have been "generally and consistently accepted and applied" by "various international tribunals, including the International Court of Justice."54

4.188 Mexico recognizes that there is no WTO precedent in which a panel has declined to exercise its jurisdiction over all of the claims made by a Member. Mexico is not arguing that the Panel could decline to exercise its jurisdiction solely on the basis of the notion of "judicial economy", contrary to what is suggested in the EC's third party submission.

4.189 In its first written submission, Mexico referred to the principle of "judicial economy" as an example of situations where WTO panels have refrained from exercising validly established substantive jurisdiction over certain claims brought before them. In Mexico's view, this example illustrates that in spite of the apparent requirement of Article 7.2 of the DSU, which stipulates that "[p]anels shall address the relevant provisions in any covered agreement or agreements cited by the parties to the dispute", WTO panels can decide not to address certain claims. In the light of this example and others already mentioned, there can be no question that WTO panels have an implicit or inherent jurisdiction.

4.190 Mexico believes that such jurisdiction includes the power to decline to exercise jurisdiction in the extraordinary circumstances of this case since there is an available forum for both parties to solve the dispute in a comprehensive manner. Mexico's request is not simply that the Panel decline its jurisdiction, but that it decline it in favour of that forum.

4.191 Mexico's request is compatible with the objective of the WTO dispute settlement mechanism to "secure a positive solution to a dispute". In this case, the underlying difference is broader than submitted by the United States before the DSB.

4.192 As a final point. Mexico wishes to make clear that it is not arguing that the Panel's power to refrain from exercising jurisdiction should be used liberally. However, this case presents exceptional circumstances, that is to say, a broader dispute exists, as recognized by both parties, the United States and Mexico, but the United States has frustrated the Mexican right to have recourse to the appropriate dispute settlement mechanism in order to resolve its grievance.

4.193 In its submission, the European Communities pointed out that in the Argentina – Poultry Anti-Dumping Duties case a WTO panel considered the dispute despite the fact that the same measures had previously been the subject of dispute settlement under Mercosur. Nonetheless, in Mexico's view, Argentina – Poultry Anti-Dumping Duties, differs from this case in various relevant respects and cannot be used as a precedent.

4.194 In Mexico's opinion, it would be not appropriate under the circumstances of this case for the Panel to exercise its substantive jurisdiction.

4. Mexico's defence under Article XX(d) of the GATT 1994

4.195 Should the Panel decide to exercise its jurisdiction and find that the measures at issue are inconsistent with Article III:4 of the GATT 1994, Mexico believes that it should find them justified under Article XX(d). In paragraphs 115 to 138 of its first written submission, Mexico explains that the measures at issue meet all the requirements of Article XX(d).

4.196 Mexico will respond to the United States' arguments concerning Article XX(d) in its second written submission. At this point, Mexico would simply like to make a couple of observations.

4.197 In paragraph 38 of its submission, the European Communities points out that the reference to "laws or regulations" must be to laws or regulations applicable in the internal legal order of the WTO Member in question. The European Communities does not cite any previous GATT or WTO jurisprudence in support of its contention. Indeed, it could not do so because the unusual facts of this case have not previously been addressed in GATT or WTO dispute settlement proceedings.

4.198 While it is true that Article XX(d) contains an illustrative list of laws, compliance with which could give rise to measures otherwise inconsistent with the GATT, the list is illustrative and not exhaustive and it cannot be concluded that it excludes international treaties. Neither can it be concluded that GATT negotiators had the intention of excluding international treaties. There is no reason in principle why the term "laws" should exclude international treaties.

4.199 Paragraph (d) of Article XX does not refer to measures "necessary to secure compliance with internal laws or regulations" or "[measures] necessary to secure compliance with laws or regulations of a Member's internal legal order" as suggested by the reading proposed by the EC. The Panel will observe that the rules of treaty interpretation "neither require nor condone the imputation into a treaty of words that are not there".

4.200 Nothing in the text of the article compels the restrictive interpretation urged by the European Communities. In light of the rapid development of international law and treaty-making in the last decade, why in principle should international treaties be excluded?55

4.201 Mexico has done no more than try to induce the United States to comply with its NAFTA obligations and to submit to dispute settlement under the NAFTA. The record demonstrates that Mexico has at all times sought to resolve the dispute through consultation, negotiation, and dispute settlement mechanisms. Nonetheless, there comes a time when it must be recognized that all avenues for international cooperation have been exhausted and a State may then resort to its own devices. It was not until all other means had failed that Mexico took the measures to which objection has now been made. Mexico, nevertheless, has not closed the door against finding a solution through cooperation, and even since adopting the measure, it has continued with consultations and negotiations, although these have failed to yield results.

4.202 As a matter of policy, if Mexico's defence were accepted, there would be no risk of trade restrictive measures that were not tied to bona fide efforts to resolve disputes being successfully justified under Article XX(d).

5. Response to the European Communities' third party submission

4.203 Mexico has read the European Communities' third party submission with interest. Mexico has already addressed various specific points made by the European Communities, and it would now like to turn to certain other remarks made in that submission with which Mexico agrees:

– In paragraph 20, the European Communities points out that the function of the Panel is to make findings in the light of the provisions of the covered agreements. It then states that this does not mean that the Panel cannot take into account other provisions of international law, when such provisions are relevant to the dispute before it. It points out that the Appellate Body has confirmed that the WTO Agreements are not to be read in "clinical isolation" from public international law. The European Communities expresses its view that it is therefore not excluded that applicable rules of international law may also include bilateral or multilateral agreements between Members, when such rules are relevant for settling a dispute before a panel.

Mexico agrees with the European Communities' submission in this regard.

– At paragraph 21, the European Communities notes that "Mexico has so far not invoked any specific provision of NAFTA or general rules of public international law in its defence against the claims of the United States" and that the Panel "may therefore not need to address the complex question of the relationship between the WTO agreements and other bilateral or multilateral agreements".

This observation is correct.

– Mexico should point out, however, that it considers that not only must the WTO agreements be interpreted in accordance with the rules of customary international law, but that these rules, in general, continue to operate within the context of the WTO and other obligations under Members' regional trade agreements. When, due to a State's conduct, the dispute settlement mechanisms of such agreements fail to operate as foreseen, the affected State must be allowed to take action under customary international law.

However, there are three reasons why Mexico has so far not referred to such rights:

4.204 The first reason is that Mexico considers that its measure is justified under Article XX(d) of GATT 1994.

4.205 Secondly, Mexico also wishes to see the United States' response to its first submission. In particular, Mexico would like to know whether the United States continues to adhere to the view expressed in the quotation in paragraph 126 of Mexico's first written submission:

"Wherever it could the United States would challenge unfair practices under the dispute settlement provisions of the General Agreement or the Tokyo Round Codes, but where other contracting parties prevented or impeded that process or blocked efforts to ensure that their practices were covered by multilateral disciplines, the United States would act to protect its interests. If such an action was considered unilateral it should be nevertheless recognized as perfectly justifiable, responsive action necessitated by the failure of bilateral or multilateral efforts to address a problem."56

4.206 Mexico's third concern about invoking its rights at general international law in this WTO proceeding is that this Panel does not have before it all the facts and relevant legal issues. Mexico recognizes that a WTO panel has jurisdiction only over the covered agreements; that it cannot take jurisdiction over issues raised under the NAFTA. In such circumstances, given the prospect of parallel international proceedings in which substantial monetary damages are being claimed against it, Mexico cannot, without having all the relevant facts and obligations before it, run the risk of its defence under international law being prejudiced in these other proceedings.

4.207 The Panel has only been presented with a "slice" of the dispute, that "slice" which the United States considers might be to its advantage to present; this is why Mexico has lodged its preliminary jurisdictional objection.

4.208 Mexico wishes to draw the attention of the Panel to one important point in this regard: assuming arguendo that the United States demonstrated that the tax at issue violated Article III of the GATT, there is a real prospect that another international tribunal might reach a contrary finding with regard to the identical provision incorporated in NAFTA Article 301. Mexico believes that the United States and the Panel should ponder how possible conflicting decisions on Article III could "secure a positive solution" to the dispute.

4.209 However, Mexico believes that its measures are, in any event, justified under international law.

6. Conclusions

4.210 For the reasons set out in Mexico's first written submission and those which it has put forward in this occasion, Mexico requests the Panel to decline to exercise its jurisdiction in these proceedings. Should the Panel decide to reject Mexico's request for a preliminary ruling, Mexico requests that the Panel find that Mexico's measures are justified under Article XX(d) of the GATT 1994.

F. CLOSING STATEMENT OF THE UNITED STATES AT THE FIRST MEETING OF THE PANEL

4.211 As discussed in some detail, the United States has established a prima facie case that Mexico's tax on HFCS and soft drinks and syrups sweetened with HFCS is inconsistent with Mexico's obligations under Articles III:2 and III:4 of the GATT 1994. In the opening session, Mexico confirmed for the Panel that it has not rebutted that case, and does not intend to rebut that case in the context of these proceedings. While the Panel must itself confirm that the legal requirements for a breach of Article III exist, the United States is confident that the prima facie case established in its written submission and confirmed by its remarks in the opening session will enable the Panel to do that.

4.212 This is in stark contrast to the two bases on which Mexico has decided to defend its breach of Article III: its request for the Panel to decline jurisdiction and its Article XX(d) defence. Mexico has not met its burden of proof with respect to either of these bases. Rather than reiterate the points discussed in this regard in its opening statement, the United States will focus its closing remarks on a couple of admissions made or clarified by Mexico's oral statement and responses to questions.

4.213 First, with regard to Mexico's request for the Panel to decline jurisdiction over this dispute, Mexico admits that its request finds no basis in the text of the DSU or elsewhere in the WTO Agreement. Instead, Mexico asserts that some undefined principle of international law which "is not written down" overrides the explicit text of the DSU and the Panel's terms of reference. This is simply not credible.

4.214 Second, with respect to Article XX(d), Mexico admits that it is not aware of any past panel or Appellate Body report nor any statements in the negotiating history to support its novel contention that the words "laws or regulations" as used in Article XX(d) actually mean – as was framed in the opening session by the Chairman of the Panel – "another Member's obligations under a non-WTO agreement." This is in addition to the fact that Mexico is unable to point to any textual basis in the GATT or elsewhere in the WTO Agreement to support its contention. However, because Mexico as the party asserting this defence bears the burden of proving it, it is up to Mexico to come forward with the factual evidence and legal arguments in support of its claim. Such legal and factual support must arise from something more than the mere absence of a prior WTO finding or any negotiating history on the subject.

4.215 Having not established that another Member's obligations under an international agreement are "laws or regulations" under Article XX(d), the Panel need not reach the issue of whether Mexico's tax "secures compliance" or is "necessary." Nevertheless, the United States would point out Mexico's rather flexible use of the word "secure" in its responses to questions posed by the Panel in the opening session. Mexico repeatedly referred to the tax as aimed at "inducing" United States compliance with its alleged NAFTA obligations. This suggests to the United States that Mexico also implicitly admits that its tax cannot in fact secure United States compliance with alleged NAFTA obligations; the most that it can hope is that its tax encourages United States compliance with those obligations by punishing the United States with a breach of the obligations Mexico owes the United States under the GATT.

4.216 In this connection, the United States also notes Mexico's candid response to the question posed by the United States as to whether Mexico's tax applies to imports of HFCS from just the United States or from other WTO Members as well. In that response, Mexico confirmed that the tax applies to HFCS imports from any WTO Member. The United States finds it difficult that Mexico's tax could be necessary to secure United States compliance with the NAFTA when the tax penalizes not just HFCS of United States origin, but HFCS from all other WTO Members.

4.217 Much more could be said about Mexico's incorrect claims with respect to its Article XX(d) defence as well as its request for the Panel to decline jurisdiction. However, in the interest of brevity, the United States will defer those points to its second submission.

4.218 Before closing, however, the United States would like to comment more broadly on the sweetener dispute with respect to the provisions of the NAFTA. The United States has made clear its view that that other matter is not relevant to this current proceeding. It is the United States' firm view that it has been acting in full conformity with its obligations regarding sugar under the NAFTA. It has a dispute with Mexico over the precise terms of those NAFTA obligations. Mexico has described its efforts to resolve that other matter and its frustration over the fact that, that issue has not been resolved to date. The Panel should understand that the United States is equally dedicated to resolving that other matter and shares Mexico's disappointment that it has not been able to reach a mutually satisfactory resolution. As Mexico noted in its opening statement, dialogue and negotiations on the NAFTA issue have continued, most recently among sweetener producers in both countries. The United States is before the WTO to resolve a WTO dispute over HFCS, but it has no less interest in resolving the NAFTA sugar issue in the appropriate forum.

4.219 Mexico has presented the Panel with a narrative that describes some of the complexities in the sugar case. There are many more that could be presented and that would uphold the United States view of the matter. The point is that this is not the place where that issue can be resolved. This dispute is about Mexico's commitments to WTO Members under the covered agreements, and Mexico has pointed to nothing in the text of those covered agreements that bars the United States from recourse under WTO dispute settlement.

G. CLOSING STATEMENT OF MEXICO AT THE FIRST MEETING OF THE PANEL

4.220 Mexico would like to confine itself to the following subjects:

4.221 Firstly, on the subject of judicial economy, Mexico referred in detail in its opening statement to the basis for its request that the Panel decline to exercise its jurisdiction, and explained why the Panel is entitled to do so. Unfortunately, the third parties presented their arguments during their session with the Panel without having had the benefit of Mexico's arguments in that respect. Mexico would therefore simply like to repeat that it is not asking the Panel to decline its jurisdiction for reasons of judicial economy. This is merely an example of the implied or incidental jurisdiction that the Panel has. Mexico would like to refer the Panel to the arguments on the subject presented in Mexico's opening statement.

4.222 Secondly, Mexico would like to refer to the issue of whether or not Article XX(d) of the GATT 1994 excludes international treaties. In this connection, Mexico would like to refer the Panel to the argument made by the Government of Guatemala in the third party session concerning the importance of regional trade agreements in the context of the multilateral trading system, and the fundamental role played by the dispute settlement mechanisms provided for under those agreements, especially as regards the legal certainty that they bring to the multilateral trading system.

4.223 The United States confirmed that there was a disagreement between the two parties, Mexico and the United States, regarding trade in sugar in the framework of the North American Free Trade Agreement (NAFTA). The United States confirmed the validity of Mexico's request for the establishment of a NAFTA Chapter XX Arbitral Panel, and confirmed that the dispute was still pending – in spite of the fact that the United States Government, more specifically the Office of the United States Trade Representative, removed it from its official website, oddly enough just before bringing this dispute before the WTO. The United States also stated that it was unfortunate that to date, more than four years after Mexico requested the establishment of an arbitral panel and more than six years after the NAFTA Chapter XX Dispute Settlement Mechanism was activated, it had not been possible to settle the dispute either through consultations and negotiations or through the dispute settlement mechanism. This is because the United States has thus far blocked Mexico's request to establish an arbitral panel. To date, the NAFTA arbitral panel has not been composed because the United States has not appointed panellists, nor has it agreed on the appointment of a chairperson.

4.224 The United States contends that the Government acted in full conformity with the NAFTA provisions. Mexico would simply like to point out that this is no more than an affirmation by the legal representative of the United States, but that the only evidence pertaining to this issue in the record is the evidence that Mexico supplied. The only evidence of the ineffectiveness of the NAFTA dispute settlement mechanism, due to the United States' intransigence in refusing to appoint panellists, is the evidence provided by Mexico. Indeed, not only did the United States fail to supply evidence to refute Mexico's arguments in this respect, but it did not even deny the evidence during the meeting. Mexico responded to the United States' statement (in reply to a question from the Panel) that a NAFTA Chapter XX arbitral panel had been established, and to its attempt to convince the Panel that the proceeding was under way. Mexico rejects the United States' assertion, pointing to a technical difference between establishing an arbitral panel and composing that panel. It is an unquestionable fact that today, more than four years after Mexico's request, the United States has not appointed panellists and that there is no arbitral panel that can settle Mexico's grievances.

4.225 Mexico has met the burden of proof which, in the circumstances, satisfies all of the requirements of Article XX(d) of the GATT 1994. It has supplied both the legal elements and the evidence relating to the United States' measures.


To continue with H. Second written submission of the United States

1 WT/DS308/1.

2 WT/DS308/4.

3 WT/DS308/5/Rev.1.

4 Pakistan had reserved its third-party rights at the DSB meeting on 6 July 2004. However, on 20 August 2004, Pakistan informed the DSB that it did not want to participate as a third-party in the panel proceedings.

5 United States' first written submission, para. 31 and exhibit US-18.

6 United States' first written submission, para. 22.

7 United Nations Economic Commission for Europe, at http://www.unece.org/stats/econ/iwg.agri/handbook.sugar.html (site consulted on 14 February 2005).

8 United States' first written submission, para. 22.

9 United Nations Economic Commission for Europe, at http://www.unece.org/stats/econ/iwg.agri/handbook.sugar.html (site consulted on 14 February 2005).

10 United States' first written submission, paras. 9-12.

11 United Nations Economic Commission for Europe, at http://www.unece.org/stats/econ/iwg.agri/handbook.sugar.html (site consulted on 14 February 2005).

12 Written version of Mexico's oral statement during second substantive meeting of the Panel with the parties, para. 36.

13 The summaries of the parties' arguments are based on the executive summaries submitted by the parties to the Panel.

14 The IEPS is also inconsistent as a tax on HFCS with Article III:2, first sentence, of GATT. However, because the IEPS so clearly taxes a directly competitive or substitutable imported product in a manner so as to afford protection to domestic production, the United States, in the interest of brevity, has chosen to focus its submission on the second sentence.

15 The IEPS is also inconsistent with Article III:4 of GATT 1994 as a law that affects "the internal sale, offering for sale, purchase, transportation, [and] distribution" of imported soft drinks and syrups and accords them "treatment ... less favourable than that accorded to like products of national origin" by taxing their agency, representation, brokerage, consignment and distribution (distribution tax). However, because the IEPS also so plainly violates GATT Article III:2, the United States, in the interest of brevity, has focus this submission on analysis under GATT Article III:2 with respect to the distribution tax as applied to soft drinks and syrups.

16 It does not include HFCS. See Section C of Annex 703.2.

17 Exhibit MEX-11.

18 Exhibit MEX-12.

19 Exhibit MEX-13.

20 Exhibit MEX-14.

21 From 1985 to 1988, Mexico had a sugar surplus. From 1989 to 1994 it had a deficit. Mexico has generated production surpluses from 1995 until 2002. See "Resumen Anualizado de Balance Azucarero de México", Evolución histórica por año calendario a partir de 1989. Exhibit MEX-15.

22 The USDA noted in 1996 that the industry was increasing its output due to better harvesting and post-harvest technology as well as higher factory yields. See USDA, "Mexican Sugar Output Forecast to Decrease", September 17, 1996, p. 1. Exhibit MEX-16.

23 The USDA noted in its report entitled "Mexican Sugar Exports to Increase", April 10, 1998, p. 3, that the cañeros (Mexican sugar cane growers) had been making technical improvements. Sugarcane yields per hectare increased from an average of 68 MT/ha in 1990 to about 72 MT/ha in 1997 due to technical improvements. Exhibit MEX-17.

24 The United States HFCS industry has, to use the USDA's words, "been plagued with excess capacity" and the Mexican market was seen as an attractive nearby market in which to export excess production. See USDA Economic Research Service, "United States Mexican Sweeteners Trade Mired in Dispute", Agricultural Outlook, September 1999, p. 18. The USDA noted that although HFCS sales in the United States increased by 13 per cent in the 1994-1997 period, the increase was not large enough to absorb the production surplus. "As a result, the sector faced tough adjustments, with some smaller operations leaving the business and others selling to or attracting investors from among larger companies." Exhibit MEX-18.

25 USDA, Mexico Sugar Semi-Annual 2000, 10 October 2000, p. 4. Exhibit MEX-20.

26 Under NAFTA Article 2005, the Parties agreed that, subject to certain conditions, " … disputes regarding any matter arising under both this Agreement and the General Agreement on Tariffs and Trade, any agreement negotiated thereunder, or any successor agreement (GATT), may be settled in either forum at the discretion of the complaining Party".

27 Panel report adopted on 13 March 1984, BISD 31S/67, paragraphs 3.10 and 3.11. In that dispute, while the panel noted that the measures were only one aspect of a broader problem, it proceeded to examine the claims of Nicaragua solely in the light of the GATT provisions. In Mexico's view, this reflected a pre-WTO approach to questions of international law that should be revisited.

28 Article 3.7 of the DSU.

29 Id., para. 3.

30 Report of the Appellate Body on US – Gasoline, p. 24, DSR 1996:1, 3, at 22.

31 Report of the Appellate Body on Korea – Various Measures on Beef, para. 157.

32 Id., paras. 161-162.

33 GATT document C/163 of 16 March 1989, p. 4. Exhibit MEX-29.

34 US – Shrimp (Article 21.5 – Malaysia).

35 US – Shrimp (Article 21.5 – Malaysia), paras. 123-124.

36 Id., pp. 128-130.

37 Mexico first written submission, para. 111.

38 Mexico's first written submission, paras. 5, 34, 112.

39 United States' first written submission, para. 45.

40 Mexico's first written submission, para. 114.

41 See DSU Articles 11, 19.1.

42 Mexico's first written submission, para. 93.

43 See also DSU Article 12.7.

44 WT/DS308/5/Rev.1.

45 Mexico's first written submission, para. 94.

46 See, e.g., Appellate Body Report on US – Wool Shirts and Blouses p. 17, DSR 1997:I, 323, at 339.

47 See, e.g., Appellate Body Report on Australia – Salmon, para 223.

48 Mexico's first written submission, para. 97.

49 Appellate Body Report on India – Quantitative Restrictions para. 84; see also Panel Report on Turkey – Textiles, paras. 9.15-9.17.

50 Exhibit MEX-30.

51 See Nuclear Tests (Australia v. France; New Zealand v. France), 1974 ICJ Reports 253, page 262.

52 Appellate Body Report on US – 1916 Act, para. 54 and footnote 30 (emphasis added).

53 Appellate Body Report on US – Wool Shirts and Blouses, p. 14, DSR 1997:I, 323, at 335.

54 Id. (emphasis added)

55 Report of the Appellate Body on India – Patents (US), para. 45.

56 GATT document C/163 of 16 March 1989, page 4. Exhibit MEX‑29.