B. Panel and Appellate Body Reports on Japan - Taxes on Alcoholic Beverages

1. Complainants

1.36. According to the European Communities, the Korean liquor tax system at issue in this dispute is very similar to the system in place in Japan until very recently. The European Communities argues that, like Korea in the instant situation, Japan applied a much lower rate to shochu (a local distilled liquor which, the European Communities consider is "like" Korean soju) than to "western-style" distilled spirits and liqueurs which are "like" or "directly competitive or substitutable" with shochu.

1.37. The European Communities notes that the Japanese liquor tax system was found to violate Article III:2 of GATT by the 1987 Panel Report on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages³⁸ (Japan - Taxes on Alcoholic Beverages I) and again by the 1996 Panel and Appellate Body Reports on Japan - Taxes on Alcoholic Beverages³⁹ (Japan - Taxes on Alcoholic Beverages II).

1.38. The European Communities concedes that, in accordance with the Panels' terms of reference, that finding was limited to the Japanese market. In the EC view, however, this does not mean that it is irrelevant to the present dispute. The EC view is that although there may still subsist superficial differences between the Japanese and the Korean market, the underlying dynamics of both markets are very similar. According to the European Communities, there is no good reason why the findings made by prior Panels with respect to the Japanese market should not be considered as pertinent in the present dispute.

1.39. The United States argues that the Korean liquor tax system at issue in this dispute is very similar to the system in place in Japan until very recently. The United States further argues that like Korea, Japan has long protected shochu, a local distilled liquor which, in its pure form, is identical to Korean soju. According to the United States, until recently, Japan applied a much lower tax rate to shochu than to other categories of Western distilled spirits that -are "like" or "directly competitive or substitutable with" shochu. The United States alleges that the structure of its law is remarkably similar to the Korea tax law, including a broad definition for shochu from which beverages such as those using a birch filter (i.e., vodka) are arbitrarily excepted.

1.40. According to the complainants, the main difference between the Korean liquor tax system and the Japanese system is that in the Korean system the taxes take the form of an ad valorem duty whereas Japan applied specific taxes. In the complainants view, for the purposes of this dispute, however, this has the consequence only of rendering even more transparent the protective effects of the Korean system as compared to those of the Japanese system. According to the complainants, in Japan - Taxes on Alcoholic Beverages II,⁴⁰ Japan's main line of defence was that while the rates on shochu were lower, the "tax/price ratios" (i.e. the tax burden expressed as a percentage of the retail price) for all categories were "roughly the same". In the complainants view, in the present case, since the taxes are ad valorem, Japan's attempted defence is not available to Korea.

1.41. The European Communities states that during the consultations Korea claimed, although without providing any supporting evidence, that current consumption patterns in Korea differ from consumption patterns in Japan. According to the European Communities, even if the alleged differences were proved to be significant, they would merely reflect the fact that western-style liquors became a mass product in Japan earlier than in Korea, to a large extent as a result of an earlier liberalisation of imports.

1.42. The European Communities further argues that the Korean market has no inherent or permanent characteristic which makes it so different from the Japanese market as to warrant the conclusion that the very same liquors which were found to be "substitutable and competitive" on the Japanese market in 1987 and 1996 cannot be regarded as such in Korea. To the contrary, the EC argument goes, the current Korean market for distilled sprits and liqueurs is in many ways reminiscent of the Japanese market in the early eighties.

1.43. The European Communities argues that, as in Japan one decade before, since the early nineties an increase in the levels of disposable income, coupled with the lifting of import quotas and a reduction in the applicable tariffs and internal taxes, have led to a spectacular increase in sales of western-style liquors on the Korean market, and in particular of whisky.

1.44. According to the European Communities, Korean consumers, like their Japanese neighbours, at first perceived western-style liquors as "luxury" items to be offered as gifts or to be consumed only on special occasions and at special places. Over time, however, the argument goes, there has been, both in Japan and in Korea, a clear trend towards lower prices, greater availability in all sales channels, and consumption patterns which are more similar to those of the "traditional" local liquor.

1.45. The European Communities further states that there has also been a trend towards the "internationalisation" of the local liquors, which in Korea is illustrated by the recent emergence of the premium soju segment and in Japan by the proliferation of whisky-like and vodka-like shochus. The result of these two converging trends is an ever increasing degree of competition between shochu/soju and western-style liquors.

1.46. The European Communities concludes, that given the close resemblance between the Korean liquor tax system and the Japanese measures at issue in Japan - Taxes on Alcoholic Beverages I and II, the Panel and Appellate Body reports adopted in those disputes are particularly relevant and should provide decisive guidance to this Panel. It is submitted by the European Communities, in particular, that the findings of those two Panels and of the Appellate Body to the effect that vodka and shochu/soju are "like" products and that shochu/soju and all other distilled spirits and liqueurs are "substitutable" and "competitive" products, are equally relevant for this dispute.

1.47. The United States also takes the position that the development of the distilled spirits markets in Japan and Korea are very similar. According to the United States, since the early 1990's an increase in the levels of disposable income, coupled with the lifting of the import restrictions and a reduction in the applicable tariffs and internal taxes, have led to a spectacular increase in sales of Western-style spirits on the Korean market, in particular whisky.

1.48. The United States further asserts that, like their Japanese neighbours, Korean consumers at first perceived Western-style liquors as "luxury" items to be offered as gifts or to be consumed only on special occasions and at special places. Over time, however, there has been, both in Japan and in Korea, a clear trend towards consumption of all types of distilled spirits on more and varied occasions, and in different methods of consumption, i.e. in mixed drinks, warm, cold, etc. According to the United States, the expanding methods and venues of consumption have also been aided by greater availability of all types of spirits in all sales channels.

1.49. According to the United States, the result of expanded purposes for spirits, and the burgeoning styles of soju is an ever increasing degree of competition between soju and Western-style liquors. Those trends are converging in Korea, as in Japan.

1.50. The United States also concludes that the close similarity between the Korean liquor tax system and the Japanese measures at issue in the recent WTO/GATT disputes make the Panel and Appellate Body findings in that case very pertinent to this Panel's examination of Korean tax measures. In particular, the United States argues that the findings of those two panels and of the Appellate Body to the effect that vodka and shochu/soju are "like" products and that shochu/soju and all other distilled spirits are directly competitive or substitutable products are especially relevant for this dispute.

2. Korea

1.51. Korea notes that both the United States and the European Communities demonstrate the desire simply to superimpose the results of the 1996 Japan - Taxes on Alcoholic Beverages Panel on this case. In Korea's view, the complainants attempt to equate Japan and Korea, their markets, and the products at issue. According to Korea, they do so by asserting that soju and shochu are 'identical', and that the 'underlying dynamics of both [the Japanese and Korean] markets are very similar', save some 'superficial differences'. Korea argues that this approach is not compatible with Article III:2 GATT.

1.52. Korea argues that Korean soju is not identical to Japanese shochu, irrespective of statements made in the context of the Japan case, to which Korea was not a party. Korea cites the example from the complainants to say that Korean companies are exporting soju to Japan. According to Korea, when Korean soju is exported to Japan, it is destined for the Korean community in Japan,⁴¹ and sold in Korean stores and restaurants. However, argues Korea, Korean producers exporting to Japan are primarily aiming to capture Japanese consumers. For this purpose, they export a different product, a sort of 'Korean shochu'. These two products are taxed differently under the Japanese liquor tax law. Korea adds that 'Korean shochu' is not sold in Korea.

1.53. Korea further argues that despite the complainants' contentions, the Korean case is not a 'mirror image' of the Japanese case, and Korea will not entertain arguments in that vein. Korea argues that it need only point to the Japan - Taxes on Alcoholic Beverages II Panel report itself, which repeatedly stresses that an Article III examination must be carried out on a 'case-by-case basis',⁴² noting in particular that 'consumers' tastes and habits . . . change from country to country'.⁴³

1.54. Korea acknowledges that the Japan - Taxes on Alcoholic Beverages II case sets forth the legal framework for the application and interpretation of Article III of GATT. Korea accepts that it will follow that framework in its analysis, but adds that when these legal rules are applied to the facts of this case, the result is completely different than under the dissimilar set of facts of the Japanese case.

Korea and Japan: Differences Between their Products and Markets

1.55. According to Korea, the first noticeable difference between soju and shochu is taste. Korea argues that Japanese shochu has a neutral taste compared to Korean soju, which is sweeter.⁴⁴ Consumers easily recognise that taste difference; Koreans prefer soju and will not accept shochu as a substitute; the Japanese feel the same way about shochu.

1.56. Secondly, according to Korea, soju is allegedly only drunk straight at a cold temperature. In Japan, on the other hand, different consumption patterns exist for the consumption of shochu: one can drink it straight or mixed with warm or cold water.⁴⁵

1.57. Korea argues that these differences are so important that Korean companies attempting to sell Korean soju in Japan have had to make a special product to appeal to the Japanese consumer. As an example Korea refers to the Korean company Jinro, which sells two products on the Japanese market, Jinro Gold and Jinro Export. According to Korea, the first product is exported to Japan in very small quantities (32 kl in 1997) with the primary purpose of targeting the Korean residents in Japan. This brand is only distributed to Korean restaurants and Korean supermarkets in Japan. The second brand, Jinro Export, targets Japanese consumers and represents the bulk of Jinro's exports to Japan (27 182 kl in 1997).⁴⁶ Korea argues that it is made to suit the Japanese taste,⁴⁷ sold in differently shaped bottles,⁴⁸ at much higher prices,⁴⁹ and is not available on the Korean market.

1.58. Korea also alludes to the EC contention that in Japan, soju is considered for tax purposes as being the same product as local 'shochu', which Korea argues is incorrect. According to Korea, when Korean standard soju (such as Jinro Gold) is exported to Japan, it is treated as a 'spirit' for tax purposes. Only the specially-produced 'Korean shochu', such as Jinro Export, is treated like Japanese shochu by the Japanese tax authorities. The tax rate for Korean standard soju exports is higher than for 'Korean shochu' exports.⁵⁰

1.59. Korea also argues that there are notable differences in the way shochu is marketed in Japan and the way that standard soju and distilled soju are marketed in Korea. Shochu is marketed more like western-type liquors that can be drunk as cocktails.

1.60. Korea further argues that Japanese shochu producers even make a shochu A (the standard version) that is aged and is brown in colour, and they make an effort to convince consumers that there are a plethora of similarities between brown shochu and whisky. Korea states for example, that the leading brand of brown shochu A in Japan, Takara Legend, closely resembles whisky in colour and packaging. Korea also asserts that in Korea, it is legally prohibited to add colour to standard soju.⁵¹

1.61. Korea contends that another important difference is the pricing structure of the Japanese market. Shochu B (the distilled version) and shochu A are similarly priced, and are selling in comparable volumes. This contrasts to the Korean soju market in which distilled soju is selling in much smaller volumes and at much higher prices than standard soju. According to Korea, in the Japanese shochu market, shochu A and shochu B have comparable market shares, whereas in the Korean market distilled soju takes up 0.2% of the soju market and standard soju takes up 99.8% of the market.

1.62. Korea notes that as the European Communities argued in the Japan - Taxes on Alcoholic Beverages II case, the prices of imported liquors and Japanese shochu were within a relatively short range, with the tax removed.⁵² Korea further notes that in contrast, as the EC experts have recognised in this case, the pre-tax prices for imported liquors in Korea are much higher than the prices for standard soju.⁵³

1.63. In its rebuttal submissions, the European Communities argues that Korea is understandably anxious to escape the clear implications for this dispute of the Panel Report on Japan - Taxes on Alcoholic Beverages I,⁵⁴ and the Panel and Appellate Body Reports on Japan - Taxes on Alcoholic Beverages II.⁵⁵ The EC view is that Korea unjustly accuses it of trying to apply mechanically the conclusions of those reports to the present case. According to the European Communities, that is an obvious misrepresentation of its position.

1.64. According to the European Communities, the present dispute must be determined on its own merits. The EC view, however, is that this Panel must take into account any adopted Panel and Appellate Body reports which are relevant to this dispute. The European Communities refers to the Appellate Body decision in Japan - Taxes on Alcoholic Beverages II, wherein it was stated:

1.65. The EC position is that it has demonstrated that the two Panel reports and the Appellate Body report on Japan - Taxes on Alcoholic Beverages II are particularly relevant for the present dispute because:

The European Communities argues that Korea fails to refute any of those similarities.

1.66. In its rebuttal submission, the United States recalls that its first submission cited the reports of the WTO panel and Appellate Body in the Japan - Alcoholic Beverages II case as setting forth the applicable legal standards and factual findings concerning a market, tax measures and products that are identical or analogous to those presented in this dispute. The United States argues that it has not called for a "mechanical" application of the analysis of the Japanese market to the Korean market, as suggested by Korea.⁵⁷

1.67. According to the United States, it is well established that the issue of what is a "like" or "directly competitive or substitutable" product for purposes of Article III:2 must be determined on a case-by-case basis on its own merits. However, in the US view, given the similarities of the tax measures and products involved in the Japanese and Korean markets, this Panel should consider that the conclusions of the panel concerning the products, measures, and extent of competition in the Japanese market can also be reasonably drawn with respect to the facts presented here.

1.68. The United States notes that Korea has contested any similarities between soju and shochu, and between the Korean and Japanese markets and disputes the US point that soju and shochu are "identical." According to the United States, while Korea understandably is entitled to dispute the point, the source for the point made by the United States was the government of Japan, which in Japan - Taxes on Alcoholic Beverages II stated that, "Essentially shochu and soju are identical products."⁵⁸ With respect to the fundamental similar qualities of the product, Japan noted that:

1.69. According to the United States, as the largest importer of Korean soju (Korean imports account for 8 percent of Japan's shochu A market), Japan would appear to be reasonably authoritative regarding the objective characteristics of the products.

1.70. The United States further argues that, even using the marketplace approach, the similarities between the present Korean rket and the Japanese market make the Japan panel's findings analogous for purposes of this proceeding. In the US view, in both markets, Western distilled spirits are more expensive and considered premium types of spirits compared to local shochu/soju, and in both markets Western spirits are used for gift-giving more frequently than the local product, although in this dispute, Korea has characterized distilled soju as uniquely suited to gift-giving. The marketplace reacted similarly in Japan and Korea, as consumption of Western spirits increased with the lifting of trade barriers and the narrowing of tax disparities. The United States notes for instance, that US exports of Bourbon to Japan have increased from 6.3 million litres in 1987 to 12.2 million litres in 1997 due to 1989 reforms in the Japanese liquor tax, and US exports of distilled spirits to Korea increased from 170,000 litres in 1990 to 644,000 litres in 1996 following the removal of quota restrictions on bottled imported spirits.

To continue with Korea and Japan: Differences Between their Products and Markets

³⁸ Panel Report on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages, (Japan - Taxes on Alcoholic Beverages I) adopted on 10 November 1987, BISD 34S/83.

³⁹ Panel Report on Japan - Taxes on Alcoholic Beverages II, WT/DS8/R, WT/DS10/R, WT/DS11/R, as modified by the Appellate Body Report, supra.

⁴⁰ Ibid. paras 4.154-4.166.

⁴¹ Korean residents in Japan numbered 699 847 persons as of June 1997.

⁴² Panel Report, paras. 6.21, 6.22, and 6.28 of the 1996 .

⁴³ Panel Report, paras. 6.21.

⁴⁴ Korea argues that soju contains six to seven additives whereas shochu only has up to two (citric acid and sugar). Korea notes that this distinction is not recognised in the 'test report' by the Scotch Whisky Research Institute, appended as EC Annex 8. Korea further notes that according to this 'test report', Korean standard soju and Japanese standard shochu are 'like' products (see para. 5). Thus, Korea concludes the report is not relevant because it does not distinguish the different additives.

⁴⁵ Korea argues that this difference is further illustrated by US Exhibit I, which shows advertisements for Japanese shochu for Japanese consumers, in which several types of uses are proposed for shochu which do not exist for soju in Korea, i.e., shochu can be drunk warm, mixed with chilled soda or on the rocks.

⁴⁶ Source: manufacturer's information. The total amount of Korean soju and 'shochu' exports to Japan in 1997, covering other manufacturers as well, was 36 478 kl (source: National Tax Administration).

⁴⁷ Unlike Jinro Gold, Jinro Export contains only two additives: sugar and citric acid.

⁴⁸ As is shown by US Exhibit H.

⁴⁹ According to Korea, by at least a factor of 5, before Japanese taxes and charges are applied.

⁵⁰ The current tax rate on standard soju and general spirits in Japan amounts to 367 188 yen/kl. The current rate for Japanese shochu is 201 900 yen/kl.

⁵¹ Standard soju by law must have a coloration level of less than 0.1 degree. (Whisky has a higher coloration level.)

⁵² Panel Report, para. 4.82.

⁵³ EC Annex 13, p.20.

⁵⁴ Panel Report on Japan - Taxes on Alcoholic Beverages I, supra.

⁵⁵ Panel Report on Japan - Taxes on Alcoholic Beverages II, supra.

⁵⁶ Appellate Body Report, p. 14.

⁵⁷ See Appellate Body Report., Japan - Alcoholic Beverages II, supra., at 20; see also Canada - Certain Measures Concerning Periodicals, adopted on 30 July 1997, WT/DS31/AB/R, at 21; The Australian Subsidy on Ammonium Sulphate, adopted on April 3, 1950, BISD II/188; EEC - Measures on Animal Feed Proteins, adopted on March 14, 1978, BISD 25S/49; Spain - Tariff Treatment of Unroasted Coffee, adopted on June 11, 1981, BISD 28S/102; Japan - Alcoholic Beverages I, supra; U.S. - Taxes on Petroleum and Certain Imported Substances, adopted on June 17, 1987, BISD 34S/136.

⁵⁸ Panel Report, para. 4.178. Japan also stated that "the tax legislation of the Republic of Korea defines soju into two sub-categories of diluted soju, which is equivalent to shochu A, and 'distilled soju, which is equivalent to shochu B, in a manner similar to Japan's definition.'" Ibid .

⁵⁹ Ibid., para. 4.175.