B. Mexico

1. Background

7. Mexico claims that since 1949, the Government of Korea has used various measures to protect its domestic production of soju such as quotas and exceedingly high tariffs. Until 1989, Korea maintained quotas on bulk imports of whisky, and until July of that year, it prohibited the import of bottled whisky.
8. Mexico further claims that it was not until the end of the 1980s that Korea began to liberalize these barriers to the import of distilled spirits, and subsequently, in the wake of the Uruguay Round, it committed itself to reduce its tariffs of 100 per cent ad valorem to 30 per cent ad valorem in ten annual periods. Its current bound tariff is 79 per cent ad valorem for almost all spirits of heading 22.08 of the Harmonized Commodity Description and Coding System (HS).
9. Mexico asserts that at the beginning of the 1990s Korea reduced some of its internal taxes. In the case of the liquor tax, as of 1 July 1991 Korea reduced the rate applicable to whisky and brandy from 200 per cent to 150 per cent; in January 1994 to 120 per cent; and in January 1996 to 100 per cent. The category "other liquors" benefited from a single reduction from 100 per cent to 80 per cent in July 1991. A tax of 35 per cent was levied on soju ³¹³ until 1991, when soju was divided into two subcategories, "diluted soju" and "distilled soju", taxed at 35 per cent and 50 per cent respectively.
10. Mexico further asserts that in 1990 the Korean Government began to apply the Education Tax Law to certain spirits, thus offsetting to a certain extent the reduction in the Liquor Tax. The Education Tax is a surtax applied to the sale of certain products pursuant to the application of the other taxes. In this case it is levied upon the Liquor Tax.
11. The application of the Liquor Tax Law in conjunction with the Education Tax Law favours the marketing of soju to the detriment of other spirits, thus affecting the marketing of the latter.

2. Legal Aspects

(a) General

12. Mexico claims that:

(a) The differential between the internal taxes applied to soju and other imported spirits is a prima facie violation of Korea's obligations under Article III.2 of the GATT 1994 and, ultimately, constitutes a case of nullification or impairment of the benefits accruing to Mexico under the said Agreement;

(b) because it is a prima facie violation of Korea's obligations under the GATT 1994, it is up to Korea to rebut the charge.

(b) Article III.2, first sentence

13. Mexico notes that the first sentence of Article III. 2 of the GATT 1994 stipulates that:

"the products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products".

14. Mexico argues that according to the Appellate Body in Japan - Taxes on Alcoholic Beverages II, for a tax measure to be in conformity with the first sentence of Article III.2 of the GATT 1994, it is necessary to determine, "first, whether the taxed imported and domestic products are 'like� and second, whether the taxes applied to the imported products are 'in excess of� those applied to the like domestic products".³¹⁴
15. Mexico considers that Korea has contravened the first sentence of Article III.2 of the GATT 1994 for the following reasons:

(a) Soju is a like product to the spirits of HS heading 22.08. ³¹⁵

(i) The notion of "like products" varies according to the provision of the GATT 1994 to which it applies. Thus, in practice, likeness of products is established on a case-by-case basis. With respect to Article III.2, the practice of various panels ³¹⁶ in the past suggests the application of the criteria of final use of the product in a given market, consumer taste and habits, and the properties, nature and quality of the products.

(ii) Spirits of HS heading 22.08, including tequila and mescal, have the same final use as soju in that they are drunk on their own, with spicy food "because the drink's harshness cuts the spiciness of the food." They also correspond to the tastes and habits of consumers of spirits and are equivalent in terms of their properties, their nature and their quality. Mexico states that it should be noted that soju like tequila and mescal, is divided into two categories: white tequila and mescal correspond to diluted soju, while matured tequila and mescal correspond to distilled soju. In both cases, the beverages are normally drunk on their own in small glasses. In Mexico's view, like diluted soju, both tequila and white mescal are clear very common and sold in great quantities, while matured tequila and mescal are more expensive drinks whose production process is more sophisticated and which, in many cases, are packaged in special bottles and offered as gifts.

(b) Even if the tariff classification does not suffice in itself to determine whether the products are "like products", it should be noted that both tequila and mescal are in the same tariff subheading (six-digit classification) as soju, i.e. HS subheading 2208.90. ³¹⁷ It should be recalled that the six-digit classification is the maximum level of precision in the HS. Moreover, the Appellate Body in Japan - Taxes on Alcoholic Beverages II stipulates that "if sufficiently detailed tariff classification can be a helpful sign of product similarity". ³¹⁸

16. Mexico asserts that the taxes levied on soju are higher than those levied on tequila. To illustrate this point, Mexico submits to the Panel the following comparative table demonstrating that the taxes levied on tequila and mescal, for example, are much "higher than those levied on soju":

	Distilled soju	Tequila and mescal	Margin of discrimination against tequila and mescal
Liquor Tax	50%	80%	160%
Education Tax	10%	30%	300%
Education Tax (applied)	5%	24%	480%
Total taxes	55%	104%	189.1%

	Diluted soju	Tequila and mescal	Margin of discrimination against tequila and mescal
Liquor Tax	35%	80%	228.6%
Education Tax	10%	30%	300%
Education Tax (applied)	3.5%	24%	685.7%
Total taxes	38.55%	104%	270.1%

(c) Article III.2, second sentence

17. Mexico notes that the second sentence of Article III.2 of the GATT 1994 stipulates that:

[n]o contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

In this connection, Mexico also notes that paragraph 1 stipulates that:

[i]nternal taxes and other internal charges [...] should not be applied to imported or domestic products so as to afford protection to domestic production.

Furthermore, Mexico notes that according to the interpretative note to Article III.2:

A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed.

18. According to Mexico, the second sentence of Article III.2 must be read in conjunction with the interpretative note. Thus, in order to determine the inconsistency of the adopted measure, the following elements must be examined:

(a) whether the imported and domestic products are "directly competitive or substitutable" and compete with each other;

(b) whether the directly competitive or substitutable imported and domestic products are not "similarly taxed"; and

(c) whether different taxes are levied on imported and domestic directly competitive or substitutable products "so as to afford protection to domestic production."

19. In Mexico's view, spirits of heading 22.08, including tequila and mescal, are "like products", and hence directly competitive or substitutable products with soju. ³¹⁹ And even assuming, for the sake of argument, that the Panel considers that spirits of HS heading 22.08 are not "like products" to soju, Mexico maintains that they are nevertheless "directly competitive or substitutable products".
20. Mexico also notes that in Japan - Taxes on Alcoholic Beverages II, which presented practically the same characteristics as the case at issue the Appellate Body concluded that:

"[s]hochu and other distilled spirits and liquors listed in HS 22.08, except for vodka, are 'directly competitive or substitutable products�". ³²⁰

Mexico considers that this conclusion is applicable to the case of Korean soju as well, given the alleged likeness of the Korean and Japanese markets. ³²¹ The Panel in that case accepted the evidence submitted by Japan ³²² according to which a shochu-like product is produced in Korea.

21. According to Mexico, Korean soju and the other spirits of HS heading 22.08 are not similarly taxed because as stated in the report of the Appellate Body in Japan - Taxes on Alcoholic Beverages II, if a product is not to be considered to have been "similarly taxed," the difference in taxation must be greater than de minimis. In the case at issue, the differences in taxes are so great and so evident that there cannot be the slightest doubt that they exceed any de minimis requirement that the Panel might set.
22. Mexico argues that the Liquor Tax and the Education Tax introduced by Korea apply to products imported so as to afford protection to domestic production because:

(a) Both the Liquor Tax Law and the Education Tax Law divide liquors into various categories; however, that division is arbitrary and cannot be justified under Article III of the GATT 1994. Moreover, the difference between the taxes is so great that it is impossible to argue convincingly that the differentials were not introduced with a view to protecting domestic production, as indeed they were.

(b) Although Korea's arguments are intended to achieve the opposite result it is interesting to examine the relationship between Korea's internal taxes and its tariffs. While the internal taxes favour soju, the tariffs applied by Korea to imports are considerably higher for soju (30 per cent ad valorem) than for other spirits of HS heading 22.08 (where they vary between 15 and 20 per cent ad valorem). Mexico attributes this particular relationship to a two-stage protection mechanism: First, by levying internal taxes on soju that are considerably lower than for other spirits, Korea is protecting the soju industry in general. However, in Mexico's view, this measure puts Korean soju production in a vulnerable position with respect to other countries which also produce soju/shochu, ³²³ obliging Korea to impose on its soju imports tariffs 50 to 100 per cent higher than those applied to other spirits. As a result, on the one hand soju imports are practically non-existent, while on the other hand, soju accounts for almost the entire Korean production of spirits.

23. The Government of Mexico requests that the Panel:

(a) find that Korea has contravened its obligations under the first sentence of Article III.2 of the GATT 1994 in that its internal taxes levied on various spirits of HS heading 22.08 (including tequila and mescal) are higher than those applied to soju;

(b) find that Korea has contravened its obligations under the second sentence of Article III.2 of the GATT 1994 in that its internal taxes afford protection to the domestic production of soju;

(c) find that the provisions applying to the Liquor Tax Law and the Education Tax Law nullify and impair the benefits accruing to Mexico under the GATT 1994;

(d) recommend that Korea amend its measures to bring them into conformity with the provisions of the GATT 1994.

C. Korea's Response to Third-Party Arguments

24. Korea's response to the Canadian third-party submission is that the submission is limited to the 'so as to afford protection to domestic production' requirement in the second sentence of Article III.2, second sentence. According to Korea, that submission only addresses the situation where this Panel would find a directly competitive and substitutable relationship between a particular product pair of a western-type liquor and a Korean soju.
25. Korea notes that Canada has not at all addressed the arguments Korea has made in its first submission in respect of this particular requirement. Korea adds that Canada's submission raises no new viewpoints.
26. Korea, however, takes issue with the third party submission of Mexico. According to Korea, Mexico's submission proceeds from the mistaken assumption that Mexico, being a third party, somehow has the rights of a complainant to this dispute. Korea notes that Mexico requests this Panel to find that the Korean Liquor Tax Law and Education Tax Law have nullified or impaired the benefits accruing to Mexico under the GATT 1994. In Korea's view, in order to obtain such a finding, Mexico should have taken recourse to normal dispute settlement procedures itself. ³²⁴ Mexico has not done so.
27. Korea also argues that another misunderstanding of Mexico is that Mexico assumes that it is entitled to introduce products of its own choice into this proceeding, by referring to Tequila and Mescal. Korea does not recall that Mescal has been mentioned at any point in time by the United States or the European Communities. According to Korea, Tequila was mentioned only in the most perfunctory manner. In Korea's view, if the Panel finds, as Korea has requested, that the only products properly brought into this dispute by the European Communities and the US are certain western-type liquors, notably whisky, brandy, vodka, rum and gin, then that is where the matter ends. Korea concludes that Mexico, being a third party, can only support the conclusions of one of the parties (presumably, the complainants) in this dispute and cannot expand the scope of this dispute.
28. Korea notes that Mexico also argues that Korea's tax system and customs duties are suspect. Mexico refers to, 'a two-stage protection mechanism'. In this connection Mexico draws attention to the fact that Korea maintains somewhat higher tariffs on soju imports than on imports of other distilled liquors. According to Korea, the explanation is much more straightforward than the sinister intentions Mexico believes to have found. No trading partner has asked Korea to reduce its tariffs on soju, and has been willing to bargain for such a reduction.
29. Significantly, according to Korea, Mexico clearly misinterprets the legal standard of Article III.2. In Korea's view, the key issue here is to determine which western-type liquors are in a sufficiently close competitive relationship with Korean sojus on the Korean market. In this connection, Korea has pointed out that standard soju is an inexpensive drink, which Koreans like to drink with their spicy meals. Mexico responds that Tequila and Mescal also go well with spicy food. Korea argues that although it may well be the case that in Mexican consumers like to drink Tequila or Mescal when they eat spicy Mexican food, that is not the issue in this dispute.
30. According to Korea, the issue in this dispute is which liquor Koreans like to drink with their meals; and, more generally, what the position of Tequila and Mescal is on the Korean market (assuming for a moment these products would be concerned by this dispute, which they are not). Korea argues that Mexico has not adduced any evidence to suggest that Korean consumers like to drink Tequila and Mescal with Korea's spicy cuisine; or that Koreans drink Tequila or Mescal straight and not mixed as a cocktail. More generally, according to Korea, Mexico has not shown that Tequila or Mescal directly compete with Korean soju.
31. Korea notes that Mexico makes much of the fact that the tariff classification of Mescal, Tequila and soju are the same. According to Korea, this is not true. The sub-classifications, tariff bindings, and applied rates for tequila and soju are different. Moreover, Mexico goes so far as to say that all products falling under the basic four digit classification HS 22.08 are 'like products'. Even the complainants do not go that far.
32. Korea refers to the Appellate Body in the Japan - Taxes on Alcoholic Beverages II, wherein it was said that tariff classifications, when they are sufficiently detailed, can be a helpful indication to decide whether the relationship between products that compete directly with each other is in fact so close that they can be considered 'like'. ³²⁵ For this reason, Korea referred to the tariff classification of vodka and standard soju, as this is the only product combination which the European Communities and the United States claim to be 'like'. With respect to Tequila and Mescal, the threshold question is not even met: there is no indication to begin with that these products compete directly with the Korean sojus on the Korean market, let alone that they are so competitive on the Korean market that they could conceivably be considered 'like'.
33. Korea reminds Mexico, and the other complainants in this case, once more of the Panel's holding in the Japan � Taxes on Alcoholic Beverages II: 'consumers' tastes and habits. change from country to country'. ³²⁶ According to Korea, if this case will serve a purpose, it is to show that markets are different. Korea adds that the Japanese market is not, as asserted by Mexico, like the Korean market, the Korean market cannot simply be equated with the Mexican market, etc.
34. According to Korea, therefore, before any conclusions about the possibility of discriminatory taxation within the meaning of Article III.2 are drawn, one has to make a detailed analysis of the market

To continue with Interim Review

³¹³ According to Section I-A of Korea's Schedule, soju belongs to tariff heading 2208.90.4000.

³¹⁴ Appellate Body Report, supra., para 1 of Section H, page 18-19.

³¹⁵ This heading includes tequila and mescal, which are Mexican products.

³¹⁶ See Border Tax Adjustments (L/3464, 18S/97); The Australian Subsidy on Ammonium Sulphate (BISD II/188); EEC - Measures on Animal Feed Proteins, adopted on 14 March 1978, (BISD 25S/49); Spain - Tariff Treatment of Unroasted Coffee, adopted on 11 June 1981 (BISD 28S/102); Japan � Taxes on Alcoholic Beverages I, supra and United States - Taxes on Petroleum and certain Imported Substances, supra.

³¹⁷ Mexico states that it is particularly interesting to note that in arguing that diluted soju and vodka are not "like products" or "directly competitive or substitutable for each other", Korea points out that they are classified under different HS subheadings. This would imply that Korea somehow recognizes the importance of the classification of products, and that more specifically, tequila and mescal are like products and directly competitive or substitutable for each other.

³¹⁸ Report of the Appellate Body on Japan - Taxes on Alcoholic Beverages II,, supra., Section H, para. 1(a). See also: EEC - Measures on Animal Feed Proteins, supra.; Japan - Taxes on Alcoholic Beverages I, supra.; and United States - Standards for Reformulated and Conventional Gasoline, supra.

³¹⁹ Appellate Body Report, Canada - Certain Measures Concerning Periodicals, supra.

³²⁰ Appellate Body Report, supra, Section I, p.32.

³²¹ According to Mexico, although Korea, in its first submission (paragraph 91, page 21), ignores the Appellate Body in Japan - Taxes on Alcoholic Beverages II and states that the Panel cannot issue a report referring to all products falling under HS22.08 in the abstract, it subsequently recognizes the importance of the tariff classification in determining the likeness of the products.

³²² Panel Report, supra, para.6.35. Japan also pointed out that Korean law contained a definition similar to Japanese law, dividing shochu into two subcategories: "diluted shochu" (shochu A) and "distilled shochu" (shochu B).

³²³ Mexico noted that Japan mentioned the likeness of its shochu with Korean, Chinese and Singapore soju.

³²⁴ See Article 10.4 DSU.

³²⁵ Appellate Body Report, supra., at p. 21. See also Panel Report, supra., at para. 6.22, stating that 'like' products are a subset of directly competitive and substitutable products.

³²⁶ Panel Report, supra at para.6.21.