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Korea - Taxes on Alcoholic Beverages

Report of the Panel

(Continued)


    3. Products at issue

  1. In order to determine whether the imported and domestic products are directly competitive or substitutable, it is necessary to properly identify such products. With respect to the domestic product, soju, there are two primary categories identified. There is distilled soju and diluted soju. Distilled soju has been described as soju made from a mix of additives and water blended into an alcohol solution extracted by a method of single-step distillation. 367 It is identified separately in the Korean tax law, although not in Korea's WTO Schedule of tariff bindings. Distilled soju accounts for less than one percent of soju sales in Korea. Distilled soju is taxed at a higher rate than diluted soju.
  2. The other type of soju is what we have described as diluted soju. There was considerable discussion about the proper appellation for this product. The complainants described it as diluted soju and Korea maintained that it should be referred to as standard soju. We have adopted the name diluted soju for the product for purposes of descriptive clarity only, without any intention of thereby drawing substantive conclusions from the name. Within this category there is standard diluted soju and premium diluted soju. 368 Standard diluted soju is a lower priced product that has been dominant since the 1960's. Premium diluted soju, which generally has additives for flavouring, has been introduced in the past few years. It is higher priced and the advertising for it has cultivated a more "up-market" image. Its market share has grown rapidly and it now represents approximately five percent of soju sales. 369 All parties have agreed that premium and standard diluted soju are variations of one product. Diluted soju is described as:
  3. soju made from a mix of additives, water and grain solution (or distilled soju solution -- the Liquor Tax Act classifies soju as being 'diluted' soju where the ratio of the grain solution or the distilled soju solution amounts to 20% or less of the total volume of alcohol), blended into an alcohol solution extracted by a method of "continuous distillation".370

  4. Korea has argued that distilled soju and diluted soju are two separate product categories for purposes of analysis under both sentences of Article III:2. Korea argues that the complainants must prove the imported products are like or directly competitive with or substitutable for each of the two domestic products separately and provide a comparison with each on a product-by-product basis. Complainants, on the other hand, argue that the two types of soju are nearly identical and therefore all soju is a single product for purposes of analysis in this case.
  5. The distinction between distilled and diluted soju is more relevant to a discussion of like products where the product categories are narrower. The Korean Fair Trade Commission has stated that:
  6. the basic difference between those two types of soju is whether the alcohol was extracted by means of single-step distillation or continuous distillation. 371

    We are not convinced that this difference is significant. Moreover, in our view, to the extent there are differences between the two types of soju, distilled soju is more similar to the imported products than diluted soju. Distilled soju is higher priced than diluted soju; distilled soju (40-45 percent) has a higher alcohol content than diluted soju (20-25 percent); distilled soju often is used as gifts, an end-use identified by Korea as one also pertaining to imports; distilled soju is aged as is the case with many of the imports. As is discussed further below, we do not think that these types of differences are sufficiently important to meaningfully distinguish between two products. We will proceed with an examination primarily of the competitive relationship of the imported products with diluted soju, including both standard and premium subcategories of diluted soju. If we find that diluted soju is directly competitive with and substitutable for the imported products, it will follow that this is also the case for distilled soju because distilled soju is intermediary between the imported products and diluted soju. Indeed, distilled soju is, on the one hand, more similar to the imported products than diluted soju and is, on the other hand, more similar to diluted soju than are the imported products.

  7. With respect to the imported products, there is a fundamental and important disagreement between the parties to the dispute. Complainants argue that all distilled beverages are directly competitive or substitutable with each other. They have presented evidence with respect to several categories of such imported products, but not all products within the tariff heading 2208 which constitutes the parameters of the terms of reference. They have argued that they have presented evidence with respect to the primary imported products as examples of the broader category. The EC, in particular, argued that to present information on each and every type of distilled beverage would put too much of a burden on complainants and would overwhelm the Panel with details of little substantive importance. Both complainants have argued that the Appellate Body ruled that all imported distilled beverages were directly competitive with or substitutable for shochu in the case of Japan -- Taxes on Alcoholic Beverages II. They argue that we should take guidance from the Appellate Body's decision in that case.
  8. The Japan – Taxes on Alcoholic Beverages II case provides unclear guidance for the present case. The panel in that instance made findings with respect to the western-style alcoholic beverages for which specific evidence was provided. However, the panel did not explicitly state that it was not making a determination with respect to the other products within HS 2208. The Appellate Body ruled that, as a matter of law, the panel erred in not making determinations with respect to all of the products within the terms of reference. The Appellate Body went on to find that all imported products identified by HS 2208 were directly competitive with or substitutable for the domestic product, shochu. In that case, the Appellate Body did not further explain its reasoning. We are unaware of the specifics of the Japan – Taxes on Alcoholic Beverages II case in this regard. While taking note of the Appellate Body's finding on this issue, we also recall the Appellate Body's statement that findings with respect to Article III:2 are to be made on a case-by-case basis.
  9. In the present case, we are of the view that we cannot make affirmative findings with respect to products for which the complainants have provided virtually no evidence with respect to their physical characteristics, end-uses, retail outlets or prices. 372 It may be possible that the products identified by the complainants serve as adequate representatives of a broader category, but complainants did not provide such evidence and relied instead on assertions combined with reference to the prior Appellate Body decision regarding Japan. While, as stated, we will make reference to other markets when such markets provide relevant evidence to the determination, the evidence from the Japanese market and the determination of the Appellate Body in that case serves as an inadequate evidentiary basis for us to conclude that all products within HS 2208 are the appropriate category of imported products in the case of Korea. Indeed, to make the determination as requested by the complainants without further evidence could be to, in some circumstances, prejudge the case. If we were to follow their reasoning that the Appellate Body decision in Japan – Taxes on Alcoholic Beverages II case had determined the parameters of the imports for all cases, then because soju is within the HS category of 2208, it could be claimed that the whole issue of the case is decided without any evidence relating to the specific case of Korea. To look at it another way, complainants would like us to establish that all products within 2208, including soju, presumptively are covered and then leave it to Korea to prove that soju is not properly included with respect to the Korean market. This could, in some circumstances, have the practical effect of shifting the burden of proof onto the defending party without the complaining parties having first established a prima facie case. It may be that such evidence concerning the whole category could be developed with respect to the Korean market or may exist with respect to other markets, as apparently was the case with respect to the Japanese market, but in this case we can only make determinations with respect to the products specifically discussed by the complainants. These are vodka, whiskies, rum, gin, brandies, cognac, liqueurs, tequila and ad-mixtures. 373 The complainants have not carried their burden of establishing a prima facie case with respect to the remainder of the products under HS 2208. 374
  10. We include tequila for which evidence was presented. We note that a third party, Mexico, provided arguments with respect to both tequila and mescal. The complainants provided specific evidence for tequila, but not mescal. We consider it appropriate to take into consideration information provided by a third party. In this case, mescal was mentioned without positive evidence of the actual or potential competitive nature of the product in the Korean market. Tequila was included in the Dodwell study where there was evidence of the response of consumers to the relative changes in the prices of soju and tequila. Tequila is a white alcoholic beverage which is also used, among other things, to accompany spicy foods.
  11. While we have declined to find all products identified by HS 2208 are included in our determination, we also do not accept the Korean argument that we are required to make an item by item comparison between each imported product and both types of soju. Relying on product categories is appropriate in many cases. Indeed, in this case parties generally referred to the category of "whiskies" which included several subcategories of types of whisky such as Scotch (premium and standard), Irish, Bourbon, Rye, Canadian, etc, all of which have some differences. The question becomes where to draw the boundaries between categories, rather than whether it is appropriate to utilize categories for analytical purposes.
  12. In our view, it is appropriate to group together all of the imported products for which evidence was presented. We note that Korea in its arguments often referred to western-style beverages. The "high-class" restaurants and bars that allegedly did not serve soju, were said to sell western-style beverages. There are some physical differences between the various imported beverages but, as discussed below, we do not find these differences sufficient to make it inappropriate to group them together as imported products. The prices of the imported products show a spread over a certain range, but as with the relationship to soju, we do not think the prices so distinct as to prohibit us from examining the identified imports as a group. The imports appear to be distributed in similar manners for similar purposes. Therefore, based on the evidence, including that discussed more fully in section 4 below, we find that, on balance, all of the imported products specifically identified by the complainants have sufficient common characteristics, end-uses and channels of distribution and prices to be considered together. 375

To continue with Product comparisons


367 See Korea First Submission, Attachment 1, Decision of the Fair Trade Commission of the Republic of Korea Case No. 9607, Advertisement 1023, 30 November 1996, at 3.

368 See discussion at footnote 20, above. To have decided otherwise would have left us discussing "standard soju" and "premium standard soju", terminology which would have been confusing.

369 The EC argues that it might account for as much as 10 percent of the market. Apparently, it is difficult to judge the market share precisely because there is no legal definition which would assist in compiling statistics. See para.6.24. Korea states that sales of premium diluted soju have declined recently. We also note that sales of imports have declined at the same time due, presumably, to the current financial crisis in Korea. The lower priced product, standard diluted soju has increased sales. These changes in levels of sales, if anything, can be taken as further support for the relationship of the products. See EC Answers to Questions, Question 1 from the Panel at pp. 1-2, and accompanying chart.

370 Korea First Submission, Attachment 1, supra., at 3.

371 Ibid.

372 The general statements by the United States and the European Communities regarding the use of the four digit tariff heading and the identified common physical characteristics and end-uses of distilled alcoholic beverages provides very weak evidence for inclusion of all products within HS 2208 given that some of those products were not even identified to the Panel.

373 These are contained within portions of Korea's domestic tariff schedule, as follows:

2208.20Spirits obtained by distilling grape wine or grape marc
2208.30Whiskeys
2208.40Rum and tafia
2208.50Gin and geneva
2208.60Vodka
2208.70Liqueurs and Cordials
2208.90.10Brandies other than that of heading No. 2208.20
2208.90.40Soju
2208.90.70Tequila

374 See Appellate Body Report on United States -- Measures Affecting the Imports of Woven Shirts and Blouses from India, adopted 25 April 1997, WT/DS33/AB/R, at pp. 12-17.

375 This decision does not prejudge the substantive discussion; rather we are merely identifying an analytical tool. It is possible that during the course of a dispute, evidence will show that an analytical approach should be revised. In this case, however, we note that the results of the inquiry described in the following sections confirm the appropriateness of grouping the imports together for purposes of analysis.