Alcoholic beverages (1996) JAPAN – ALCOHOLIC BEVERAGES II1(DS8, 10, 11)

Main facts Parties Timeline of dispute Complainants Respondent Phase Canada European Communities United States Respondent Japan Phase Date Establishment of Panel 27 September 1995 Circulation of Panel Report 11 July 1996 Circulation of AB Report 4 October 1996 Adoption 1 November 1996

Relevant legal provisions GATT, Art. III (National Treatment) The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production. 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. Moreover, no 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.

Relevant legal provisions GATT, Art. III (National Treatment) (Ad) Paragraph 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

Understanding national treatment The products are related? No. (No violation of NT) They are like. (III.2.1) The imported product is taxed more than the domestic counterpart. (III.2.1) They are direct substitutes. (Ad. III.2) The products are unevenly taxed. (III.2.2) The taxation amounts so as to afford domestic protection. (III.1)

Measure and product at issue Measure at Issue Product at Issue Japanese Liquor Tax Law that established a system of internal taxes applicable to all liquors at different tax rates depending on which category they fell within. The tax law at issue taxed shochu at a lower rate than the other products. Vodka and other alcoholic beverages such as liqueurs, gin, genever, rum, whisky and brandy, and domestic shochu.

Panel findings Article III:2 contains two distinct obligations. First sentence involves the treatment of “like” products Second sentence involves the treatment of “directly competitive or substitutable” products The complaining party bears the burden of proving a violation of those obligations. 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. Moreover, no 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.

Panel findings How to assess likeness? Japan/USA: “Aim or effect” test (US Malt Beverages/Auto Taxes) Canada/EC: Objective comparison of properties , nature, quality, uses and tariff classifications of the products at issue The Panel sided with the Canada/EC Application of likeness test (are the products similar?) Only vodka met the standard of likeness to Shochu, although they differed in key aspects such as alcoholic strength and method of filtration Tariff bindings also played a important role in assessing the likeness of those beverages Evaluation of whether the Japan’s excise tax was “in excess of” its tax on Shochu (are the taxes different?) On both volume and alcoholic content basis, vodka was taxed higher The Panel concluded that there was a violation of GATT Article III:2’s first sentence

Panel findings How to assess if products are substitutes? The Panel relied on a 1987 report that had examined Japanese beverages market and found many to be directly competitive or substitutable The report, bundled with more recent data, persuaded the WTO Panel that Shochu was directly competitive with or substitutable for the other products in dispute The Panel examined tax data based on volume and strength of alcohol and concluded that Shochu and other beverages were not similarly taxed. Is the differentiation set in accordance or divergence from Article III:1? Is there a protection of domestic production? Panel said that it was not necessary for plaintiffs to show i) that there was a discriminatory intent, ii) there was considerable impact on imports. Environmental consequences

Panel findings “Shochu and vodka are like products and Japan, by taxing the latter in excess of the former, is in violation of its obligation under Article III:2, first sentence, of the General Agreement on Tariffs and Trade 1994.” “Shochu, whisky, brandy, rum, gin, genever, and liqueurs are "directly competitive or substitutable products" and Japan, by not taxing them similarly, is in violation of its obligation under Article III:2, second sentence, of the General Agreement on Tariffs and Trade 1994.”

Appelate body Both Japan and United States appealed, Canada and EC did not. USA agreed with the conclusions found by the Panel, but diverged on its reasoning. Appellate body confirmed the judgement of the Panel, but refined its legal reasoning. Ref. III.1: The AB stated that the first paragraph should be interpreted as informing the rest of Article III. Ref. III.2 first sentence: the AB agreed with the conclusions, but warned that in some cases tariff bindings would not be a reliable criterion for determining product likeness Ref. III.2 second sentence: the AB agreed with the conclusions, but noted that the Panel failed to conduct a “comprehensive”, “careful” and “objective” analysis of the design, architecture, and structure of the taxes being considered. In present case, the Panel presented its conclusions with a blurred base. Although there is clear indication that the AB wanted a better analysis of the taxes involved in this case, it affirmed the Panel decision. The lack of remand powers may be the key of this option. The AB chose to set better standards for the future cases, but just accepted what it was presented.

Appelate body Policy implications There were problems with the AB decision as well. The AB decided to clarify the meaning of III:1, especially regarding the phrase “applied to imported or domestic products so as to afford protection to domestic production” without being requested to do so by either party. On the other hand, the AB failed to provide an response to a complaint from Japan regarding the legality of the Liquor Tax Law based on its price/tax logic. Conclusion The AB recommended that Japan conform its Liquor Law to GATT rules in 1996. Japan agreed to revise the law. Policy implications Environmental Implications The broadened interpretation of “like products” may challenge the ability of governments to safeguard their domestic environment Should environmental protections be proposed under article III or XX? Jurisprudential Implications Connection between international trade law and other international law branches GATT negotiation history is still relevant AB has a strong position towards Panels, directly correcting their mistakes The composition of Panels is emphasized