WORLD TRADE  
ORGANIZATION  WT/DS75/R 
WT/DS84/R  
17 September 1998 
 (98-3471) 
 Original:   English 
   
 
    
 
Korea - Taxes on Alcoholic Beverages 
 
 
 
Report of the Panel  
 
    
 
   The report of the Panel on Korea – Taxes on Alcoholic Beverages is being circulated to all Members, 
pursuant to the DSU.  The report is being circulated as an unrestricted document from 
17 September 1998 pursuant to the Procedures fo r the Circulation and Derestriction of WTO 
Documents (WT/L/160/Rev.1).  Members are reminded that in accordance with the DSU only parties 
to the dispute may appeal a panel report.  An appeal  shall be limited to issues of law covered in the 
Panel report and legal interpre tations developed by the Panel.  There shall be no ex parte  
communications with the Panel or Appellate B ody concerning matters under consideration by the 
Panel or Appellate Body. 
     
 
   
 
  
Note by the Secretariat
:  This Panel Report shall be adopted by the Dispute Settle ment Body (DSB) within 60 days after the date of its 
circulation unless a party to the dispute decides to appeal or th e DSB decides by consensus not to adopt the report.  If the Pa nel Report is 
appealed to the Appellate Body, it shall not  be considered for adoption by the DSB un til after the completion of the appeal.  I nformation on 
the current status of the Panel Report is available from the WTO Secretariat.  WT/DS75/R 
 WT/DS84/R 
 Page i 
 
 
TABLE OF CONTENTS  
Page  
I. PROCEDURAL BACKGR OUND....................................................................................................... .1 
II. MEASURES IN ISSUE.......................................................................................................... ................3 
A. T HE LIQUOR TAX LAW.............................................................................................................................3 
1. Categories.................................................................................................................. ...............................3 
2. Tax rates................................................................................................................... ................................6 
B. T HE EDUCATION TAX LAW.......................................................................................................................6 
III. FACTUAL ARGUMENTS......................................................................................................... ...........8 
A. E UROPEAN COMMUNITIES .........................................................................................................................8 
B. U NITED STATES ............................................................................................................................... .......11 
C. K OREA ............................................................................................................................... .....................13 
1. Features of distille d alcoholic beverages................................................................................... .............14 
2. Consumer behaviour .......................................................................................................... ....................15 
3. Price....................................................................................................................... .................................15 
4. Korean soju ................................................................................................................. ...........................15 
5. Changes since 1990.......................................................................................................... ......................17 
IV. CLAIMS OF THE PART IES...................................................................................................... ........19 
V. LEGAL ARGUMENTS............................................................................................................. ..........20 
A. P RELIMINARY ISSUES ..............................................................................................................................2 0 
1. General ..................................................................................................................... ..............................20 
2. Specificity of the panel requests........................................................................................... ..................20 
3. Adequacy of consultations ................................................................................................... ..................22 
4. Confid entia lity............................................................................................................. ...........................24 
B. P ANEL AND APPELLATE BODY REPORTS ON JAPAN - TAXES ON ALCOHOLIC BEVERAGES .....................25 
1. Complainants................................................................................................................ ..........................25 
2. Korea....................................................................................................................... ...............................27 
C. T HE BURDEN OF PROOF ...........................................................................................................................31 
1. Korea....................................................................................................................... ...............................31 
2. Complainants................................................................................................................ ..........................33 
D. A RTICLE III ARGUMENTS ........................................................................................................................34 
1. Complainants................................................................................................................ ..........................34 
2. Korea....................................................................................................................... ...............................49 
VI. REBUTTAL ARGUMENTS ......................................................................................................... ......73 
A. EUROPEAN  COMMUNITIES..............................................................................................................73 
1. Shochu and soju ............................................................................................................. ........................73 
2. The Japanese market and the Korean market ................................................................................... ......73 
3. All types of soju are one and the same product.............................................................................. ........74 
4. Soju and vodka are like pr oducts............................................................................................ ................77 
5. Soju and the other distilled spirits are di rectly competitive and s ubstitutable products .........................81 
6. The Dodwell study ........................................................................................................... ......................90 
7. The Sofres report........................................................................................................... .........................93 
8. The Trends cope su rvey ....................................................................................................... ...................94 
9. The measures are applied  "so as to afford protection to domestic prod uction".....................................94 
B. UNITED  STATES......................................................................................................................... .........96 
1. General: Violation of Article III:2......................................................................................... .................96 
2. Violation of Article  III:2, First Sentence.................................................................................. ..............97 
3. Violation of Article III:2, Second Sentence ................................................................................. ..........99 
4. The Dodwell Study........................................................................................................... ....................109 
5. The measures are applied "so as to af ford protection to dom estic production"....................................111 
C. KOREA....................................................................................................................... .........................112 WT/DS75/R 
WT/DS84/R Page ii 
 
 
1. The Nielsen Study ........................................................................................................... .....................112 
2. General comments............................................................................................................ ....................112 
3. Generalisations abou t the Korean  products................................................................................... .......113 
4. Actual (or poten tial) competition ........................................................................................... ..............114 
5. Broad or narrow interpreta tion of products in dispute....................................................................... ...124 
6. "So as to afford protection" ................................................................................................ ..................125 
7. Comments of Korea to the EC Trendscope survey ..............................................................................1 26 
D. EC  AND  US COMMENTS  ON THE  NIELSEN  STUDY....................................................................127 
VII. ANSWERS TO  QUESTIONS ...................................................................................................... .....130 
A. EUROPEAN  COMMUNITIES............................................................................................................130 
B. UNITED  STATES......................................................................................................................... .......136 
C. KOREA....................................................................................................................... .........................139 
VIII. THIRD-PART Y ARGUMENTS.................................................................................................... ...151 
A. CANADA...................................................................................................................... .......................151 
B. MEXICO...................................................................................................................... ........................152 
1. Background .................................................................................................................. ........................152 
2. Legal Aspects ............................................................................................................... ........................152 
C. KOREA'S  RESPONSE  TO THIRD-PARTY  ARGUMENTS..............................................................156 
IX. INTERIM REVIEW ............................................................................................................. .............159 
X. FINDINGS .................................................................................................................... ......................164 
A. C LAIMS OF THE PARTIES .......................................................................................................................164 
B. P RELIMINARY ISSUES ............................................................................................................................164  
1. Speci ficity ................................................................................................................. ...........................164 
2. Adequacy of consultations ................................................................................................... ................167 
3. Confid entia lity............................................................................................................. .........................168 
4. Late submission of evidence ................................................................................................. ...............168 
5. Private counsel ............................................................................................................. ........................169 
C. MAIN ISSUES ............................................................................................................................... ...........171 
1. Interpretation of Article III:2............................................................................................. ...................171 
2. Evidentia ry issues.......................................................................................................... .......................174 
3. Products at issue........................................................................................................... ........................176 
4. Product co mparisons ......................................................................................................... ...................180 
5. Not simila rly taxed......................................................................................................... ......................192 
6. So as to afford protection .................................................................................................. ...................193 
7. Like Product ................................................................................................................ .........................193 
XI. CONCLUSIONS................................................................................................................ .................194 
  WT/DS75/R 
 WT/DS84/R 
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I. PROCEDURAL BACKGROUND 
1.1. This proceeding has been initiated by two co mplaining parties, the European Communities 
and the United States. 
1.2. On 2 April 1997, the European Communities re quested consultations with Korea under 
Article XXII:1 of GATT and Article 4 of the Unde rstanding on Rules and Procedures Governing the 
Settlement of Disputes ("DSU") (WT/DS75/1).  The United States (WT/DS 75/2) and Canada 6(WT/DS75/3) requested to be joined in those cons ultations, pursuant to Article 4.11 of the DSU on 
17 and 21 April 1997, respectively.  Korea agreed  to those requests (WT/DS75/4 and WT/DS75/5).  
Consultations between the European Communities a nd Korea were held in Geneva on 29 May 1997, 
in which the United States and Canada participated. 
1.3. On 23 May 1997, the United States requested consultations with Korea under Article XXII:1 
of GATT and Article 4 of the DSU with respec t to the same matter (WT/DS84/1).  Canada 
(WT/DS84/2) and the European Communities (WT/ DS84/3) requested to be joined in those 
consultations, pursuant to Article 4.11 of the DSU,  on 29 May and 5 June 1997, respectively.   
1.4. Consultations were held in Geneva on 24 June 1997, between  the United States and Korea, 
and the European Communities and Canada participated  as third-parties.  Another set of consultations 
were held on 8 August 1997, to address US requests for further clarifications, but the parties were 
unable to settle the dispute. 
1.5. On 10 September 1997, the European Commun ities (WT/DS75/6), and the United States 
(WT/DS84/4), each requested the establishment of a panel pursuant to Article 6.1 of the DSU.   
1.6. In its panel request, the Eur opean Communities claims that: 
 Korea, by according a preferential tax treatment, through the Liquor Tax Law 
and the Education Tax Law, to soju vis- a-vis certain alcoholic beverages falling 
within HS heading 2208, has acted inc onsistently with Article III:2 of GATT 
1994, therefore nullifying or impairing th e benefits accruing to the European 
Communities under the GATT 1994. 
1.7. In its panel request the United States claims that: 
 Korea, under its general Liquor Tax Law, imposes a lower tax on the 
traditional Korean distilled spirit soju th an the high taxes it applies to other 
distilled spirits such as whisky, brandy , vodka, rum, gin and "ad-mixtures".  
This difference in tax burden is made even  more dramatic by the application of 
an Education Tax.   
1.8. The Dispute Settlement Body (DSB) agreed to th ese two requests for a panel at its meeting of 
16 October 1997, establishing a single panel pursuant to Article 9.1 of the DSU with the following standard terms of reference: 
 "To examine, in light of the relevant pr ovisions of the covered agreements cited by 
the European Communities in document WT/DS75/6 and the United States in 
document WT/DS84/4, the matter referred to the DSB by the European Communities 
and the United States in those documents and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements". WT/DS75/R 
WT/DS84/R Page 2 
 
 1.9. Canada and Mexico reserved their rights to participate in the Panel proceedings as third-
parties. 
1.10. On 26 November 1997, the United States and th e European Communities jointly requested 
the Director-General to determine the composition of the panel, pursuant to paragraph 7 of Article 8 
of the DSU.  On 5 December 1997, the Dir ector-General composed the Panel as follows: 
 Chairman: Mr. Åke Lindén  Panelists: Professor Frédéric Jenny    Mr. Carlos da Rocha Paranhos 1.11. The Panel had substantive meetings with th e parties on 5 and 6 March 1998, and on 21 and 
22 April 1998.  WT/DS75/R 
 WT/DS84/R 
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II. MEASURES IN ISSUE 
2.1. Korea maintains a multi-tiered taxation regime on the sale of alcoholic beverages.  Under the 
Liquor Tax Law of 1949, as amended, Korea creates  various categories of distilled spirits, on which it 
imposes different ad valorem  taxes.  Under the Education Ta x Law of 1982, as amended, Korea 
assesses a surtax on certain of these sales, determined  as a percentage of the established liquor tax. 
2.2. Both the liquor tax and the education tax on al coholic beverages are imposed at the wholesale 
level.  The tax is payable by the manufacturer of the beverages or, in the case of imports, by the 
importer.  Tax liability accrues at the time of sh ipment from the factory (in the case of alcoholic 
beverages made in Korea) or of withdrawal  from the bonded warehouse (in the case of imported 
alcoholic beverages). 
A. THE LIQUOR TAX LAW 
2.3. The Liquor Tax Law lays down a system of excise taxes applicable to all alcoholic beverages 
(whether manufactured in Korea or imported) intend ed for consumption in Korea.  The taxes applied 
to the categories in dispute are in the form of ad valorem  taxes.   
2.4. For the purposes of assessing the tax, the valu e of imported alcoholic beverages includes 
transport and insurance costs as well as the import duty imposed.  In other words, the tax base for 
imports is the price noted on the import declara tion when the goods are withdrawn from the bonded 
warehouse (i.e., the CIF import value plus duty).1   
2.5. Domestic alcoholic beverages are taxed on the value of production costs, sales costs 
(including advertising), extraordinary costs, and pr ofits, i.e., the tax base is the price of the goods 
when they are shipped from the production site.2  The categories of distilled spirits established by the 
Liquor Tax Law, and the applicable tax rates, are described below. 
1. Categories 
2.6. Liquor Tax Law divides alcoholic beverages into eleven categories, some of which are further 
divided into sub-categories, and assigns to each of them a different tax rate.  These categories include 
"soju," "whisky," "brandy," "gener al distilled liquors" (which covers beverages such as vodka, gin, 
rum and tequila), "liqueurs," and "other liquors" (to the extent that liquors falling within this category 
may contain distilled spirits or liqueurs falling within  any of the preceding categories).  Article 3 of 
the Liquor Tax Law sets forth definitions of these categories.3 
(a) Soju 
2.7. Article 3.6 has four sub-categories of soju.  Sub-categories A and B apparently refer to 
"distilled soju," while sub-categories C and D apparently refer to "diluted soju."  
2.8. Article 3.6.A and 3.6.B states the legal definition of soju as: 
(a) Soju may be produced from discontinuous distillation of a fermented mash developed 
from the basic constituents of a starch source, yeast and water. 
                                                      
1 Article 19.2 of the Liquor Tax Law. 
2 Presidential Decree, Article 26. 
3 A translation of the relevant provisions of Article 3 is provided as US Exhibit A. WT/DS75/R 
WT/DS84/R Page 4 
 
 
(b) Soju may be produced from discontinuous  distillation as in Paragraph A above, but 
during the fermentation and production pro cess other ingredients may be added as 
determined by Presidential decree. 
2.9. Thus paragraphs (A) and (B) describe two "types"  of soju:  (i) soju created by fermentation 
and discontinuous distillation, but without additives; and (ii) soju created by fermentation and 
discontinuous distillation a nd containing additives. 
2.10. According to Article 3.6.A, distilled soju cannot  
(a) be produced from sprouted grain; (b) be filtered through charcoal of white birch; or 
(c) be produced in a process whereby water is mixed with grain and the mash sealed for 
fermentation and sub sequent distillations. 
2.11. The chapeau of Article 3.6 specifies that soju mu st have an extract content of 2% or less. 
2.12. The legal definition of diluted soju in Article 3.6.C and 3.6.D is as follows soju: 
(a) Soju may be produced by diluting neutral spirits with water or by adding thereto 
those ingredients as determined by Presidential Decree; 
(b) Soju may be produced by adding to the pr oducts produced in accord with paragraphs 
A through C immediately above the product of paragraph A, when determined by 
Presidential Decree, or other grain spirits as determined by Presidential Decree. 
2.13. The definition of diluted soju in 3.6.C and D re lies on "neutral spirits,"  which is defined by 
Article 3.1 of the Liquor Tax Law as follows: 
(a) Neutral spirits may be produced from th e distillation of a fermented mash developed 
from the basic constituents of a starch s ource and a sugar source that results in a 
product that is 85 percent or more alcohol; 
(b) Neutral spirits may be produced from th e distillation of ingredients containing 
alcohol, resulting in a product that  is 85 percent or more alcohol. 
(b)  Whisky, brandy, and "general distilled liquors" 
2.14. Whisky, brandy and "general distilled liquors" are defined in Articles 3.7, 3.8 and 3.9, 
respectively.  The definitions include a 2% extract limitation that distinguishes them from liqueurs.  
All three include fermentation and distillation as the manufacturing process.  However, unlike the 
definition for soju, they genera lly specify starch sources. 
2.15. Article 3.7 of the Liquor Tax Law, the "whisky" category, includes all types of whisky made 
totally or partly from sprouted grain and aged in wooden casks, as well as, under certain conditions, 
admixtures of whisky and other spirits or ingredients.
4 
                                                      
4 See Article 3.7 of the Liquor Tax Law.  The whisky definition includes three subparagraphs.  
Paragraph (A) specifies only sprouted grains and thus addresses malt whisky.  Paragraph (B) appears to broaden 
the starch source to normal grain as well as sprouted and thus addresses ordinary grain whisky.  Both (A) and (B) provide for aging in wooden barrels and thus address premium brands of whisky.  Paragraph (C) addresses  WT/DS75/R 
 WT/DS84/R 
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2.16. Article 3.8, the "brandy" category, includes al l liquors distilled from a fermented mash of fruit 
or fruit wine and aged in wooden casks.  Subject to  certain conditions, it includes also ad-mixtures of 
those liquors with other spirits or ingredients.5 
2.17. The category of "General Distilled Liquors" is  a miscellaneous category comprising several 
kinds of distilled spirits.  It consists of six paragraphs.  
-- Paragraph (A) specifies kaoliang-ju lees as a starch source, and the manufacturing process 
includes sealing prior to fermenting and distilling; it is designed to address kaoliang-ju , which 
can be imported from China.  
-- Paragraph (B) specifies sugar cane, sugar beet, sugar, and/or molasses as a starch source; it 
addresses rum.   
-- Paragraph (C) specifies "fruits of juniper tree" as an ingredient; it addresses gin.   
-- Paragraph (D) specifies filtering of the alcohol; it addresses vodka .   
-- Paragraph (E) merely concerns "materials ma inly containing starch or sugar produced by 
fermentation and distilla tion."  It covers tequila  and any distilled spirit.  Its wording is the 
same as that used in the first part of the definition of "neutral spirits".6   
-- Paragraph (F) addresses mixed distilled drinks  (e.g., gin and rum mixed drinks).  
(c) Liqueurs 
2.18. Article 3.10, the "liqueurs" category, covers  liquors with more than 2% extract content 
produced by distillation of a starch or sugar source to  which ginseng juice, fruits or fruits extracts are 
added.7 
2.19. Article 3.11 sets forth the category of "other liquors," a residual category including all liquors 
(whether fermented or distilled) not falling within any of the other categories defined by the Liquor 
Tax Law.8  It includes inter alia  admixtures of whisky and brandy.  
                                                                                                                                                                     
premium blended whisky and/or whisky with sugars, acids, seasonings, fragrances, colouring, or carbon dioxide 
added. 
5 See Article 3.8 of the Liquor Tax Law. 
6 See Article 3.1 of the Liquor Tax Law.   
7 See Article 3.10 of the Liquor Tax Law. 
8 See Article 3.11 of the Liquor Tax Law. WT/DS75/R 
WT/DS84/R Page 6 
 
 2. Tax rates 
2.20. The Korean law imposes different ad valorem  tax rates on the various categories and sub-
categories of distilled spirits.  Pursuant to the defin itions, soju is given a tax rate of 35 to 50 percent, 
while other distilled alcoholic beve rages are taxed at 80 to 100 percent.  The applicable liquor tax 
rates are:
9 
 
Item  
 Ad Valorem 
 Tax Rate (%) 
Diluted soju  35 
Distilled soju  50 
Whisky 100 
Brandy 100 
General distilled liquors (vodka, gin, rum) 80 
General distilled liquors containing whisky or brandy 100 
Liqueur  50 
Other liquors:  -With 25% or more alcohol  -With less than 25% alcohol  -Which contain 20% or more whisky or brandy  
80 70 
100 
 B. T
HE EDUCATION TAX LAW 
2.21. The Education Tax Law of 1990 is assessed as a surtax on the sale of a variety of items, 
including most alcoholic beverages.  For alcoholic beverages, the applicable rate is determined by 
reference to another tax -- the applied liquor tax rate.10    For those assessed a liquor tax rate of 80% or 
greater, the law imposes an education surtax calculated as 30% of the liquor tax imposed.11  F o r  
alcoholic beverages assessed a liquor tax rate of l ess than 80%, the law imposes an education surtax 
calculated as 10% of the liquor tax imposed. 
                                                      
9 The applicable tax rates are set forth in Article 19.2, and Korean Taxation: 1997, § 3(b) p. 188 
(Korean Ministry of Finance and Economy). 
10 In addition to the liquor tax, other taxes upon which the Education Tax is levied include the Special 
Excise Tax, the Per Capita Inhabitant Tax, the Regist ration Tax, the Horse Race Ta x, the Property Tax, the 
Aggregate Land Tax, the Tobacco Consumption Tax, the Automobile Tax and the Transportation Tax. 
11 Education Tax Law, Art. 5.  WT/DS75/R 
 WT/DS84/R 
 Page 7 
 
 
2.22. This tax structure results in a 30% surtax for imported distilled alcoholic  beverages, including 
whisky, brandy and general distille d liquors (vodka, rum, gin, tequila, shochu, etc.) except for imports 
of Japanese shochu, which are classified for tax pur poses and taxed at 10%.  Of all distilled alcoholic 
beverages, only soju and liqueurs are subject to the lesser 10% surtax.  Prior to 1995, soju was 
exempted from the Education Tax.  However, af ter negotiations between Korea and the European 
Communities that Korea agreed to subject soju to the Education Tax at a rate of 10%. 
2.23. The applicable rates on the categories concerned by this dispute, expressed as a percentage of 
the amount payable pursuant to the Liquor Tax, is as follows: 
 
Tax rates applied pursuant to the Education Tax Law 
Product As % Liquor Tax 
Diluted soju 10 
Distilled soju 10 
Whisky 30 
Brandy 30 
General distilled liquors 30 
General distilled liquors containing  
whisky or brandy 30 
Liqueurs 10 
Other Liquors: 
 -more than 25% alcohol content  
30 
 -less than 25% alcohol content 10 
 -containing whisky or brandy 30 WT/DS75/R 
WT/DS84/R Page 8 
 
 
III. FACTUAL ARGUMENTS 
A. E
UROPEAN COMMUNITIES  
3.1. The European Communities pro ceeds from the premise that in response to its reiterated 
requests, Korea has reluctantly acced ed to make a number of changes to its liquor tax system which 
have reduced (but by no means eliminated) the differ ence between the internal taxes applied to soju 
and those applied to other categories of  distilled liquors. 
3.2. The European Communities states that as of 1 January 1991, Korea abolished the Customs 
Defence Tax, which until then had been applied only to imported liquors.  It further states that on the 
same date, Korea also abolished the Liquor Defence Tax, which had been levied at a lower rate on 
soju than on other distilled spirits and liqueurs.  Further, the European Communities states that Korea 
eliminated an uplift ratio of 1.0:1.1 (the so-calle d "times 1.1 multiplier") which had been applied in 
order to inflate artificially the import duty paid value on which the Liquor Tax is assessed in the case 
of imported beverages. 
3.3. The European Communities adds that these amen dments were followed by a reduction of the 
Liquor Tax rates on the category of "whisky" from 200% to 150%, and on the category of "general 
distilled liquors" from 100% to 80%, both effective fro m 1 July 1991.  According to the European 
Communities, this decrease, however, was partia lly nullified by a simultaneous increase in the 
Education Tax rates, which were raised to 30% fo r most distilled liquors other than "soju". At the 
same time, the category of "soju" was divided into  the sub-categories of "distilled soju" and "diluted 
soju" and the rate on "distilled soju" raised from 35% to 50%. 
3.4. According to the European Communities, in J une 1993, it reached an agreement with Korea 
(the "1993 Agreement") whereby Korea undertook to  reduce progressively over a period of two years 
the liquor tax rate applicable to the "whisky" and "brandy" categories from 150% to 100%.  The 
European Communities asserts that Korea furthe r agreed to levy the Education Tax on both sub-
categories of soju (which had until then been ex empt from such tax) at a rate of 10% as from 1 
January 199412 and to increase the tax on admixtures containing whisky or brandy (which are mainly 
bottled in Korea)  from 80% to 100%. 
3.5. The European Communities furthe r asserts that the 1993 Agreement envisaged that a new 
round of consultations would ta ke place in 1996 in order to discuss further reductions of the 
remaining tax differences.  According to the European Communities, as compensation for the 
continued application in the meantime of much lowe r taxes to soju, Korea agre ed to further reduce the 
effectively applied import duties on whisky, brandy ot her than wine brandy (which already benefited 
from a 15% applied rate), rum, gin, vodka and liqueurs (but not on soju) from 30% to 20%. 
3.6. The European Communities allege that the cons ultations provided for by the 1993 Agreement 
eventually took place in January 1997.  Neverthele ss, according to the European Communities, Korea 
did not meet the EC's request to eliminate the rema ining tax differentials so as to bring its liquor tax 
system in conformity with the GATT.  
The Korean market for distilled liquors 3.7. The European Communities states th at the Korean market for distilled spirits and liqueurs was 
virtually closed to imports until the late eighties.   According to the EC's argument, until 1 January 
1989, imports of distilled spirits in bulk were subject  to quotas, whereas imports of distilled spirits in 
                                                     
 
12 The EC claims that Korea did not implement this commitment until 1 January 1995.  WT/DS75/R 
 WT/DS84/R 
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bottles were prohibited until 1 July 1989, and thereaf ter subject to quantitative restrictions until 
1 January 1990. 
3.8. The European Communities further argues th at, Korea applied prohibitively high import 
duties: 150% until 1984; 100% until 1988; and 50 % until 1991.  According to the European 
Communities, until March 1990 Korea applied an impor t deposit requirement.  The EC's position is 
that, currently the applied import duty rate is 20% for all distilled spirits and liqueurs, except brandy 
(which is subject to a 15% import duty) and so ju (which is subject to a 30% import duty).13  
3.9. The European Communities furt her argues that, following the elimination of the import 
quotas and a substantial reduction of import duties and internal taxes, imports of distilled spirits and 
liqueurs have grown steadily but still represent only around 3.5% of the market.  According to the 
European Communities, this share is unusually low.  The European Communities is of the view that 
in most other OECD countries the share of imported sprits is between 30% and 40% of the market for 
distilled liquor.  By comparison, the European Comm unities states that in Japan the share of imported 
spirits was 8% in 1995, despite the fact that at th at time Japan applied a system of discriminatory 
internal taxes similar to the one in dispute. 
3.10. According to the European Communities, the Korean spirits market is overwhelmingly 
dominated by soju.  In 1996 sales of soju amount ed to 90 million 9L cases (810 million litres), which 
represents as much as 94% of the distilled spirits market.14  Soju's position, however, is allegedly 
being eroded by growing sales of im ported spirits and liqueurs, and in particular of whisky.  Over the 
past few years, sales of soju have allegedly incr eased at a lower pace than the total spirits market 
(between 1993 and 1994 sales of soju even decreased in  absolute terms). As a result, the market share 
of soju fell from 96.37 % in 1992 to 94.39  % in 1996.15 
3.11. The European Communities states that imports of soju are insignificant.  In 1997, Korea 
allegedly imported just 1,625 litres.16  In contrast, argues the European Communities, Korea exports 
large quantities of soju.  The European Communiti es further asserts that during the first eleven 
months of 1996, exports of soju totalled 43 milli on litres of soju, which represents about 5% of the 
Korean soju production.  According to the Europ ean Communities, the main export market is Japan, 
where soju is considered for customs and tax purposes as being the same product as local "shochu". 
3.12. The European Communities further asserts that almo st all soju sold in Korea is diluted soju. 
Distilled soju is estimated to account for just over 1%  of the total sales of soju .  While diluted soju is 
generally an inexpensive liquor,  distilled soju may fetch very high prices, similar to those paid for 
imported premium brands of whisky. 
3.13. The European Communities argues that, confr onted with growing sales of western-style 
liquors, the manufacturers of diluted soju have been forced to address what are generally perceived by 
Korean consumers as negative attributes of that liq uor as compared with the "western style" distilled 
liquors: inferior quality, harsh taste, hangover effects.  
3.14. According to the European Communities, this has led to the emergence of new so-called 
"premium soju" brands, whose distinctive characteristi cs are a milder taste, the use of flavouring (e.g. 
with honey) and/or ageing processes, and more s ophisticated packaging.  The European Communities 
asserts that the prices for premium soju brands are between two and three times higher than those for 
                                                      
13 A table summarising the recent evolution of the ta riff treatment of the products concerned by this 
dispute is included in EC Annex 4. 
14 EC Annex 5. 
15 EC Annex 6. 
16 EC Annex 7. WT/DS75/R 
WT/DS84/R Page 10 
 
 standard diluted soju. According to the European Co mmunities, in spite of that, sales of premium soju 
are growing very rapidly.  By EC estimates, in 1996 they represented 6% of soju sales and reached 
10% in 1997. 
3.15. The European Communities points out that whisky  is the largest category of distilled spirits 
after soju.  Sales of whisky allegedly increased  from 11 million litres in 1992 to 27 millions in 1996, 
i.e. by almost 140%.  As a result, the European  Communities argues that the share of whisky rose 
from 1.53% in 1992 to 3.14% in 1996.  According to  the European Communities, one of the main 
reasons for this increase is the progressive reducti on in the applicable liquor tax rate from 200% in 
1990 to 100% in 1996.  The European Communities fu rther argues that Scotch whisky imported from 
the European Communities, whether in bottles or in bulk, accounts for virtually all of the sales within 
this tax category. 
3.16. The European Communities further argues that th e category of brandy is still very small but 
growing rapidly.  The increase has allegedly been  particularly remarkable in the case of cognac, 
which went up from just 13,000 litres in 1992 to 193,000 litres in 1996.  As in the case of whisky,  the 
argument goes, this increase is in part due to th e progressive reduction of the Liquor Tax rate from 
150% in 1990 to 100% in 1996.  Almost all brandy sold  in Korea is imported, whether in bottles or in 
bulk. 
3.17. According to the European Communities, the cat egory of "General Distilled Liquors" is also 
very small.  In the EC view, unlike sales of whis ky and brandy, sales of liquors falling within this 
category have stagnated and in some cases even dec lined.  One of the reasons for this, according to 
the European Communities is that, unlike whisky and brandy, this category has benefited only from a 
marginal reduction of taxes.  The European Communities  alleges that.  Although the liquor tax rate on 
this category was lowered from 100% to  80% as from 1 July 1991, this reduction was almost totally 
offset by a simultaneous increase of the app licable Education tax rate from 10% to 30%.
17  A  
significant proportion of sales within this category is  imported.  According to estimates of the EC 
industry, imports would represent approximately 20% of the sales of gin, 50% of the sales of rum and 
70% of the sales of vodka. 
3.18. The European Communities further alleges th at pre-mixes of distilled liquors and non-
alcoholic beverages account for a major portion of sales (95% according to the estimates of the EC industry) within the category of "liqueurs".  Acco rding to this argument, soju-based cocktails (e.g. 
lemon flavoured soju, cherry flavoured soju) account fo r the vast majority of the sales of pre-mixes.  
The EC view is that soju cocktails are a rela tively new product targeted at the young generation and 
enjoy considerable success.  According to the European Communities, during 1995 alone, sales of 
soju cocktails increased by 1250%.  There are no imports of soju cocktails.  
3.19. In contrast, the European Communities argues that  it may be estimated that as much as 90% 
of the sales of "authentic" or "single item" liqueurs ar e imported.  Sales of this type of "liqueurs" have 
been growing off a small base at 15-20% every year and are currently estimated to represent 300,000 
litres out of total market for liqueurs of 13.5 million litres.  
3.20. The European Communities further argues that  although no official sales figures have been 
made available by the Korean Government, the EC  industry estimates that while sales of whisky and 
other imported liquors declined during 1997, sales of soju would have increased.  As a result, the 
European Communities argues, soju may have regain ed its lost share of the market.  This new 
development is the result of extraordinary circumstances. 
                                                     
 
17 EC Annex 2.  WT/DS75/R 
 WT/DS84/R 
 Page 11 
 
 
3.21. According to the European Communities, in th e first place, the depreciation of the Korean 
won, which has made import ed liquors more expensive18.  To this, states the European Communities, 
it must be added the effects of the boycotts agai nst imported products orch estrated by civic groups 
and by business associations such as the Central Council of Korean Night-spots' Operators during the 
first months of 1997.  Finally, according to the European Communities, the financial crisis which 
broke in October of last year, and the ensuing sl ow down in the Korean economy has made consumers 
much more price conscious and further depressed the sales of imported liquors to the benefit of the 
less taxed and less expensive soju. 
3.22. The European Communities argues that western-st yle liquors used to be perceived by Korean 
consumers as "luxury" items.  According to the European Comm unities, at present the prices for 
western-style liquors remain much higher than the pr ices for diluted soju.  Nevertheless, according to 
the European Communities, following the lifting of the import quotas and the lowering of import 
duties and liquor taxes, there has been a clear trend towards lower cons umer prices, broader 
availability in all sales channels and consumption patte rns which are more similar to those of soju.   
3.23. The European Communities concludes that the remaining tax differentials stand as an 
obstacle to that trend and hinder further competiti on between soju and imported western-style distilled 
spirits and liqueurs. 
B. UNITED STATES  
3.24. From the US perspective, the products concerne d by this dispute are soju, a locally produced 
distilled liquor, on the one hand, and imported distilled spirits classified under the Harmonized 
System (HS) heading 2208, on the other hand,19 including spirits such as vodka, whisky, gin, rum, 
brandy and liqueurs.  Exports in 1996 of U.S.  distilled spirits to Korea were allegedly only $1.8 
million compared to an average export leve l in recent years of $90 million to Japan.   
3.25. The United States alleges that the current tax syst em and the state of the Korean market grows 
out of many years of protecting soju.  It claims that although Korea has dismantled some of its trade 
barriers to imports over the last ten years (an effort  that has produced inroad s for imported spirits in 
the Korean market),  Korea retains two tax laws  that categorises liquor products arbitrarily, and 
imposes corresponding discriminatory tax rates.    
3.26. The United States further alleges that Korea’s current tariff a nd tax regime governing the sale 
of alcoholic beverages has grown out of a historica lly restrictive market for alcoholic beverages that 
has shaped the Korean market as it stands today. 
3.27. The United States asserts that after 1949, high tariffs, quotas and other measures were used by 
the Korean government to discourage the importatio n of distilled alcoholic beverages and conserve 
the country’s foreign exchange reserves.  It cites,  for example, that in th e 1970's Korea assessed a 
duty of 150% C.I.F. on whisky imports.  Until Janua ry 1989, Korea maintained quota restrictions on 
bulk imports of whisky, and it  prohibited the importation of bottled whisky until July 1989.  
Importers were required to pay a deposit on the va lue of their imports, and the government permitted 
only twelve licensed importers until 1989. 
                                                      
18 The average monthly exchange rate between the Korean Won and the ECU fell from 1028.35 Wons 
to an ECU in January 1997 to  1616.28 wons in December 1997 , i.e. by almost 60 %.   
19 Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80 percent vol.; spirits, 
liqueurs and other spirituous beverages; compound alcoholic preparations of a kind used for the manufacture of beverages. WT/DS75/R 
WT/DS84/R Page 12 
 
 3.28. The United States further alleges that in the 198 0's, Korea began to liberalize these barriers to 
distilled spirits imports by reducing applied rates on whisky.  In 1982, the government reduced the 
rate of duty imposed on whisky from 150% to 100% fo r products certified for use in tourist hotels.  In 
1984, the government extended this rate reduction to a ll whisky imports regardless of destination.  In 
1988 the customs duty was further cut to 50%, wher e it remained until a reduction to 40% in 1991, 
followed by 30% in 1993.  In 1996, Korea applied a tariff rate of  20% on whisky.  Korea’s WTO bound rate, as a result of negotiations during the Uruguay Round, descends from a base of 100% in 
1995 to a final rate of 30% in 2004 in equal annual instalments. 
3.29. The United States also alleg es that, following pressure from the European Communities, 
Korea has also recently dismantled a number of its non-tariff barriers against distilled alcoholic 
beverages.  In 1988, Korea eliminated the impor t deposit requirements for small and medium sized 
importers.  In 1989, it reduced this deposit for large importers from 10% to 5%; increased the number 
of licensed importers from 12 to 25; lifted quota restrictions on the import of bulk whisky; and permitted the import of whisky bottled abroad for the first time, albeit subject to a quota.  In 1990, the 
government removed this quota, abolished the im port deposit requirement for large importers, and 
removed government limitations on the number of  licensed importers.  In 1991, Korea allowed 
foreign investment in the importation and distribution of spirits. 
3.30. The thrust of the US case is that concurrent  with these tariff and non-tariff measures, Korea 
maintained a discriminatory system of internal tax es weighted against imported alcoholic beverages.  
According to the United States, after World Wa r II, taxes on whisky and beer provided the 
government with a steady and easily collected form of revenue.  However, in the face of increasing 
pressure, especially from the EC, Korea enacted a seri es of tax reductions on some imported distilled 
alcoholic beverages.  Korea allegedly decreased the liquor tax rate on whisky and brandy from 200% 
to 150% in July 1991, 120% in January 1994, and 100% in January 1996.  
The current Korean market for distilled liquors 
3.31. The United States submits that th e Korean market for distilled alcoholic beverages, valued at 
approximately 2 trillion won in 1989, has been one of  the largest in Northeast Asia.  However, the 
United States adds that the Korean market for dis tilled spirits and liqueurs was virtually closed to 
imports until the late eighties.  Until 1 January 1989, imports of distilled spirits in bulk were subject to 
quotas, and  imports of distilled spirits in bottles we re prohibited and thereafter subject to quantitative 
restrictions until 1 January 1990.  Applied ta riffs were prohibitive until 1991.  Currently, the 
applicable import duty is 20% for all distilled spirits and liqueurs, except brandy (which is subject to a 
15% import duty) and soju (which is subject to a 30% import duty). 
3.32. The United States argues that in light of this background, the Korean market for alcoholic 
beverages has been dominated by traditional bevera ges, such as soju, with a relatively low alcohol 
content (25%) and bottled for mass consumption.  In 1996 sales of soju amounted to 89.825 million 
nine-litre cases (i.e., 808 million litres), which represen ts as much as 94% of the distilled spirits 
market. 
3.33. The United States further argues that imports of so ju into Korea are insignificant.  Last year 
Korea allegedly imported less than 2000 (1,625) litr es.  However, Korea exports large quantities of 
soju.  During the first eleven months of 1996, exports of soju totalled 43 million litres, which 
represents about 5% of Korean soju production.  The main export market is alleged to be Japan. 
3.34. According to the United States, almost all soju so ld in Korea is diluted soju.  Distilled soju is 
estimated to account for less than 1% of the total sal es of soju.  The United States claims that although 
diluted soju is generally inexpensiv e, distilled soju can fetch very high prices, similar to those paid for 
imported premium brands of whisky.    WT/DS75/R 
 WT/DS84/R 
 Page 13 
 
 
3.35. The United States asserts that in the last ten years, the Korean government’s relaxation of 
several import barriers has increased the compet itiveness of the domestic market for alcoholic 
beverages, even though the retail prices for Western- style liquors remain much higher than the prices 
for diluted soju.   
3.36. The United States argues that manufacturers of soju have addressed what are generally 
perceived by Korean consumers as its negative attr ibutes compared with the imported liquors:  poor 
quality, bad flavour, hangover effects, etc.  This has led to the emergence of a new segment of so-
called "premium soju" brands, whose distinctive characteristics are a milder taste, the use of 
flavouring (e.g., with honey), and/or ageing pro cesses and more sophisticated bottle designs.  The 
prices for premium diluted soju brands are between two and three times higher than those for standard 
diluted soju.  It is estimated that sales of pr emium soju represented 6% of soju sales in 1996 and 
probably reached 10% in 1997. 
3.37. The United States further argues that in addition to developing new types of soju for 
consumption in Korea, soju makers have also be gun to exploit the export market for soju.  Exports 
have risen dramatically in the last few years.   
3.38. According to the United States, Korean consum ption of whisky has increased by about 30% 
annually since 1994.  Between 1992 and 1996, the Korean market for wh isky incr eased fro m 315 
million won to 880 million won.  Moreover, whisky bottled abroad makes up an increasing share of this market, growing from 1.7% of this market in 1992 to 46.7% of the market in 1996.   
3.39. However, the United States adds that although imports of distille d spirits have grown steadily, 
they still represent only around 3.5% of the Korean ma rket.  In most other OECD countries, the share 
of imported spirits is allege dly between 30% and 40%.  
C. K
OREA  
3.40. According to Korea, the complainants spend considerable time arguing that Korea has a 
history of protecting its soju industry.  Korea st ates that no case has been brought against it for these 
alleged violations. In Korea's view, therefore, these allegations are irrelevant to the case at hand, and 
they should be disregarded.  
3.41. Korea also notes that in the same way that the complainants wish to gloss over the differences 
between the Korean and Japanese mark ets, they also wish to glo ss over the characteristics of the 
Korean market and products that do not fit their line of argument.  Korea notes for example, that the complainants treat 'soju’ as one product.  According to Korea, however, Korean distilled soju is very 
different from what the complainants refer to as 'dilu ted' soju.  In Korea's view, the latter is certainly 
not a 'dilution' of the former.   
3.42. Korea further argues that no Korean producer or consumer would consider distilled and 
diluted soju to be substitutes.  Korea further states that although the complainants mention the 
existence of important differences between a 'dilu ted’ soju and 'distilled’ soju, the complainants 
dismiss these differences by saying that distilled so ju occupies less than 1% of the soju market.  
3.43. Korea argues that, having so dismissed distilled soju, the complainants proceed to use 
examples drawn from the exceptions in order to su pport general statements about all soju.   WT/DS75/R 
WT/DS84/R Page 14 
 
 3.44. According to Korea, this dispute is about 'diluted’ soju, ('standard’ soju),
20 which represents 
more than 99% of all 'soju' sold in Korea.  Furt her, according to Korea, the question in this case is 
whether Korea’s system of taxing distilled be verages discriminates against imported distilled 
alcoholic beverages, to the advantage of standard soju.  Of those western-type liquors, Korea argues 
that the Panel must be cognisant that whisky is by far the most important, representing the greatest 
proportion of all the imported distilled beverages. 
3.45. Korea seeks to show that its system for the taxation of alcoholic beverages is not 
discriminatory, because the products at issue in this  case are simply not in competition.  According to 
Korea, the United States and the European Commun ities try to establish that competitive relationship 
by making generalisations such as "all are dr unk with the same purposes: thirst-quenching, 
socialization", that they are made from the ox ymoronic "same large variety of raw materials",  by 
drawing specific examples from clearly exceptional cases,  or -- their last resort-- by arguing that the 
products are in 'potential' competition with each other. 
3.46. Korea gives a general background about alcoholic drinks.  Korea states that if one travels 
around the world, one will encounter a seemingly infi nite variety of alcoholic  beverages, many having 
a long and interesting history.  Korea further argues that throughout the ages, virtually every culture in 
the world discovered that the natural process of de composition of certain raw materials, typically 
fruits and vegetables, led to sometimes tasty results.  Over time, through trial and error, the process of 
creating certain alcoholic beverages has become increasingly refined. 
1. Features of distilled alcoholic beverages 
3.47. Korea states that within the broad category of alcoholic beverages, one can distinguish 
distilled beverages.  According to Korea, to make a distilled alcohol, one first starts with fermented 
raw material.  That fermented matter is put throu gh a process of refinement and concentration, called 
distillation.21  Beverages that have been distilled are gene rally referred to as 'spirits’, and spirits are 
the products at issue in this case.  
3.48. Korea further states that distilled liquors can be derived from materials as varied as  grain, 
corn, rice, fruit, sugar cane or beets, potatoes, or  tapioca.  Korea asserts that the selection of raw 
materials for the manufacture of distilled alcoholic beverages may be traced to different geographical, 
cultural and consumer requirements and can play an important role in determining the ultimate 
qualities of the finished product. 
3.49. Korea notes that another distinction is sometime s drawn between 'brown’ and 'white’ spirits.  
According to Korea, this distinction refers to th e production process and app earance of the beverages: 
brown spirits are brown (e.g., whisky or cognac); white  spirits are clear (e.g., Korean soju or gin).  
Korea further states that brown spirits are generally  matured in wooden casks and derive their flavour 
mainly from this process and from the original distille d ingredients.  White spirits are not aged before 
bottling and instead rely on the addition of ingredient s during the distillation process, or afterwards, to 
provide their distinctive flavour.  These ingredients differ from one drink to another (e.g., gin derives 
its special flavour from the juniper berry).  
                                                      
20 There is a disagreement between th e complainants and Korea on whether to use the term diluted soju 
or standard soju. For purposes of clarity, we adopt the te rm diluted soju. Within the category of diluted soju are 
two sub-categories of premium diluted soju and standard diluted soju.  No substantive determination is implied 
by this decision regarding terminology. We also note that this appears to be the terminology used by the Korean 
Fair Trade Commission in the decision submitted by  Korea (Attachment 1 to Korea's first submission). 
21 Distillation is defined in Webster’s dictionary as 'a process that consists of driving gas or vapour 
from liquids or solids by heating and condensing to liquid products. . .’  WT/DS75/R 
 WT/DS84/R 
 Page 15 
 
 
2. Consumer behaviour 
3.50. Korea argues that consumer preferences for alc oholic beverages vary from country to country.  
Certain countries have their own national drink.  Fo r instance, argues Korea, in France, wine is the 
national drink, in Germany it is beer, and in Japan it is sake.  Korea adds that  some national drinks are 
virtually unknown in other countries.  According to Korea, this is the case fo r Korean soju, which is 
hardly known outside Northeast As ia and Korean communities abroad. 
3.51. Korea further argues that these national drinks re flect the different cultures and traditions of 
the various countries.  In addition, argues Korea, the climate, food and history of a country also 
determine the customs of its people and the way they  drink alcoholic beverages.  Thus, according to 
Korea, in hot countries one drinks certain alcoholic  beverages to quench one's thirst, while in cold 
countries one drinks certain alcoholic beverages to keep warm.  In other countries people drink 
particular alcoholic beverages for mere entertai nment purposes, i.e., in bars, night clubs or posh 
hotels. In other countries one drinks particular al coholic beverages as an accompaniment to a meal.  
3.52. Korea further asserts that in Fran ce, for instance, it is common to drink wine over a meal.  In 
Korea's view, this is because the nuanced flavour of wine complements the food French people eat.  
However, with spicy food one is unlikely to order a beverage such as wine, because such food would 
overwhelm wine’s subtle fl avours.  In Korea, the argument goes, Koreans drink soju with their spicy 
food.  Soju goes well with Korean barbecue and ot her Korean meals, because the drink's harshness 
cuts the spiciness of the food.  
3.53. Korea further argues that people can also drink al coholic beverages either mixed, on the rocks 
or straight, cold or hot or a combination of both.  According to Korea, soju is never drunk mixed, 
whereas whisky, vodka and Japanese shochu are drin ks which commonly are drunk both straight and 
mixed. 
3. Price 
3.54. Korea further argues that alcoholic beverages can vary widely in price.  Korea gives as an 
example, a bottle of bordeaux which has allegedl y been known to fetch thousands of dollars at 
auction, while a bottle of potato-based alcohol can be  very cheap.  In Korea's view, one of the factors 
affecting the price of an alcoholic beverage is the type of raw materials used to produce it.  Additional 
manufacturing processes, such as ageing, increase the value and price of a product, partly because 
only a selected portion of the product is suitable for ag eing. Prices will also be affected by distribution 
costs and margins, product image, consumer demand, etc. 
4. Korean soju 
3.55. Korea notes that despite their similarity in names, a sharp distinction must be drawn between 
'diluted' or 'standard’ soju on the one hand, and dis tilled soju on the other hand.  Standard soju is not a 
diluted form of distilled soju.22 
3.56. According to Korea, standard soju is a very  common beverage, and millions of litres are sold 
each year.23  Korea asserts that it is made from cheap ra w materials: joojung (ethyl alcohol), which is 
drawn from fermented sweet potatoes, tapioca or co rn and distilled so as to obtain as pure an alcohol 
                                                      
22 Korea asserts that the word 'soju’ is a term which has become generic. 
23 The exact figure for standard soju taxed volume in 1996 is 787 195 kl. (Sources: National Tax 
Administration, Statistical Yearbook of National Tax 1996 (1997); Customs  Administration & Korean Traders 
Association, Statistical Yearbook of Trade 1996  (1997)).  The exact figure for standard soju taxed volume in 
1997 is 814 159 kl. (Source: National Tax Administration, not yet published.) WT/DS75/R 
WT/DS84/R Page 16 
 
 as possible.  To make standard soju, that alcohol (j oojung) is not further distilled, but is diluted with 
water, and six to seven additives are added.
24  Korea adds no further ageing or colouring is permitted 
by law.   Korea asserts that this drink has a relatively low alcoholic strength for a spirit: 25%.   
3.57. Korea further argues that another unusual characte ristic of standard soju is that, unlike other 
spirits, it is commonly consumed with meals.  This  is also recognised outside Korea, in areas with 
important Korean communities.  Korea cites as an  example Santa Clara, California, where Korean 
restaurants that only have a license to sell low alcohol drinks are permitted a special exemption to sell standard soju as well.  According to Korea, this is  a recognition of the fact that it is customary for 
Koreans to drink a distilled beverage (of 25% alcohol content) with their meals.
25 
3.58. Korea argues that distilled soju, on the other hand, is an artisanal product,26 sold in tiny 
quantities (0.2% of the volume of standard soju).27 According to Korea, distilled soju is usually made 
from grain or rice.28  Korea states that the production process is quite sophisticated, no additives are 
added.  By law, argues Korea, distilled soju can be aged for up to two years prior to sale.  Korea also 
asserts that the alcoholic strength of distilled soju is  40% to 45%, which is considerably stronger than 
standard soju.  Korea also argues that moreover, dist illed soju has a distinct taste, which is smoother 
than standard soju. Distilled soju is 10 to 20 times mo re expensive than standard soju, pre-tax, and is 
packaged in special ceramic bottles, and is often offered as a gift. 
3.59. Korea states that it should be noted that the Korean liquor tax law classifies standard soju and 
distilled soju separately and attaches a different ta x rate to each, 35% and 50% respectively.  Korea 
also notes that while the United States acknowledges that standard soju and distilled soju have the 
same rate of Education Tax (10%), it fails to mention that the liquor ta x on distilled soju is 50%, while 
the liquor tax on standard soju is 35%.  Korea also notes that another mistaken attempt at trivialising 
the distinctions between distilled and standard soju is the EC assertion that the distinction in the tax 
law was introduced only in 1991, and that this was in response to pressure from the European 
Communities.  According to Korea, the distinction was made as early as 1962. 
3.60. Korea notes that in recent years certain "up-mark et" varieties of standard soju have been 
introduced, which are commonly referred to as 'pre mium' soju.  The composition of "premium" is 
slightly different from standard soju, giving the drink a somewhat milder taste.29  The producers 
charge a higher price for this variety, up to twice the price for standard soju before tax.  According to 
Korea, to justify this higher price, they sometimes make exaggerated claims. 
                                                      
24 Sugar, citric acid, amino acid, solbitol, mineral salt, stevioside, and aspartame. These additives all 
serve a particular purpose to enhance the taste of soju , i. e.,  sugar, to make it sweet; citric acid, to give soju a 
sour taste; amino acid, to enhance its flavour and act as a sweetener, adding a seaweed-like taste; solbitol, a 
form of sweetener which has a thick sweet taste; mineral salt, which acts as a catalyst to bring a change of taste 
to all the additives; stevio side, which has strong light sweet taste 150 to 300 times sweeter than sugar; and 
aspartame (nutrasweet), which is a chemical fla vour enhancement 200 times sweeter than sugar. 
25 According to Korea,  'Today, soju and a platter of  barbecued meat are as inseparable in South Korea 
as beer and hot dogs or margheritas and chips in the United States’, San Jose Mercury News, 
http://infi.net/global/cgi-bin/sj/slwebcli_post.pl. 
26 The artisans who make distilled soju are recognised  as 'Human Treasures’ by Korean Governmental 
Decree. Their skill is recognised as an 'Intangible Cultu ral Asset’. One such example (Moon Bae-Sool) is shown 
in US Exhibit D. 
27 The exact figure for distilled soju consumption in 1996 is 1325 kl. Source: National Tax 
Administration, Statistical Yearbook of National Tax 1996 (1997).  
28 The complainants state that distilled soju is made of  potato or grain.  Korea claims that in reality 
potatoes are not used.  The leading brands of distilled soju (Moon Bae-Sool and Andong Soju) are made from 
grain or rice. 
29 For instance, in the leading bran d of 'premium' soju, Kimsatgat, h oney replaces stevioside as one of 
the seven additives.   WT/DS75/R 
 WT/DS84/R 
 Page 17 
 
 
3.61. Korea also argues that the complainants focu s on these claims to draw inferences for the 
entire soju market,30 or even to question the credibility of information Korea gave during the 
consultations which took place prio r to this Panel proceeding, implying that Korea drew a false 
distinction between distilled and standard soju.31  In Korea's view, the reality is, however, that 
premium soju is no more than an upgraded commodity.  It is classified as standard soju in the liquor 
tax law.  Premium soju only represented 4.46% of  standard soju sales in 1996 and 5.39% in 1997.32 
5. Changes since 1990 
3.62. Korea asserts that there is a strong undertone in  the complainants' submissions that there has 
always been something wrong with Korea’s liquor and education taxes, and under pressure from the 
EC and the US, Korea finally came to recognise this .  Korea further states that the complainants 
suggest that the changes Korea introduced since 1990 came too slowly, and ultimately did not remove 
the illegal nature of the taxes.   
3.63. According to Korea, the European Communiti es and the United States have indeed gone to 
great lengths to influence Korea's domestic policies in the recent past.  Korea submits that in the 
interest of avoiding friction with important tr ading partners and allies, Korea has tried to 
accommodate US and EC demands by foregoing tax revenue.  In Ko rea's view, this was not an 
admission of fault.   
3.64. Korea notes that the European Communities alleg es that decreases in Korea’s liquor tax were 
'almost totally offset by a simultaneous increase of the applicable education tax rate’.33  According to 
Korea, the European Communities shou ld have also mentioned that at the time that the education tax 
was increased from 10% to 30%, the defence tax (30% ) was repealed.  Thus, in Korea's view, there 
was an overall reduction in the applicable tax rate. 
                                                      
30 To illustrate, the 15 pages of advertisements included in the EC first submission only include two 
advertisements for standard soju (about 95% of the soju market), all the rest being advertisements for premium soju (4 to 5% of the soju market). 
31 According to Korea, the EC, in support of this s uggestion, cited advertisements for a standard soju 
brand which claimed that this soju was aged. However, the Korean Fair Trade Commission, in a decision of 30 
November 1996, found that this claim constituted false adve rtising. The decision is reproduced in Attachment 1. 
32 According to Korea, in 1996, total taxed volume of premium soju was 35 108 kl (including the 
leading brands 'Chamnamoo' produced by Jinro, 'Kimsatgat' produced by Bohae and 'Chungsanri' produced by 
Kyoungwoul). In 1997, total taxed volume was 43 873 kl (including the same brands). (Source: National Tax 
Administration). The EC and US estimate, unsubstantiated, that premium soju sales represented 6% of total soju 
sales in 1996 and increased to 10% in 1997 is therefore incorrect. (See EC first submission at para. 54 and US 
first submission at para. 41.) Note that the total taxed volume of standard soju was 787 195 kl in 1996 and 814 
159 kl in 1997. 
33 EC first submission, para. 57. WT/DS75/R 
WT/DS84/R Page 18 
 
 3.65. Korea presents the following table that purports  to show the reduced tax burden on whisky 
since 1991: 
 
 (in %) Whisky liquor 
tax Education tax Defence tax Combined 
surtax burden Combined tax 
burden 
 Before 1991 200 10 30 80 280 
Before 1994 150 30 - 45 195 
Before 1996 120 30 - 36 156 
Since  1996 100 30 - 30 130  WT/DS75/R 
 WT/DS84/R 
 Page 19 
 
 
IV. CLAIMS OF THE PARTIES 
4.1. The European Communities claims that: 
(i)  Korea is in breach of its obligations  under GATT Article III:2, first sentence, by 
applying internal taxes on imported vodka pursuant to the Liquor Tax Law and the 
Education Tax which are in excess of those applied on soju; and 
(ii) Korea is in breach of its obligations under Article III:2, second sentence, by applying 
higher internal taxes pursuant to the Liquor Tax Law and the Education Tax Law on imported liquors falling within the categories of 'whisky', 'brandy', 'general distilled 
liquors, 'liqueurs', and 'other liquors' (to the extent that they contain other distilled 
spirits or liqueurs) than on soju, so as to  afford protection to its domestic production 
of soju. 
4.2. The United States claims that the Korean la ws outlined above diffe rentiate among distilled 
spirits on the basis of arbitrary characteristics, resulti ng in great disparities in the treatment of soju and 
imported distilled spirits.  According to the United States, at the very minimum: 
(i) Korea’s application of internal taxes on vodka that exceed taxes applied to soju is 
inconsistent with the first sente nce of GATT Article III:2; and 
(ii) Korea's application of higher internal taxes to imported distilled spirits classified 
under HS heading 2208 falling within its legal categories of "whisky," "brandy," 
"general distilled liquors," "liqueurs" and "other liquors" (to the extent that they contain other distilled spirits) afford prot ection to its domestic production of soju, 
inconsistent with the second sentence of Article III:2. WT/DS75/R 
WT/DS84/R Page 20 
 
 
V. LEGAL ARGUMENTS 
A. P
RELIMINARY ISSUES  
1. General 
5.1. The complainants argue that Korea's request  for preliminary rulings was not properly 
formulated and it was unclear what provisions of the WTO Agreement, if any, Korea considers to 
have been violated by the complainants, and that it was also unclear what precisely is the issue being 
addressed by Korea to the Panel. 
5.2. According to the European Communities, it is unclear whether Korea is asking the Panel to 
find that the European Communities has violated ceratin procedural provisions of the DSU, or 
whether it is asking the Panel to dismiss the compla int because certain procedural pre-requisites were 
not fulfilled, or whether it is asking the Panel to discharge itself. 
5.3. The United States was of the view was that given the scarce information provided by Korea in 
Korea’s oral statement (which formed the basis of its request for preliminary rulings) it considers that 
any preliminary ruling by the Panel would not be wa rranted.   The United States adds that to the 
extent the request for a preliminary ruling warrant s any attention, it may be addressed in the Final 
Panel report. 
2. Specificity of the panel requests 
5.4. Korea takes issue with the specificity of the requests for a panel made by both the European 
Communities and the Unites States. 
5.5. Korea notes that the European Communities, in  its request for a panel, has referred to a 
preferential tax rate on 'soju' vis-a-vis 'certain' alcoholic beverages falling within HS heading 2208.  
Korea states that the European Communities has not clarified its position even in its written 
submission.  Korea further notes that the European Communities claim that 'all other distilled spirits 
and liqueurs' other than 'soju' falling within HS 2208 are within the purview of this dispute.  
5.6. Korea states that the US' request for a panel lacks specificity as well.  Korea notes that the 
United States, in its request for a panel, refers to  higher tax rates on 'other distilled spirits', while 
specifically mentioning 'whisky, brandy, vodka, rum, gin, and ad mixtures'.  Korea further notes that 
the United States, in its first submission, seeks to broa den the dispute to all dist illed spirits, other than 
soju, that are classified under HS 2208. 
5.7. Korea argues that such vaguely worded complaints  violate its rights of defence.  According to 
Korea, HS 2208 is a very broad tariff classificati on, which covers a wide variety of alcoholic 
beverages, including non-western liquors such as kor yangu, Korean soju, Insam ju, Ogapiju, and 
Japanese shochu.  Korea notes that it is surprising that both complainants refer to 'western-style 
liquors', yet HS 2208 also includes non-'western-style liquors'. 
5.8. Korea argues that this lack of specificity of  the complainants' claims is improper for two 
reasons - 
(i) it frustrates Korea's right of defense, which is a general principle of due process 
implicit in the DSU; and  WT/DS75/R 
 WT/DS84/R 
 Page 21 
 
 
(ii) it violates a clear obligation of the DSU, wh ich is that such a request should 'identify' 
the specific measures at issue, and 'presen t the problem clearly', as stipulated in 
Article 6. 
5.9. Korea, therefore, requests the panel to issu e a preliminary ruling, limiting the products at 
issue in this dispute.  Korea submits that the only imported liquors whose tax rates are to be compared 
with the tax rate on the domestic soju products are:  whisky, brandy, vodka, gin, and rum.  According 
to Korea, these are the liquors identified specifically by  the United States in its request for a panel  In 
Korea's view, parties to a dispute cannot unilaterally al ter the terms of reference by expanding, in their 
first submission, on issues not previously raised.   
5.10. Korea also submits that it is unable to identify which items the United States is referring to by 
its reference to 'ad mixtures' in its request for a panel. 
5.11. Korea also claims that the complainants have  not clearly distinguished the domestic liquors 
that are supposed to be more favourably taxed in Korea.  Korea states, in particular, that the 
complainants have not distinguished between Korea' s distilled soju, an artisanal product sold at very 
high prices in tiny quantities, and subject to a 50% tax rate, on the one hand, and, on the other hand, 
diluted or standard soju, which is a large volume, inexpensive drink, consumed with meals and taxed 
at a rate of 35%. 
5.12. Korea argues that both complainants, in their re quests for a panel, have referred to one 'soju' 
product, without acknowledging that there are, in reality, two different products, with two different 
tax rates.  Korea also states that  the complainants have not recognized that one group of western-style 
spirits ('liqueurs'), which they have mentioned in passing, is taxed at the same rate as distilled soju 
(50%). 
5.13. The European Communities argues that its panel re quest is more than sufficiently specific to 
meet the minimum requirements of Article 6.2 of th e DSU.  According to th e European Communities, 
the mere fact that HS 22.08 covers many different t ypes of liquors is no basis to consider that it lacks 
specificity. 
5.14. The European Communities also  rejects Korea's assertion that it has, through its first 
submission, broadened the scope of its complaint as contained in the request for a panel.  According 
to the European Communities, its request for a pane l refers to '.. certain alcoholic beverages falling 
within HS 22.08'.  In the EC's view, that HS positi on does not cover only 'spirits' but also 'undentured 
ethyl alcohol of an alcoholic strength by volume of less than 80% 'liqueurs' and 'other spirituos 
beverages' not falling within any other position of chapter 22 of the HS.   
5.15. The European Communities notes that its first submission refers to 'soju and all other distilled 
spirits and liqueurs falling within HS 22.08.  In th e EC's view, therefore, its first submission if 
anything narrows rather than broa dens the scope of its complaint. 
5.16. The United States argues that Article 6.2 of the DS U requires, inter alia, that the request for a 
panel "identify the specific measures at issue and provide a brief summary of the legal basis of the 
complaint sufficient to present the problem clearly."  According to the United States, its panel request 
satisfied both these requirements, and it also clearly  includes all distilled spirits within HS heading 
2208, as maintained in the first US submission.  
5.17. The United States argues that in accordance with Article 6.2 of the DSU, its request for the 
establishment of a panel defined the Korean measur es at issue:  the general liquor tax law and the 
Education Tax; and provided a brief summary of the legal basis of the complaint.  The United States 
refers to Bananas III , where the Appellate Body allegedly no ted that this provision concerning the WT/DS75/R 
WT/DS84/R Page 22 
 
 legal basis requires that the request for a panel must be sufficiently specific with  respect to the claims 
being advanced, but need not lay out all the arguments
34 that will subsequently be made in the party’s 
submission.  The United States argues that with respect to its request in this dispute, the legal claim is 
clear: that Korea’s taxes are higher on imported disti lled spirits than on its dom estic product "soju," in 
violation of Article III:2 of the GATT.   
5.18. The United States argues that Korea’s request that the Panel limit the proceeding to five 
specific products -- whisky, brandy, vodka, rum, and gin, is equally without basis.  According to the United States, the panel request, which defines the term s of reference of the panel, refers to taxation 
of "other distilled spirits" --  i.e., distilled spirits other than soju.  By using the term "such as," it sets 
forth the five products and "ad mixtures"
35 as examples, and not as an exclusive list.  According to the 
United States, the extent to which the United Stat es and European Communities establish to the Panel 
that all such products are "like" or "directly compet itive or substitutable" is a matter to be determined 
through the course of these proceedings, beginning w ith the first submission.  The United States notes 
that, under Article 7 of the DSU, the Panel may not  decline to address products that are clearly within 
its terms of reference, but must base its findings on the entirety of the proceeding.36 
5.19. As regards the challenge of defining which soju is referred to, the European Communities 
states that it regards all the varieties of soju as one product, with the necessary result that 'liqueurs' are 
more heavily taxed than some soju.  According to  the European Communities, the question of whether 
soju is or is not a single product is a substantiv e issue which cannot be decided by the panel in a 
preliminary ruling.   
5.20. The United States also argues that with respect to  the use of the word "soju," its panel request 
made it clear that the tax preference for all soju was covered, giving Korea ample objective notice that 
the entire category was to be challenged.  Accordi ng to the United States, given the major emphasis in 
Korea's first submission concerning the differences between diluted and distilled soju, it is evident 
that Korea in fact did have ample notice -- suffici ent to structure its entire first submission on the 
basis of alleged differences in the two kinds of soju. 
3. Adequacy of consultations 
5.21. Korea also submits that explicit obligations of the DSU - namely 3.3, 3.7 and 4.5 - have been 
violated.  Korea in effect alleg es that the complainants did not e ngage in consultations in good faith 
with a view to reaching a mutual solution as envisaged by the DSU. 
5.22. Korea alleges that there was no meaningful ex change of facts because the complainants 
treated the consultations as a one-sided question a nd answer session, and therefore, frustrated any 
reasonable chance for a settlement. 
                                                      
34 Appellate Body Report on European Communities - Regime for the Importation, Sale and 
Distribution of Bananas (Bananas III) , adopted on 25 September 1997, WT/DS27/AB/R, para. 141. 
35 According to the United States, ad-mixtures are generally low grade distilled spirits composed of a 
percentage of high grade spirits combined with neutral spirits and water.  They are taxed as "other liquors" 
under Article 3.11 of the Korean Liquor Law, and are thus well within the terms of reference.  For instance, in 
Korea, there are many brands of ad mixes, such as Black Joker malt whisky.  The alcohol in Black Joker 
contains 19.9% whisky, with the other 80.1% coming from neutral spirits.  The product then looks and tastes like whisky, but is considerably cheaper.  This is due to  the fact that neutral spirits do not undergo any post 
distillation processing, unlike whisky which must be aged in wooden barrels for two years, or more. 
36 Appellate Body Report on Japan - Taxes on Alcoholic Beverages  adopted on 1 November 1996, 
WT/DS8/AB/R, WT/DS1O/AB/R, WT/DS11/AB/R at 27; Appellate Body Report, Bananas III , paras. 145-147.  WT/DS75/R 
 WT/DS84/R 
 Page 23 
 
 
5.23. Korea considers this non-observance of specific provisions of the DSU as a "violation of the 
tenets of the WTO dispute settlement system" and requests the Panel for a ruling (no indication is 
made as to what relief Korea is seeking on this point). 
5.24. Both complainants assert that Korea's claim w ould appear to be that they have infringed 
Articles 3.3, 3.7 and 4.5 of the DSU because they did not attempt to reach a mutually acceptable 
solution to the dispute in the course of the consultations  that preceded the establishment of this Panel.  
They note that at the first meeting with the Pane l, Korea asserted that the United States and the 
European Communities have "ignored": 
(i) Article 3.3 of the DSU, which provides that the "prompt settlement of disputes is 
essential to the effective functioning of the WTO"; 
(ii) Article 3.7 of the DSU, to the extent it calls for a "mutually acceptable" and 
"positive" solution; and 
(iii) Article 4.5 of the DSU, which states th at in the course of consultations, Members 
should attempt to "obtain satisfactory adjustment" of the matter. 
5.25. The complainants refer to the panel deci sion in Bananas III in which it was stated 
[....] Consultations are, however, a matter reserved for the parties.  The DSB is not 
involved; no panel is involved;  and the consultations are held in the absence of the 
Secretariat.  In these circumstances, we are not in a position to evaluate the consultation process in order to determine if it functioned in a particular way.  While 
a mutually agreed solution is to be preferre d, in some cases it is not possible for the 
parties to agree upon one.  In those cases, it is our view that the function of the panel 
is only to ascertain that consultations, if re quired, were in fact held or, at least, 
requested. 
As to the EC argument that consultations must  lead to an adequate explanation of the 
complainants' case, we cannot agree.  Consu ltations are the first step in the dispute 
settlement process.  While one function of th e consultations may be to clarify what 
the case is about, there is nothing in the DS U that provides that a complainant cannot 
request a panel unless its case is adequately  explained in the consultations.  The 
fulfilment of such a requirement would be difficult, if not impossible for the complainant to demonstrate if a respondent chose to claim a lack of understanding of 
the case, a result which would undermine the automatic nature of the panel 
establishment under the DSU.  The only per-re quisite for requesting a panel is that 
consultations have 'failed to settle a dispute within 60 days of receipt of the request  
for consultations...  Ultimately, the function of providing notice to a respondent of a 
complainant's claims and arguments is serv ed by the request for the establishment of 
a panel and by the complainants' submissions to that panel.
37 
The complainants point out that Korea cannot dispute the fact that consultations were in fact held on 
three separate occasions between itself and both the United States and the European Communities. 
5.26. The complainants state that, in any event it is not true that they refused to engage in a 
'meaningful exchange of facts' during the GATT Arti cle XXII consultations.  They allege that it was 
Korea's attitude during the consultations whic h prevented such exchange from taking place. 
                                                      
37 Panel Report on Bananas III , WT/DS27/R, paras. 7.18-7.19. WT/DS75/R 
WT/DS84/R Page 24 
 
 5.27. The United States further argues th at Korea’s complaints about the alleged inadequacy of the 
complainants’ attempts to settle the dispute or engage  in good faith consultatio ns have no bearing on 
the authority of the Panel or the progress of this proceeding. 
5.28. The United States asserts that Korea’s asserti on that the United States and the European 
Communities failed to engage in good faith consultations is belied by the record.  According to the 
United States, the three parties to this dis pute (Korea, the United States and the European 
Communities) held consultations on three separat e occasions over a six-week period, in which 
numerous factual and legal issues were discussed, including the fact that the Korean Liquor Law 
applies to all types of distilled spirits covered by  HS 2208.  The United States asserts that it presented 
detailed factual questions to Korea and requested th at the answers be provided in writing.  According 
to the United States, Korea refused to reply in writing but did agree to provide oral answers.  The 
United States also states that Korea acknowle dged that it was in possession of a market study 
commissioned by Korean producers of distilled spirits, but declined to provide a copy. 
5.29. The United States asserts that with the Europ ean Communities, it requested Korean data for 
1990-1996 on all distilled spirits under HS heading 2208, by both volume and value, Korea initially 
stated at the 24 June consultation that it would try to provide this information.  According to the 
United States, however, during the consultations held on 8 August 1997, the Korean delegation 
refused to provide copies of this information, stati ng that it was only for the use of its private lawyers 
for defensive purposes in the event a panel proceeding was initiated. 
5.30. The United States, therefore, believes that th ese events make all the more baffling Korea’s 
request for a procedural ruling, given that the United States failed to obtain sufficient factual 
information from Korea. 
4. Confidentiality 
5.31. Korea alleges that both complainants breach the confidentiality requirement  of Article 4.6 of 
the DSU by making reference, in their submissi ons, to information supplied by Korea during 
consultations. 
5.32. The European Communities argues that Korea's interpretation of Article 4.6 of the DSU is 
wrong.  According to the European Communities, the confidentiality requirement of Article 4.6 of the 
DSU concerns parties not involved in the disput e and the public in general.  The European 
Communities stresses that the requirement cannot in an y way be read as referring to the panel itself.  
In the EC view, Article 4.6 cannot be interpreted as a limitation on th e rights of parties at the panel 
stage.  
5.33. It is also the EC view that, if the interpreta tion by Korea of Article 4.6 were correct, it is 
Korea which has violated Article 4.6 of the DSU by  making extensive reference to the consultations 
in support of its claim under Article 3.3, 3.7, and 4.5 of the DSU.   
5.34. The European Communities concludes that it is not the purpose of Article 4.6 of the DSU to 
limit the possibilities available to a panel to be apprised  of information on the dispute before it.  In the 
EC's view, there can be no 'artificial wall' betw een the consultation and the panel proceeding through 
which the transfer of information is blocked. 
5.35. The United States considers that Korea's claim concerning a breach of confidentiality in the 
U.S. and EC submission is unclear concerning the relief  it requests.  to the extent it alleges a violation 
of the DSU, such a claim is not within the panel' s terms of reference.  Moreover, according to the 
Untied States, the citation in a footnote in the fi rst U.S. submission cited by Korea attempted to  WT/DS75/R 
 WT/DS84/R 
 Page 25 
 
 
highlight a factual issue concerning which there was confusion in the Korean law, a point that was rectified by the first submission and is of no consequence as a factual or legal matter. 
B. P
ANEL AND APPELLATE BODY REPORTS ON JAPAN - TAXES ON ALCOHOLIC BEVERAGES  
1. Complainants 
5.36. According to the European Commun ities, 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 situ ation, Japan applied a much lower rate to shochu  (a local distilled 
liquor which, the European Commun ities consider is "like" Korean soju) than to "western-style" 
distilled spirits and liqueurs which are "like" or "d irectly competitive or substitutable" with shochu. 
5.37. 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 ). 
5.38. 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 Co mmunities, there is no good reason why the findings 
made by prior Panels with respect to the Japanese ma rket should not be considered as pertinent in the 
present dispute. 
5.39. The United States argues that the Korean liquor ta x system at issue in this dispute is very 
similar to the system in place in Japan until very r ecently.    The United States  further argues that like 
Korea, Japan has long protected shochu, a local distill ed liquor which, in its pure form, is identical to 
Korean soju.   According to the United States, un til recently, Japan applied a much lower tax rate to 
shochu than to other categories of Western distilled sp irits that -are "like" or "directly competitive or 
substitutable with" shochu.  The United States alleg es 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. 
5.40. According to the complainants, the main differe nce 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, fo r 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.  A ccording to the complainants, in 
Japan - Taxes on Alcoholic Beverages II ,40  Japan's main line of defen ce 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. 
                                                      
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. WT/DS75/R 
WT/DS84/R Page 26 
 
 5.41. The European Communities stat es that during the consultations Korea claimed, although 
without providing any supporting evidence, that cu rrent consumption patterns in Korea differ from 
consumption patterns in Japan.  According to th e 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 earli er than in Korea,  to a large extent as a result of an earlier 
liberalisation of imports. 
5.42. The European Communities further argues that  the Korean market has no inherent or 
permanent characteristic which makes it so differe nt 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 distille d sprits and liqueurs is in many ways reminiscent 
of the Japanese market in the early eighties. 
5.43. The European Communities argu es that, as in Japan one decad e before, since the early 
nineties an increase in the levels of disposable in come, coupled with the lifting of import quotas and a 
reduction in the applicable tariffs and internal taxe s, have led to a spectacular increase in sales of 
western-style liquors on the Korean market, and in particular of whisky. 
5.44. According to the European Communities, Kore an 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 toward s lower prices, greater availability in all sales 
channels, and consumption patterns wh ich are more similar to those of the "traditional" local liquor.   
5.45. The European Communities furthe r 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 prolif eration 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. 
5.46. The European Communities concludes, that give n 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/so ju and all other distilled spirits and liqueurs are 
"substitutable" and "competitive" products, ar e equally relevant for this dispute. 
5.47. The United States also takes the position that th e development of the distilled spirits markets 
in Japan and Korea are very similar.  Accordi ng 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 taxe s, have led to a spectacular increase in sales of 
Western-style spirits on the Korean market, in particular whisky. 
5.48. The United States further asserts that, like thei r 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 a ll 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 ve nues of consumption have also been aided by 
greater availability of all types of spirits in all sales channels.  WT/DS75/R 
 WT/DS84/R 
 Page 27 
 
 
5.49. According to the United States, the resu lt of expanded purposes for spirits, and the 
burgeoning styles of soju is an ever increasing degr ee of competition between soju and Western-style 
liquors.  Those trends are converging in Korea, as in Japan. 
5.50. The United States also concludes that the clos e 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 pertinen t to this Panel’s examination of Korean tax 
measures.  In particular, the United States argues th at 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 
5.51. 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 attemp t 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 th is approach is not compatible with Article III:2 
GATT.   
5.52. Korea argues that Korean soju is not identical to Japanese shochu, irrespective of statements 
made in the context of the Japan case, to which Ko rea was not a party.  Korea cites the example from 
the complainants to say that Ko rean 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, argu es Korea, Korean producers exporting to Japan are 
primarily aiming to capture Japanese consumers.  Fo r 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 shoc hu’ is not sold in Korea. 
5.53. Korea further argues that despite the complain ants’ 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 examinati on 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   
5.54. 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 un der the dissimilar set of facts of the Japanese case. 
Korea and Japan: differences betw een their products and markets 
5.55. According to Korea, the first noticeable differe nce between soju and shochu is taste.  Korea 
argues that Japanese shochu has a neutral taste compared to Korean soju, which is sweeter.44  
                                                      
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 add itives whereas shochu only has up to two (citric acid 
and sugar). Korea notes that this distinction is not recogn ised in the 'test report’ by the Scotch Whisky Research 
Institute, appended as EC Annex 8.  Kor ea further notes that according to this 'test report’, Korean standard soju WT/DS75/R 
WT/DS84/R Page 28 
 
 Consumers easily recognise that taste difference;  Koreans prefer soju and will not accept shochu as a 
substitute; the Japanese feel th e same way about shochu.  
5.56. Secondly, according to Korea, soju is allegedly only drunk straight at a cold temperature.  In 
Japan, on the other hand, different consumption patte rns exist for the consumption of shochu: one can 
drink it straight or mixed with warm or cold water.
45 
5.57. 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 Jinr o, 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 resi dents in Japan.  This 
brand is only distributed to Korean restaurants a nd Korean supermarkets in Japan.  The second brand, 
Jinro Export, targets Japanese cons umers and represents the bulk of Ji nro'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. 
5.58. 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 ar gues is incorrect.  According to Korea, when 
Korean standard soju (such as Jinro Gold) is expor ted 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 fo r Korean standard soju exports is higher than 
for 'Korean shochu' exports.50    
5.59. Korea also argues that there are notable differe nces in the way shochu is marketed in Japan 
and the way that standard soju and distilled soju ar e marketed in Korea.  Shochu is marketed more 
like western-type liquors that can be drunk as cocktails.   
5.60. Korea further argues that Japanese shochu produ cers even make a shochu A (the standard 
version) that is aged and is brown in colour, and th ey 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   
5.61. Korea contends that another important differe nce is the pricing structure of the Japanese 
market.  Shochu B (the distilled version) and sh ochu A are similarly priced, and are selling in 
comparable volumes. This contrasts to the Korean so ju 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 
                                                                                                                                                                     
and Japanese standard shochu are 'like’ products (see para. 5).  Thus, Korea concludes the report is not relevant 
because it does not distinguis h the different additives.   
45 Korea argues that this difference is further illustra ted 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 dr unk 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.)  WT/DS75/R 
 WT/DS84/R 
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Korean market distilled soju takes up 0.2% of the so ju market and standard soju takes up 99.8% of the 
market. 
5.62. Korea notes that as the European  Communities argued in the Japan - Taxes on Alcoholic 
Beverages II case, the prices of imported liquors and Japanes e 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 
5.63. In its rebuttal submissions, the European Co mmunities 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 Appe llate Body Reports on  Japan  -  Taxes on Alcoholic 
Beverages II .55  The EC view is that Korea unjustly a ccuses 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.  
5.64. According to the European Communities, the pr esent dispute must be determined on its own 
merits. The EC view, however, is that this Pane l 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: 
Adopted Panel reports are an im portant part of the GATT acquis. They are often considered 
by subsequent Panels. They create legitimate  expectations among members, and, therefore 
should be taken into account where they are relevant to any dispute.56 
5.65. The EC position is that it has demonstrated th at the two Panel reports and the Appellate Body 
report on Japan - Taxes on Alcoholic Beverages   II are particularly relevant for the present dispute 
because: 
(a)  the tax measures are very similar;  (b)  the products concerned are the same; and  
(c)  there is no fundamental difference be tween the Japanese market and the Korean 
market. 
The European Communities argues that Korea fails to refute any of those similarities. 
5.66. 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 co ncerning 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   
                                                      
52 Panel Report, para. 4.82. 
53 EC Annex 13, p.20. 
54 Panel Report on Japan - Taxes on Al coholic Beverages I , supra . 
55 Panel Report on Japan - Taxes on Al coholic 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 WT/DS75/R 
WT/DS84/R Page 30 
 
 5.67. According to the United States, it is well establis hed that the issue of what is a "like" or 
"directly competitive or substitutable" product for pu rposes 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 Ko rean markets, this Panel should consider that 
the conclusions of the panel concerning the produc ts, measures, and extent of competition in the 
Japanese market can also be reasonably drawn with respect to the facts presented here. 
5.68. The United States notes that Korea has contested  any similarities between soju and shochu, 
and between the Korean and Japanese markets and di sputes the US point that soju and shochu are 
"identical."  According to the United States, wh ile 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: 
These [shochu/soju] products have the following common three features:  First, they 
use grains or potatoes as the base material, wh ich is readily available at low cost in 
this part of the world.  Second, they have  a relatively low alcoholic strength. . . .  
Third, they are consumed directly after distillation.  They do not normally undergo 
further post-distillation processing.59 
5.69. 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. 
5.70. The United States further argues that, even usi ng the marketplace approach, the similarities 
between the present Korean market and the Jap anese 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-givi ng more frequently than the local product, although 
in this dispute, Korea has characterized distille d 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 ta x disparities.  The United States notes for instance, 
that US exports of Bourbon to Japan have incr eased from 6.3 million litres in 1987 to 12.2 million 
litres in 1997 due to 1989 reforms in the Japanese li quor 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. 
5.71. The United States also notes that the evolution of the marketplace in Korea and Japan also 
bears great similarity.  Only a decade ago, Japanese "izakayas" (the Japanese equivalent of traditional 
Korean restaurants) used to serve only shochu, sake and beer, whereas western style "snack bars" 
would serve western distilled spirits, but not shochu.   Today, shochu and west ern distilled spirits are 
usually available at both the "izakayas" and "snack  bars."  Korea is beginning to resemble the 
Japanese market of today, with increasing availabilit y of western spirits in traditional, casual Korean 
restaurants and bars.  According to the United States,  Korea’s greater constraint of choice of distilled 
                                                                                                                                                                     
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.  WT/DS75/R 
 WT/DS84/R 
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spirits availability in various bar and restaurant ve nues bears a closer resembla nce to Japan before its 
last round of market liberalization in 1989.   
5.72. The United states notes that the marketplace does reveal some differences between Korea and 
Japan.  The market for Western sp irits in Korea is predominantly served by one type of imported 
spirit (whisky), while Japan has matured into a mark et for many types of imported spirits, with the 
most recent spirit to become popular being tequila.  According to the United States, Korean consumption patterns are much more fixed in traditi onal, family-type restaurants than in Japan, where 
a wider range of distilled spirits is consumed.  However, most of these differences between 
shochu/soju consumption in Korea and Japan are a function of market maturity and evolution of 
drinking tastes and styles.  
5.73. The United States further states that Korea h as conceded that it classifies both soju and 
shochu in the same HS classification at the eight-dig it level -- item 2208.90.40. The fact that Korean 
manufacturers may export two kinds of soju to Japan (namely, Jinro Gold and Jinro Export) does not make these products any less similar.  It is common  for companies to modestly differentiate their 
products in order to meet the needs of different sets of consumers -- one ve rsion for expatriates and 
another, seasoned differently, to meet local tastes and customs.   Korean manufacturers do the same when they market two versions of soju in Japan.  In fact the differences in the two kinds of soju 
exports probably reflect Japanese laws and cost consid erations more than anything else.   Most of the 
additives in Korean soju are sw eeteners with varying thickening qualities (fructose, oligosaccharide 
and stevioside) -- functions served by sugar in the version for Japanese consumers.  Most importantly 
though, these are clearly additives, as opposed to ingredients.  Liquor laws around the world, 
including Korea’s, recognize the distinction by placi ng a limit on the percentage of sugar that may be 
added to a distilled spirit (on the order of 2 per cent), after which it becomes yet another competitive 
product, a liqueur.   At the same time, there is no requirement in Korean law to use any sweetener at 
all in soju, thus making it possible for soju to cont ain no additives at all.  Korea also classifies soju 
and shochu identically for both tax and tariff purposes. 
5.74. Furthermore,  according to the United States, Ko rea’s reliance on differences in the additives 
between shochu and soju as establishing that they are fundamentally different is contradicted by its 
description of premium soju.  Even though premium so ju differs from standard soju by its additives, 
such as honey, Korea states that premium soju is “only an upgraded version of standard soju.” Why are differences in additives critical in the context of  vodka and shochu, but irrelevant with respect to 
premium and standard soju?   Clearly, Korea’s conclusion concerning premium soju is the legally 
correct one:  such additives should not be deci sive in examining these products under Article III. 
C. T
HE BURDEN OF PROOF  
1. Korea 
5.75. Korea proceeds from the premise that to prove a vi olation of the first sentence of Article III:2, 
the Appellate Body in the Japanese Liquor Taxes case cl early stated that there are two limbs that must 
be proved by the complainant. First the complainan ts must prove that the products concerned are in 
fact 'like’. Secondly, the complainants must prove  that the imported product was taxed in excess of 
the domestic 'like’ product. 
5.76. According to Korea, regarding Article III:2 second sentence, the complainants must prove 
three things: first, that the imported and domestic products are directly competitive and substitutable 
products, second, that foreign products are subject  to tax differentials that are more than 'de minimis' , 
and third that tax was applied 'so as to af ford protection’ to domestic production. WT/DS75/R 
WT/DS84/R Page 32 
 
 5.77. Korea further argues that under both the firs t sentence and second sentence, the obligation 
rests on the complainant to prove all the requirement s of the respective sentences.  In Korea's view, 
this burden cannot be discharged by making inadmiss ible analogies to another case and another set of 
facts. Korea emphasizes that the burden must be di scharged with regard to the facts of the case at 
hand. 
5.78. According to Korea, the Panel can make no ru ling about the tax rates of all products falling 
under HS 2208 in the abstract. Therefore, the complainants must prove, on a product-by-product basis, that the products at issue are directly comp etitive or substitutable, or even 'like’, products.  
5.79. Korea points out that the complainants have only submitted evidence regarding a limited 
number of imported alcoholic drinks falling under HS 2208: whisky, brandy, vodka, gin, and rum.  
They have also mentioned by name a few othe r, though by no means all, alcoholic beverages 
(liqueurs, tequila, ad mixtures, koryangju, Japanese shochu) covered by HS 2208, without providing 
an intelligible argument or evidence in their regard.
60  In Korea's view, the complainants have not met 
their burden of proving that these are 'like', or directly competitive or substitutable products with the 
Korean sojus.  
5.80. Korea submits that the complainants' principa l and theoretical argument that all distilled 
spirits necessarily compete everywhere in the wo rld, because of some similarities in physical 
characteristics and end use, runs counter to  the controlling preceden t. This precedent, Japan – Taxes 
on Alcoholic Beverages II , clearly requires a concrete market anal ysis. Furthermore, to the extent the 
complainants have analysed the Korean market, this analysis is demonstrably poor.  Accordingly, the 
complainants have not met their burden of proof; and they cannot meet their burden by quibbling with 
Korea's positions.  
5.81. Korea submits that it is not up to Korea to pr ove that the western-style liquors are not DCSP 
or 'like' any of the Korean sojus. It is up to the complainants to show  that they are.   Korea does not 
need to prove that there is no cross-elasticity of demand.  In Korea's view, the complainants brought 
this case; they ought to carry their burden of provi ng that such cross-elasticities exist.  All Korea has 
to do is rebut the proof brought by the complainants.61  
5.82. Korea further argues that there is not much  evidence in the complainants’ documents.  
According to Korea, the complainants make many assertions without any attempt at evidence.  Korea 
further argues that, absent an intelligible argument and supporting evidence, Korea has had no way to 
defend itself so that this part of the complaint al so infringes a fundamental principle of due process.62  
5.83. Korea therefore submits that the Panel should re ject any such broad-ranging complaints out of 
hand. 
                                                      
60 Korea argues that these products are granted only the most perfunctory mentions by the EC and the 
US. They do not even figure on the co mparative charts that the US and EC have provided (see, for example, EC 
Annex 9, which only shows standard soju, distilled so ju, whisky, brandy, gin, and rum, and the US first 
submission, table at page 20, which only shows whisky, brandy, gin, rum, vodka, soju and shochu).  
61 According to the European Communities, this case is not like  US - Measure Affecting Imports of 
Woven Wool Shirts and Blouses from India , adopted on 23 May 1997, WT/DS33/AB/R.  & WT/DS33/R  . There 
the defendant bore the burden of proof in invoking an exception  to the GATT. 
62 See India-Patent Protection for Pharmaceutical and Agricultural Chemical Products , adopted on 16 
January 1998, WT/DS50/AB/R, at p. 33 (Korea states that due process is a principle implicit in the WTO 
Dispute Settlement Understanding).  WT/DS75/R 
 WT/DS84/R 
 Page 33 
 
 
2. Complainants 
5.84. The European communities notes that Korea a lleges that it has only submitted evidence 
regarding a limited number of impor ted alcoholic beverages  (namely whisky, brandy, vodka, gin and 
rum) and claims that the Panel should reject the EC  complaint as far as other distilled spirits falling 
within HS 2280 are concerned.   
5.85. According to the European Comm unities, Korea’s claim is factually wrong.  In the EC view, 
Korea appears to have derived its list of products from Annex 9 of th e EC submission, yet that Annex 
is by no means the only piece of evidence submitted by  the EC in this case.  Other pieces of evidence 
submitted by the European Communities allegedly do cover specifically other types of distilled 
spirits.  
5.86. In particular, the European Communities takes issue with the proposition that, in order to 
meet its burden of proof in this case, it is require d to provide specific evidence with respect to each 
and every single type of  dis tilled liquor falling within HS 2208. 
5.87. The European Communities refers to Korea's a ssertion that, "if one travels around the world, 
one will encounter a seemingly infinite variety of alc oholic beverages."  In the EC view, even a much 
shorter trip within the borders of the EC would su ffice to convince the Panel of the large variety of 
distilled spirits produced in the EC. 
5.88. According to the European Communities, had th e EC submitted specific evidence with regard 
to each and every known type of distilled spirit manufactured in the European Communities, the Panel 
would have been unnecessarily overburdened.  Further,  the EC view is also that in some cases it 
would have been materially impossible to gather su ch evidence.  The Europ ean Communities refers to 
one of the criticisms levelled by Korea against th e Dodwell study, that the respondents may have been 
confused by an allegedly too complex set of questions.  What, asks th e European Communities , if the 
respondents had been asked to look at the prices of forty or fifty different types of western distilled 
spirits instead of just seven? 
5.89. The European Communities reiterates that all distilled spirits are produced according to the 
same method and, as a result, share the same b asic physical characteristics.  The European 
Communities states that the distilled spirits for which it has submitted specific evidence are those 
traded in largest volumes, both between the Europ ean Communities and Korea, and globally.  They 
are allegedly representative of the full spectrum of distilled spirits.  According to the European 
Communities, there is virtually no distilled spirit whose production process and physical 
characteristics do not resemble closely those of at least one of the spirits for which the EC has 
provided specific evidence.  
5.90. The European Communities concludes, therefore, that if the Panel found, as it should, that 
those spirits for which specifi c evidence has been submitted are "directly competitive and 
substitutable" with soju, it should infer that all ot her distilled spirits falling within HS 2208 also are 
"directly competitive and substitutable" with soju. 
5.91. According to the European Communities, this approach has been endorsed by the Appellate 
Body in Japan - Taxes on Alcoholic Beverages II.   In that case, the complainants claimed that shochu 
was "directly competitive or substitutable" with a ll other distilled spirits falling within HS 2208. 
Nevertheless, like the complainants  in this case, they submitted speci fic evidence only with respect to 
a limited number of representative spirits.  The Panel concluded that only certain  spirits falling within 
HS 2208 were "directly competitive or substitutable" with shochu.63  According to the European 
                                                      
63 Panel Report, para. 7.1. WT/DS75/R 
WT/DS84/R Page 34 
 
 Communities, on appeal, this finding was reversed by the Appellate Body which ruled that the Panel’s 
failure to incorporate in its conclusions all the li quors falling within its term s of reference (i.e. all 
distilled spirits falling within 2208)  was an error of law.
64  
5.92. The United States noted Korea’s claim that pr oduct-specific evidence must be submitted for 
every conceivable type of distilled spirit classified  under Heading 2208.  The United States clarified 
that the Dodwell study covered the full spectrum of di stilled spirits in this dispute and those currently 
being exported by the United States. While there ma y be other products of importance, such as pre-
mixed cocktails and admixtures, these are only varia tions of the products employed in the Dodwell 
study.  There is no distilled spirit produced in the Un ited States that is not akin to those employed in 
the Dodwell study.   
5.93. More importantly, argues the United States, gi ven the fundamental similarities between all 
distilled spirits,  it is not necessary to provide speci fic evidence, even less a market study, for every 
conceivable product that might fall within HS head ing 2208.  The products are all fairly highly 
concentrated forms of distilled alcohol consumed for socialization and relaxation, and all markets 
recognize them as being in competition.  The Ko rean measures themselves group these products 
together in the same law, mostly as exceptions to soju.  In the Korean tax law, to the extent the 
Western spirits are not designated in specific cate gories such as whiskey and brandy, most are lumped 
in the general category of “general distilled spirits,”65 with the same tax rate.  Given Korea’s own 
recognition of the similarities of the products, and the other evidence presented in this dispute that the 
products in the Dodwell study are directly competitive or substitutable with soju, it is reasonable to 
conclude that all imported distilled spirits ar e equally so.   The Appellate Body in the Japan  case took 
precisely this approach.  In the Japan  case, the panel had not included all products within HS heading 
2208 in its findings under Article III:2, second senten ce, having specified only whisky, brandy, rum, 
gin and liqueurs.66  The Appellate Body found the limited fi nding was in error and modified it to 
include all distilled spirits in HS 2208.67 
D. ARTICLE III ARGUMENTS  
1. Complainants 
5.94. In this sub-section, the arguments of the European Communities and the United states are 
combined as the arguments of the "complainants". 
(a) GATT Article III:2, first sentence 
i) General 
5.95. The complainants draw the attention of the Pa nel to GATT Article III:2,  first sentence,  
which provides 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" 
                                                     
 
64 Appellate Body Report, p. 26. 
 65  Korean Liquor Tax Law, Article 3.9. 
 66  Panel Report in Japan  – Taxes on   Alcoholic Beverages II , supra .,  at para. 7.1 
 67 Appellate Body Report in  Japan –Taxes on Al coholic Beverages II , supra ., at pp. 26, 32.  WT/DS75/R 
 WT/DS84/R 
 Page 35 
 
 
5.96. The complainants state that as confirmed by the Appellate Body in Japan - Taxes on 
Alcoholic Beverages II ,68  in order to establish whether an internal  tax is applied in violation of Article 
III:2,  first sentence,  it is neces sary to make two determinations: 
(i) whether the taxed imported and domestic products are "like"; and 
(ii)  whether the taxes applied to the importe d products are "in excess of" those applied to 
the like domestic products. 
5.97. According to the complainants, before maki ng those two determinations,  it must be 
ascertained whether the taxes in ques tion constitute an "internal tax". 
5.98. The complainants refer to the d ecision by the Appellate Body in Japan - Taxes on Alcoholic 
Beverages II ,  wherein the Appellate Body stated that th e general principle contained in Article III:1 
informs also the first sentence of Article III:2. Nevert heless, in order to establish a violation of Article 
III:2, first sentence,  it is not necessary to show that  the measure at issue is applied "so as to afford 
protection to domestic production" sep arately from the above requirements.69 
ii) The Liquor Tax and the Education Tax  are "internal taxes" 
5.99. The complainants state that the Liquor Tax and the Education Tax are levied on all distilled 
spirits and liqueurs intended for consumption in Korea, whether locally manufactured or imported, 
and not just "on" or "in connection" with the importa tion of distilled spirits and liqueurs. Accordingly, 
in the EC view, they constitute "internal taxes"  in terms of GATT Article III:2, and not "import 
charges"  within the purview of GATT Articles II and VIII. 
iii) Vodka  is "like" soju 
5.100.  The complainants state that GATT does not define  the notion of "like product".  According to 
the complainants, the approach followed by previous  Panels  has been to examine whether products 
are "like" on a case-by-case basis in light of factors such as the physical characteristics of the products 
concerned, their end uses and their customs classi fication. This approach was endorsed expressly by 
the Appellate Body in Japan -  Taxes on Alcoholic Beverages  II70 and in Canada - Certain Measures 
Concerning Periodicals .71 
5.101.  The complainants note that in the same reports the Appellate Body held that the terms "like 
products" should be construed "n arrowly" for the purposes of Article III:2, first sentence72.  The 
complainants further notes that "like" produc ts need not be identical in all respects73.  Thus, it has 
been established by a previous Panel th at in the case of alcoholic beverages: 
                                                      
 68 Ibid. at pp.18-19. See also Appellate Body Report on Canada - Certain Measures Concerning 
Periodicals , supra . 
69 Appellate Body Report on  Japan - Taxes on Alcoholic Beverages II , supra ., pp. 18-19. See also 
Appellate Body Report on European Communities – Bananas III , supra ., para 216. 
70 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II , supra ., p.20. 
71 Appellate Body Report on Canada - Certain Measures Concerning Periodicals , supra ., p. 21.  
72 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II , supra ., pp 19-20; See also 
Appellate Body Report on Canada - Certain Measures Concerning Periodicals , supra ., p.21 
73 See Panel report on Japan - Taxes on Alcoholic Beverages  II , supra ., para 6.21.  See also  the Panel 
Report on Japan - Taxes on Alcoholic Beverages I , supra, para 5.5, referring to the Panel Report on United 
States - Taxes on Petroleum and Certain Imported Substances , supra, para 5.11, where the Panel found that 
some of the imported and domestic products, albeit not identical, were like products since they served substantially the same uses.  WT/DS75/R 
WT/DS84/R Page 36 
 
 
[m]inor differences in taste, colour and other properties (including different alcohol contents) 
do not prevent products from qualifying as like products.
74 
5.102.  The complainants take the position that in this  instance, vodka and soju are "like" products 
because they have the same physical characteristics and, consequently, are objectively apt to serve 
identical end uses.  Furthermore, according to th e complainants, Korean soju is the same liquor as 
Japanese shochu, which has already b een found by the two Panels on Japan - Taxes on Alcoholic 
Beverages  to be "like" vodka. 
(a) Soju  and vodka have virtually the same physical characteristics and, therefore, 
serve for the same end uses  
5.103.  According to the complainants, the essential characteristics of vodka and soju can be 
summarised as follows: 
     Table 3  
   Vodka    Distilled soju   Diluted soju  
Raw materials     Potatoes, grains  Potatoes, grains  Neutral spirits 
   Neutral spirits  
Process    Continuous  Pot Still   Continuous  
Distillation   distillation  distillation  Charcoal filtration excluded 
Usual bottling strength  37.5-40% ABV  40-45% ABV  20-30% ABV 
Appearance   Clear   Clear   Clear  
 
5.104.  According to the complainants, from  the above  table, it emerges that the main differences 
between soju and vodka are confined to the following: 
(i)  diluted soju is usually bottled at an alcoholic strength of 25 % ABV whereas vodka is 
sold at 37.5%-40% ABV 
(ii)  unlike vodka, distilled soju is obtaine d by non-continuous distillation and cannot be 
filtered through white birch charcoal, alt hough it can be filtere d through any other 
materials. 
5.105.  At the request of the EC industry, the Scot ch Whisky Research Institute has conducted a 
series of analyses on a sample of well known bra nds of soju and vodka, which prove that the 
manufacturing processes and the physical character istics of the two liquors are nearly identical75 
According to the European Comm unities the analyses indicate that: 
(i)  all the sampled brands had been fermented from similar carbohydrate sources; 
(ii)  all of them had been distilled to concentrate alcohols; (iii)  none had been matured in wood post-distillation; (iv)  none contained significant levels of residue; 
                                                     
 
74 Panel Report on Japan - Taxes on Alco holic Beverages  I , supra ., para 5.9. 
75 See EC Annex 8  WT/DS75/R 
 WT/DS84/R 
 Page 37 
 
 
(v)  none had significant levels of obscuration; 
(vi)  the major volatile congeners were at sim ilar levels in vodka a nd diluted soju.  They 
are only marginally higher in distilled soju; and 
(vii)  all contained similar levels of methanol. (b)  The differences between vodka and soju  are the same as between vodka and 
Japanese shochu  
5.106.  According to the complainants , the differences between vodka and soju are clearly minor and 
do not prevent soju and vodka from being "like" produc ts.  In the EC view, the existence of the very 
same differences between vodka and Japanese s hochu did not prevent the two Panels on Japan - 
Taxes on Alcoholic Beverages   from reaching the conclusion that t hose two liquors were "like" in the 
sense of Article III:2, first sentence. 
5.107.  The complainants state that the average alcoho lic strength of shochu A is, as that of Korean 
diluted soju, around 25%. In spite of that, notes the complainants, the two Panel Reports on Japan - 
Taxes on Alcoholic Beverages  concluded that shochu A was like vodka. The Panel Report on  Japan - 
Taxes on Alcoholic Beverages II   noted in this regard that: 
"... a difference in the physical characteristics of  alcoholic strength of two products did not 
preclude a finding of likeness especially since alcoholic beverages are often drunk in the diluted form..."
76 
5.108.  The complainants further note that like dis tilled soju, both shochu B and shochu A may not, 
by law, be filtered through white birch charcoal.  In addition, the complainan ts note that the Japanese 
Liquor Tax Law requires that shoc hu B must be obtained through discontinuous distillation.  In the 
EC view, however, these differences were not an obstacle for the Panel Report on Japan - Taxes on 
Alcoholic Beverages II  to conclude that both types of shochu were like vodka.  
(c)  Korean soju is treated as shochu in Japan  
5.109.  As mentioned above, Korean soju is exported in  large quantities to Japan , where it is treated 
for all purposes as being the same product as shochu.  Diluted soju corresponds to  Japanese shochu A,  
whereas distilled soju is the equivalent to Japanese shochu B. 
5.110.  The complainants note that in Japan -  Taxes on Alcoholic Beverages II , the Japanese 
Government stated that:  
"... the largest producer of shochu is either th e Republic of Korea or the People's Republic of 
China ... the liquor tax legislation of the Republic  of Korea defines soju in two sub-categories 
of 'diluted soju', which is equi valent to shochu A, and 'distilled soju', which is equivalent to 
shochu B, in a manner similar to Japan's defin ition. Essentially, shochu and soju are identical 
products 77." 
5.111.  The complainants further note that in res ponse to these claims, the Panel "accepted the 
evidence submitted by Japan according to which a shochu-like product is produced in various 
countries outside Japan, including the Republic of Korea..."78  In the US view, the similarities in the 
                                                      
76 Panel Report on Japan - Taxes on Al coholic Beverages II , supra ., para 6.22 
77 Panel Report on Japan - Taxes on Al coholic Beverages II , supra ., para 4.178. 
78 Ibid., para 6.35. WT/DS75/R 
WT/DS84/R Page 38 
 
 way Japanese shochu and Korean soju are advertised  further confirm the "equivalence" of these 
products. 
5.112.  The complainants conclude that the "likeness" of  soju and shochu is further confirmed by the 
results of the analytical tests conducted by the Scotch Whisky Research Institute.
79 
iv) Imported vodka is taxed "in excess of" soju 
5.113.  The complainants argue that the prohibition of  discriminatory taxes in Article III:2, first 
sentence, is not conditional on a trade effects test nor is it qualified by a de minimis standard80.  The 
complainants refer to the Appellate Body in Japan -Taxes on Alcoholic Beverages II , which stated 
that "even the smallest amount of 'excess' is too much"81. 
5.114.  The Table below is presented by the complain ants purportedly to summarise the differences 
in taxation between vodka and soju. It purporte dly indicates that both the Liquor Tax and the 
Education Tax are applied to vodka at a much higher ra te than to diluted soju and distilled soju. In all, 
the combined tax rate applied on vodka is 1.9 times  higher than the combined rate on distilled soju 
and 2.7 times higher than the combined tax rate on diluted soju. 
Table  4  
Comparison of the tax rates on soju and vodka  
  Liquor Tax  Education Tax   Combined Tax Rate  Discrimination Index   
    (As % of Liquor     Tax Base) Diluted soju  35 %  3.5 %  38.5 %   1.00  
Distilled soju  50 %  5 %  55 %   1.43/1.00 
Vodka   80 %  24 %  104 %   2.70/1.89 
 
5.115.  The complainants conclude that it is indisput able that the taxes applied to imported vodka 
pursuant to both the Liquor Tax Law and the Education Tax Law are  "in excess of"  those applied to 
soju. 
(b) GATT Article III:2, second sentence 
i) General 
5.116.  The complainants note that GATT Article  III:2, second sentence, reads as follows: 
[M]oreover, no contracting party shall otherwi se apply internal taxes or other internal 
charges to imported or domestic products in  a manner contrary to the principles set 
forth in paragraph I.  
5.117.  The complainants further note that GATT Ar ticle III:1 provides in relevant part that: 
The contracting parties recognise that inte rnal taxes .... should not be applied to 
imported or domestic products so as to afford protection to domestic production. 
                                                     
 
79 See  EC Annex 8. 
80 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II ,  supra ., p. 23. 
81 Ibid.  WT/DS75/R 
 WT/DS84/R 
 Page 39 
 
 
5.118.  The complainants further note that the Inte rpretative Note to Article III:2 states that: 
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. 
5.119.  According to the complainants, in Japan - Taxes on Alcoholic Beverages II ,82 the Appellate 
Body confirmed that in order to determine whether an  internal tax measure is inconsistent with Article 
III:2, second sentence it is necessary to  address the following three issues: 
(i) whether the imported products and the dom estic products are "directly competitive or 
substitutable products" which are in  competition with each other; 
(ii) whether the directly competitive or subs titutable imported and domestic products are 
"not similarly taxed"; and 
(iii) whether the dissimilar taxation of the directly competitive or substitutable imported 
products is "applied ... so as to afford  protection to domestic production". 
5.120.  The European Communities in particular note that , in addition, it must be determined whether 
the measures at issue are "internal taxes". As already discussed above in connection with the 
application of Article III:2, first sentence, both the Liquor Tax and the Education Tax are internal 
taxes within the meaning of Article III:2,  rather  than import charges within the purview of GATT 
Articles II and VIII. That conclusion, in the compla inants' view, is equally valid for the purposes of 
applying Article III:2, second sentence. 
ii) Soju and all other distilled spirits and liqueu rs are competitive and substitutable products 
5.121.  According to the complainants, in Japan - Taxes on Alcoholic Beverages II , the Appellate 
Body stated that a determination whether two pr oducts are "competitive or substitutable" must be 
made on a case-by-case basis and in light of  "all the relevant facts in that case".83 
5.122.  The complainants further argue that in the same report, the Appellate Body found that in 
deciding whether two products are directly competitive  or substitutable, it may be appropriate to look 
not only at such matters as physical characteristi cs, end uses and customs classification but also "at 
competition in the relevant markets".84  In doing so, it is appropriate,  according to the Appellate 
Body,  to examine the "elasticity of substitution".85  
5.123.  The complainants argue that it is important to note that Article III:2, second sentence is 
concerned not only with differences  in taxation between products wh ich are actually competitive on a 
given relevant market but also with differences in taxation between products  which are potentially 
competitive.  Indeed, according to the complainants , whereas consumer tastes and habits may differ 
from one market to another, tax measures should not be used to "freeze" consumers' preference for a 
domestic product. For that reason, the complainan ts argue, evidence that two products are not 
                                                      
82 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II , supra ., p. 24;  See also 
Appellate Body Report on Canada - Certain Measures Concerning Periodicals ,  supra .,  pp. 24-25. 
83 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II , supra ., p. 25 
84 Ibid. 
85 Ibid. WT/DS75/R 
WT/DS84/R Page 40 
 
 competing actually in a market at a given point in time is not a defense if the absence of actual 
competition is due, at least in part, to the tax measures in dispute.
86 
(a) Soju and all other distilled spirits and liqueurs have the same basic physical 
characteristics and are apt for the same end uses  
5.124.  The complainants argue that the notion of "dir ectly competitive and substitutable" products is 
broader in scope than that of "like" products. Ac cording to the complainants, two products which are 
too "different" in terms of physical properties or  of end uses to qualify as "like" for the purposes of 
Article III:2, first sentence, may still be "competitiv e or substitutable" in the sense of Article III:2, 
second sentence. The complainants note that as recently recalled by the Appellate Body in Canada - 
Certain Measures Concerning Periodicals87, a case of "perfect substituta bility" would no longer fall 
within the second sentence of Article III: 2,  but within the first sentence. 
5.125.  The complainants further note that the Panel Report on Japan - Taxes on Alcoholic 
Beverages I indicated that: 
[t]he flexibility in the use of alcoholic drinks  and their common characteristics often offered 
an alternative choice for consumers leading to a competitive relationship. In the view of the 
Panel there existed - even if not necessarily in  respect of all the economic uses to which the 
product may be put - direct competition or  substitutability among the various distilled 
liquors.88  
5.126.  According to the complainants, the basic physical  properties of soju and the other categories 
of liquors concerned in this dispute are essentially  the same. All distilled spirits are concentrated 
forms of alcohol produced by the process of distilla tion.  In the complainants' view, at the point of 
distillation, all spirits are nearly identical, which means that raw materials and method of distillation 
have almost no impact on the final product. Post-d istillation processes such as ageing, dilution with 
water or addition of flavourings , do not change the basic fact that the product sold is still a 
concentrated form of alcohol. 
5.127.  The complainants present a table below which co mpares the key characteristics of soju and 
the main types of distilled sprits at issue in this di spute. This table purports to show that all of them 
have essentially the same physical characteristics. For instance, according to the complainants, the 
main differences between soju and whisky, the la rgest category after soju, are limited to the 
following: 
(i) whisky must be made, at least in part, from sprouted grain; 
(ii)  whisky has an average alcoholic stre ngth of 37-40% ABV, whereas diluted soju is 
generally sold at 25%ABV (in contrast, th e alcoholic strength of distilled soju is 
similar to that of whisky); and 
(iii)  whisky must be aged in wooden casks. 
                                                      
86 Panel Report on Japan -  Taxes on Alcoholic Beverages II , supra ., para 6.28. See also Appellate 
Body Report on Canada  - Certain Measures Concerning Periodicals , supra ., p.28. 
87 Appellate Body Report on Canada - Certain Measures Concerning Periodicals ,  supra ., p. 28. 
88 Panel Report on Japan - Taxes on Al coholic Beverages I , supra .,  para. 5.7   WT/DS75/R
 WT/DS84/R
 Page 41DISTILLED SPIRITS – COMPARISON OF PHYSICAL CHARACTERISTICS AND MANUFACTURING PROCESSES 
 WHISKY BRANDY GIN RUM VODKA SOJU SHOCHU 
Raw Material Grain Grapes Grain;  neutral 
spirits* Sugar Cane; 
Molasses Grain;  Potatoes;  
neutral spirits* Grain;  Potatoes;  
neutral spirits* Grain;  Potatoes;  
neutral spirits* 
% of Alcohol at Distillation †Less than 95% †Less than 95% †At or above 
95% †Less than 95% At or above 95% Not less than 
85% Not less than 
85% 
% of Alcohol at Bottling †Not less than 
40% †Not less than 
40% †Not less than 
40% †Not less than 
40% Not less than 
40% Not less than 
20% Not less than 
20% 
Method of Distillation Continuous or 
Pot Still Continuous or 
Pot Still Continuous Continuous Continuous Continuous or 
Pot Still Continuous or 
Pot Still 
Aged in Wooden Casks Yes Yes Yes/no Yes/no No Yes/no Yes/no 
Color Amber Amber, Clear1 Clear to Amber Clear to Amber Clear2 Clear Clear to Amber 
% of Alcohol 37-50 36-50 37-50 37-50 37-50 20-45 20-45 
Added 
Flavorings Variety3 Peach, 
Blackberry, 
Cherry, Apricot, 
Coffee Spice, Lemon Spice, Lemon Currant, Lemon, 
Orange Lemon, Honey Lemon, Variety 
of Fruit Flavors 
Body/Taste Intensity Medium  Medium Light to Medium Light to Me dium Light Light to medium Light to Medium 
 
1 Examples of clear brandies include grappa, pisco 
2 Addition of flavoring adds color, e.g. red/purple 
3US and Canadian regulations permit the addition of flavorings;  EU regulations do not 
*Vodka, gin, soju and shochu may be produced from neutral spir its, which is an alcoholic spirit distilled at not less than 95% a lcohol by volume from any material  of agricultural 
origin. 
†Based on U.S. standards of identity (Title 27 Code of Federal Regulations, part 5);  EU and other countries allow bottling of brandy at 36% and vodka, gin and rum at 37.5%, 
Australia allows whisky to be bottled at 37 per cent.  Japa n maintains no minimum alcohol requirements for these products.  WT/DS75/R 
WT/DS84/R Page 42 
 
 5.128.  The complainants argue that in practice, the above differences are even less important than 
they might appear at first sight: 
(i) soju can be made and is often made from  the same type of cereal grains as whisky, 
even if they are not sprouted; 
(ii)  whisky is often served on the rocks or mixed with water or other non-alcoholic 
beverages and is therefore consumed at a similar strength as diluted soju; 
(iii)  distilled soju can and is sometimes aged for up to two years in wooden casks. Some 
brands of diluted premium soju claim to be aged in oak barrels. 
5.129.  The complainants argue that the above differen ces are clearly not sufficient to prevent soju 
and whisky from being directly "substitutable" or "competitive" products in the sense of Article III:2, 
second sentence.  According to the complainants, the existence of si milar differences between whisky 
and Japanese shochu did not preclude the 1987 and 1996 Panels on Japan - Taxes on Alcoholic 
Beverages  from finding that those liquors were in competition on the Japanese market.
89 
5.130.  The complainants further argue that having essentially the same basic physical properties, 
soju and all the other distilled spirits and liqueurs are objectively apt to serve the same end-uses: 
(i) all of them are drunk with the same purposes: thirst quenching, socialisation, 
relaxation, etc. 
(ii)  all of them may be drunk in similar wa ys: "straight", diluted with water or other non-
alcoholic beverages or mixed w ith other alcoholic beverages; 
(iii)  all of them may be consumed  before, after or during meals; and 
(iv)  all of them may be consumed at home or in public places such as restaurants, bars, 
etc. 
5.131.  In the complainants' view, the above reasons alone  are more than sufficient to conclude that 
soju and all other distilled spirits and liqueur s are objectively "substitutable" and potentially 
"competitive" in the Korean market.  In addition, the complainants argue that there is conclusive 
evidence that, despite the distorti ons introduced by the Korean liquor tax system, competition between 
soju and other distilled liquors on the Korean market  is not just potential but, to a significant degree, 
also actual. 
(b) Soju and the other distilled spirits and lique urs are sold in the same sales  channels and 
are promoted and advertised in a similar way 
5.132.  The complainants assert that the consumption of western-style liquors used to be confined to 
upmarket restaurants and entertainment establishmen ts.  However, the argument goes, over the past 
few years western-style liquors have gained consider able distribution penetration.  According to the 
complainants, with the main exception of traditional Korean-style restaurants, where soju and other 
traditional local liquors continue to predominate,  western-style liquors are now widely available 
alongside soju in most sales channels, both for on-premise and off-premise consumption. 
                                                      
89 See Panel Reports on Japan - Taxes on Alcoholic Beverages I , supra ., para 5.7; and on Japan - Taxes 
on Alcoholic Beverages II , supra ., paras 6.28 to 6.32.  WT/DS75/R 
 WT/DS84/R 
 Page 43 
 
 5.133.  As evidence of the increasing availability of west ern-style liquors, the complainants point to a 
recent survey completed by Hankook Research in  May 1997 and covering more than 700 sales 
outlets, which allegedly found that the leading brands  of whisky were sold in a majority of outlets 
within each relevant category. More specifically, the survey established that 'Imperial', 'Passport' and 
'Dimple', the "three big" brands of whisky,  were sold in 76%, 81% and  61%, respectively,  of the 
surveyed on-premise outlets and in 64%, 98 % and 85%, respectively, of the surveyed off-premise 
outlets.
90 
5.134.  The complainants further purport to show by the photographs included in their exhibits91 that 
off-premise outlets often display soju and other dist illed sprits and liqueurs side-by-side on the same 
shelves, thus providing evidence in their view, that  both the retailers and the public regard them as 
being in competition. 
5.135.  According to the complainants, the advertising of soju, and especially of premium soju, is 
very similar to the advertising of western-style liquors and tends to emphasise precisely those characteristics which are generally attributed by Ko rean consumers to western-style liquors, such as 
pureness, mild taste, maturity, no-hangover effects, etc.
92  
5.136.  The complainants assert that likew ise, the packaging of soju, and in particular of premium 
soju, is similar to the packaging of western-style spirits and liqueurs. 
5.137.  The complainants state that, like their Japan ese 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 ti me, however, there has been, both in Japan and in 
Korea, a clear trend towards consumption of a ll 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 ve nues of consumption have also been aided by 
greater availability of all types of spirits in all sales channels. 
5.138.  The complainants further state that, to cap italize on Korean consumer's expanded awareness, 
the soju market has been creating new categories and brands of soju at a fast pace.  Most of the 
activity has been in the recently established premium soju segment.  For example, in Korea, Bohae 
Brewery first successfully used the strategy of inco rporating flavoured additives such as honey to soju 
in its Kim Sat Gat brand soju.  Kim Sat Gat was qui ckly followed by other premium sojus that also 
contained honey, or were flavoured by aging in wood.  
(c) Consumers' demand for soju has been responsi ve to the changes in the price of whisky 
5.139.  The complainants argue that there is sta tistical evidence indicating that, despite the 
competitive distortions created by Korea's liquor ta x system, demand for soju has been responsive in 
the past to changes in the prices of the other categor ies of distilled liquors, and in particular to changes 
in the price of whisky. 
5.140.  The complainants further argue that the app licable liquor tax rate on whisky has been 
progressively lowered from 200% in 1990 to 100% in 1996.  According to the complainants, during 
the same period, the applicable import customs duties were lowered from 70% to 20%. These tax and 
tariff changes were followed by a reduction of th e prices for whisky and a spectacular increase in 
sales from 11 million litres in 1992 to 27 million litres in 1996. 
                                                      
90 See EC Annex 10. 
91 See EC Annex 11 and US Exhibit G. 
92 See the advertising materials included in EC Annex 12 and US Exhibit G.  WT/DS75/R 
WT/DS84/R Page 44 
 
 5.141.  The complainants argue that, the increase in sales of whisky took place, to a significant 
extent, at the expense of soju.  A ccording to the complainants, until l ast year sales of soju have grown 
at a lower pace than overall demand for distilled spirits  and liqueurs.  As a result, the complainants 
argue, soju lost market share, mainly to the benef it of whisky.  Thus, the argument goes, whereas the 
market share of soju fell from 96.37% in 1992 to 94.39% in 1996, during the same period the share of 
whisky increased by a similar percentage from 1.53% to  3.14%.  The complainants conclude that this 
transfer of market share from soju to whisky s hows that the two liquors are in competition with each 
other on the Korean market. 
5.142.  The complainants further explain that this tr end may have reversed itself during 1997 as a 
result of the depreciation of the Korean won, the campaign of boycotts against imported products and 
the financial crisis of last autumn. According to the complainants, this reversal of market trends 
constitutes an additional proof of the substitutabilit y between soju and imported western-style liquors. 
(d) The Dodwell study shows that there is a significant degree of cross-price elasticity 
between soju and  all other distilled spirits and liqueurs 
5.143.  The complainants presented a document,
93 which purports to contain a copy of a study 
completed on 17 July 1997 for the Confederati on of European Producers Spirits by Dodwell 
Marketing Consultants Ltd in co-operation with Frank Small and Associates, Korea ("the Dodwell 
study"). 
5.144.  The complainants argue that the purpose of the Dodwell study was to test the hypothesis that 
a reduction in the prices of western-style spirits and liqueurs and/or an increase in the prices of soju 
following a change in the applicable liquor tax rates will lead to a relative in crease in the consumption 
of western-style liquors at the expense of soju. 
5.145.  According to the complainants, the research met hod used in the Dodwell study is the same as 
that followed in the ASI study, which was cited by the Panel on  Japan - Taxes on Alcoholic 
Beverages II   as one of the reasons for its conclusion th at shochu and all other spirits and liqueurs 
were competitive in the Japanese market.94 
5.146.  The complainants further state that the Dodwe ll study is based on the responses to  questions 
from a representative sample of 500 Korean spirits drinkers. The complainants also state that the 
survey-takers showed to each respondent pictures of  representative brands of soju, premium soju and 
three brown spirits (standard scotch, premium scotch and cognac) and a list of prices for each, and asked which type of beverage the respondent would most like to buy given the prices specified.   
5.147.  The complainants argue that initially, both th e proposed price for standard soju and the 
proposed prices for the other beverages were ba sed on current representative prices on the Korean 
market ("Level 1" prices).  The prices for soju we re then successively increased to "Level 2" and to 
"Level 3".  At each of the three price levels for so ju, the prices for the other beverages were reduced 
in  two steps  ("Level  2" and "Level 3").  Thus , the complainants argue that the respondents were 
confronted with nine different price combinations .  All the prices proposed to the respondents were 
within the range of the price levels which could reasonably result from the elimination of the existing 
differences in tax rates.  The same research was ca rried out also with respect to the main types of 
white spirits (gin, vodka, ru m and tequila) and liqueurs. 
                                                     
 
93 See EC Annex 13. 
94 See Panel Report on Japan - Taxes on Alcoholic Beverages II , supra ., paras 6.29 and 6.32  WT/DS75/R 
 WT/DS84/R 
 Page 45 
 
 5.148.  The complainants argue that the Dodwell study confirms that there is a significant degree of 
cross-price elasticity between soju and brown spirits, as allegedly evidenced by the following 
findings: 
(i) even very small price movements gave ra ise to significant chang es in the preferences 
of the respondents.  For example, if the cu rrent representative price of standard soju 
was increased by just 100 won (10% of the Level 1 price) and the prices for brown liquors remained the same, the share of respondents who would buy brown liquors instead of soju would increase by 8% from 15.2% to 16.4%; 
(ii)  the respondents were even more sensitive to an equivalent decrease in the price of the 
brown sprits.  For instance, if the price fo r a bottle of standard Scotch whisky fell 
from 11,500 won (Level 1) to 10,150 won (Level 2) and the price of standard soju remained unchanged, the share of standard  Scotch whisky would increase from 7.4% 
to 10% (i.e. by 35%); 
(iii)  the switch is most marked when the pr ice for soju increases and, simultaneously, the 
prices for brown liquors decline.  At current representative prices (Level 1), the share 
of consumers who prefer brown spirits to so ju (including premium soju) is 15.2%.  If 
the price of standard soju was increased by 200 won to Level 3 and, at the same time, 
the prices for brown liquors fell to Level 3, the share of brown spirits would increase 
to 28.4%, i.e. by as much as 87%. 
5.149.  The complainants also argue that the Dodwell st udy shows that cross-price elasticity between 
soju and white sprits and liqueurs is also significant.  Thus, it is alleged that according to the study, if 
the price of soju was increased by 200 won to Level 3 and, simultaneously, the price for white sprits 
and liqueurs was reduced to Level 3, the share of  consumers who would prefer white spirits and 
liqueurs to soju (including premium soju) would increase from 13.8% to 23.8% (i.e. by 72 %). 
iii) Soju and other distilled spirits and liqueurs are "not similarly taxed" 
5.150.  The complainants note that, as confirmed by the Appellate Body in Japan - Taxes on 
Alcoholic Beverages ,  for two competitive or substitutable products to be deemed as "not similarly 
taxed", the difference in taxation must be more than  de minimis   
95.  The complainants further notes 
that in  the same report,  the Appellate Body held that whether any particular tax differential is or is 
not  de minimis  must be determined on a case-by-case basis96. 
5.151.  The complainants presented the following tabl e which purports to show the differences in 
taxation between each of the sub-categories of soju a nd the other categories concerned in this dispute.  
According to the complainants, the table evidences that diluted soju is taxed at the lowest combined 
rate, whereas distilled soju is taxed at a lower co mbined rate than any other category with the only 
exception of  "liqueurs". 
                                                      
95 Appellate Body Report on Japan - Taxes on Alcoholic Beverages , supra ., p. 23; 
96 Ibid. WT/DS75/R 
WT/DS84/R Page 46 
 
 
Table 5
 
Comparison of the tax rates applied to soju  
and other distilled spirits and liqueurs 
 
    Liquor Tax  Education  Combined  Discrimination   
    r a t e  ( % )   tax rate    tax rate (%)  Index   
      (% Liquor       Tax Base)   
Diluted soju    35  3.5  38.5  1.00 
Distilled Soju        50  5    55  1.43/1.00 
Whisky    100  30  130  3.38/2.36 
Brandy     100  30  130  3.38/2.36 
General distilled spirits   80  24  104  2.70/1.89 
- (containing whisky or brandy) 100  30  130  3.38/2.36 
Liqueurs      50  5    55  1.43/1.00 
Other Liquors  
-more than 25% alcohol content      80  24  104  2.70/2.36 
-less than 25% alcohol content  70  7  77  2.00/1.40 -containing whisky or brandy  100  30  130  3.38/2.36 
 
 5.152.  The complainants conclude that table 5 provid es evidence that the differences in taxation are 
in all cases far from being "de minimis" and, therefore,  that soju is not "similarly taxed".  According 
to the complainants, the combined tax rate on whis ky and brandy, for instance, is 2.36 times higher 
than the rate on distilled soju and 3.38 ti mes higher than the rate on diluted soju.  
iv) The differences in taxatio n are applied so as to afford protection to the domestic production 
of soju 
5.153.  The complainants note that in Japan - Taxes on Alcoholic Beverages II, the Appellate Body 
laid down the following approach for establishing wh ether dissimilar taxation of directly competitive 
or substitutable products is applied "so as to  afford protection to domestic production": 
we believe that an examination in any case of whether dissimilar taxation has been applied so 
as to afford protection requires a comprehensiv e and objective analysis of the structure and 
application of the measure in question on dom estic as compared to imported products. We 
believe it is possible to examine objectively the underlying criteria used in a particular measure, its structure, and its overall applica tion to ascertain whether it is applied in a way 
that affords protection to domestic products. 
Although it is true that the aim of a measure may not be easily ascertained, nevertheless its 
protective application can most often be discer ned from the design, architecture and revealing 
structure of a measure. The very magnitude of the dissimilar taxation in a particular case may be evidence of such protective application, ... Most often, there will other factors to be 
considered as well. In conducting this inquiry, pa nels should give full consideration to all the 
relevant facts and all the circumstances in any given case.
97  
5.154.  The complainants argue that in the present case, the following facts and circumstances 
regarding the "structure of the measures " as well as its "overall application on domestic as compared 
                                                      
97 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II , supra ., p. 29.  WT/DS75/R 
 WT/DS84/R 
 Page 47 
 
 to imported products " constitute irrefutable evidence that the Liquor Tax Law and the Education Tax 
Law are applied "so as to afford protection" to Korea's domestic production of soju.  For this 
proposition, the complainants gives the following factors: 
(i)  the very magnitude of the tax differentials; 
(ii)  the lack of rationality of the product categorisation; 
(iii)  the fact that there are virtually no imports of soju; 
 (iv)  the fact that soju accounts for the vast majority of the Korean production of distilled 
spirits and liqueurs;  
 (v) the fact that almost all whisky and brandy, as well as a significant proportion of the 
liquors falling within the categories of General Distilled Liquors and Liqueurs are 
imported; and 
 (vi)  the existence of a long history of tax discrimination and protectionism. 
(a) The magnitude of the tax differentials 
5.155.  The complainants argue that in Japan - Taxes on Alcoholic Beverages II , the Appellate Body 
found that the very magnitude of the difference in taxation between shochu an d other distilled spirits 
and liqueurs was sufficient evidence to conclude th at the Japanese Liquor Tax Law was applied so as 
to afford protection to the domestic production of shochu.
98 
5.156.  According to the complainants, the situation is si milar in the present dispute.  It argues that 
the tax differentials between soju and other distill ed spirits and liqueurs are so large that they 
constitute sufficient evidence in themselves that the Liquor Tax Law and the Education Tax Law are 
applied so as to afford protection to the domestic production of soju. 
5.157.  The complainants state that the tax differentials at issue in this dispute appear to be even 
bigger than those taken into consideration by the Panel and the Appellate Body in Japan - Taxes on 
Alcoholic Beverages II .99  They add that, it must be recalled that  the tax differentials between soju and 
other distilled spirits and liqueurs would be much larger but for the successive changes introduced by 
Korea since 1990 in response to pressure from the Community. 
(b) The product categorisation is arbitrary 
5.158.  The complainants are of the view that the Liquor  Tax Law defines soju almost exclusively in 
negative terms, by excluding from a very broad, cat ch-all formula any type of distilled spirits which 
happen to be imported in significant quantities.  Accord ing to the complainants, the lack of specificity 
of the legal definition of soju is further attested by the overlap between that definition and the legal 
definitions of other residual categories (e.g. the sub-category defined in Article 3.9 E of the Liquor 
Tax Law).  In the complainants' view, this clearly sh ows that the application of a lower rate of tax to 
                                                      
98 Ibid. 
99 In Japan - Taxes on Alcoholic Beverages II , the taxes in dispute were specific taxes per litre of 
beverage instead of ad valorem  taxes.  This makes it extremely difficult to compare the tax differentials at issue 
in the two cases.  Nevertheless,  it is worth noting that, according to the complainants, in Japan - Taxes on 
Alcoholic Beverages II the differences in specific taxes translated into a difference in tax/price ratios between 
shochu and whisky of between 10 % and 32 % of their retail sales price (See Panel Report on Japan - Taxes on 
Alcoholic Beverages II , supra, at para 4.159). In comparison, in the present case, the tax differential between 
soju and whisky may represent as much as 91.5 % of the CIF import value of whisky.  WT/DS75/R 
WT/DS84/R Page 48 
 
 soju does not correspond to any distinguishing characte ristic of soju, but is merely aimed to afford 
protection to Korea's domestic  production of distilled spirits. 
5.159.  For instance, the complainants argue that accord ing to their respective legal definitions, the 
only difference between diluted soju and gin is that  the latter has juniper berries and plant flavourings 
added before distillation
100.  However, according to the compla inants, this obviously minor difference 
entails a tax differential equivalent to more than 90%  of the import CIF value of a bottle of imported  
gin.  In the complainants' view, this huge tax diffe rential is clearly disproportionate and can only be 
explained as being aimed at affording prot ection to the domestic production of soju. 
(c) Domestic soju is "isolated" from imports of soju 
5.160.  The complainants further note that in Japan - Taxes on Alcoholic Beverages II , both the Panel 
and the Appellate Body noted that: 
"... the combination of customs duties and intern al taxation in Japan has the following impact: 
on the one hand, it makes it difficult for foreign-produced shochu to penetrate the Japanese market and, on the other, it does not guarant ee equality of competitive conditions between 
shochu and the rest of 'white' and 'brown' sp irits. Thus, through a combination of high import 
duties and differentiated internal taxes, Japan  manages to 'isolate' domestically produced 
shochu from foreign competition, be it foreign pr oduced shochu or any other of the mentioned 
white and brown spirits".
101  
5.161.  According to the complainants, the situation is similar in the present case.  The complainants 
argue that Korean soju is effectively "isolated" fro m competition from foreign soju.  It is alleged that 
imports of soju into Korea have always been neglig ible.  It is argued that in 1997 for instance, the 
imported volume of soju was just 1,625 litres, which allegedly represents barely  0.0002% of  the total 
soju sales in Korea.  According to the complainants, therefore, it is i ndisputable that by favouring soju 
vis-a-vis other liquors, Korea protects a "domestic production". 
5.162.  The complainants further argue that Korean so ju is even more "isolated" from imports of 
foreign soju than Japanese shochu was from foreign shochu in  Japan - Taxes on Alcoholic Beverages .  
It is argued that in that case, Japan could point to  the existence of a significant, even if small in 
relative terms, flow of shochu imports (between 1-2%).   In contrast, it is argued that imports of soju 
into Korea are virtually non-existent. 
5.163.  The complainants assert that as in the case of shochu in  Japan - Taxes on Alcoholic 
Beverages II ,  one of the reasons why Korean soju is "i solated" from imports of foreign soju is the 
high level of the import duties on that product. It is argued that currently, the bound rate on soju is 
79% and the applied rate 30%.  In co mparison, it is alleged that in Japan - Taxes on Alcoholic 
Beverages II ,  the bound and applied rates on shochu were  26.7% and 17.9%, respectively.  It is 
further argued that the applied import duty rate on soju (30%) is higher than the applied rate on any 
other category of distilled spir its and liqueurs (15%-20%). 
                                                      
100 See the legal definitions of diluted soju and gin at Articles 3.1 and 3.9 C of the Liquor Tax Law, 
respectively. 
101 Panel Report on Japan - Taxes on Alcoholic Beverages II , supra ., para. 6.35, cited by the Appellate 
Body Report on the same case, supra ., p. 31.   WT/DS75/R 
 WT/DS84/R 
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(d) Soju accounts for the vast majority of the Korean production of distilled spirits and 
liqueurs 
5.164.  According to the complainants, it may be estimat ed that soju accounts for  more than 95 % of 
the Korean production of distilled spirits and liqueurs.  Thus, by applying a lower tax rate to soju,  
Korea is affording protection not just to its domest ic production of soju but more generally to its 
entire domestic industry of distilled spirits and liqueurs. 
(e) Almost all whisky and brandy sold in Korea is imported 
5.165.  The complainants argue that whereas imports of soju are almost non-existent, virtually all the 
sales of whisky and brandy, as well as a significant proportion of the sales of white spirits and 
liqueurs are imported.  In the complainants' view, th is makes the Korean liquor tax system even more 
protective in effect than the tax measures at issue in Japan - Taxes on Alcoholic Beverages I and II , 
where a majority of sales within the more taxed category of "whisky/brandy" was domestically produced. 
(f) There is a long history of tax discrimination and protectionism 
5.166.  The complainants further argue that the Korean  soju industry has traditionally benefited from 
a very high degree of protection against imports.  According to this view, until 1989 the Korean 
market for distilled spirits and liqueurs was almo st closed to imports through the combined 
application of quantitative restrictions and dissu asive import duties.  Since then, the argument 
continues, Korea has been forced to lift the im port quotas and to negotiate with the complainants a 
reduction of the applied customs duties as part of the 1993 Agreement.  The complainants assert that 
in light of Korea's past record of  protectionism in this sector,  it becomes evident that the measures at 
issue are but a last ditch attempt by Korea to con tinue to afford protection to its domestic soju 
industry against imports of western-style liquors. 
5.167.  The complainants respectfully requ est the Panel to find that:   
(i) Korea is in breach of its obligations under GATT Article III:2, first sentence, by 
applying internal taxes on imported vodka pursuant to the Liquor Tax Law and the 
Education Tax Law which are in excess of those applied on soju; and 
(ii) Korea is in breach of its obligations under GATT Article III:2, second sentence, by 
applying higher internal taxes pursuant to the Liquor Tax Law and the Education Tax Law on imported liquors, classified under HS heading 2208, currently falling within the categories of "whisky", "brandy", "gener al distilled liquors", "liqueurs" and "other 
liquors" (to the extent that they contain distilled spirits or liqueurs) than on soju, so as 
to afford protection to its domestic production of soju. 
2. Korea 
(a) General 
5.168.  Korea notes that in bringing this case before th e Panel, the United States and the European 
Communities have called into question the validity of  the Korean tax regime on alcoholic beverages, 
claiming that this regime discriminates against so me imported spirits, to the benefit of a Korean 
distilled alcoholic beverage called 'soju’, and in violation of Article III:2 of the GATT.  Korea 
concedes, as the complainants point out, that it imposes  a different rate of tax on soju than it imposes 
on certain imported alcoholic bevera ges. However, in Korea's view, not every difference in rates of 
tax amounts to a violation of Article III:2. WT/DS75/R 
WT/DS84/R Page 50 
 
 5.169.  Korea asserts that Article III:2 is perhaps the provision of the GATT that treads most heavily 
upon national sovereignty.  In Korea's view, a nati on’s taxation system is the product of a long and 
intricate domestic political process.  Korea argues that taxes are built up over years, and reflect different and evolving policy goals.  No country imposes a single rate of tax on all products.  Korea 
also notes that the GATT contains no requirement th at countries harmonise their tax systems.  Korea 
asserts that the fundamental purpose of Art. III:2 is to avoid protectionism. 
5.170.  Korea further argues that  the prohibitions of Art. III:2, while honouring their anti-
protectionist purpose, must be strictly interpreted.  In Korea's view, before the tax rates of imported 
and domestic products can be compared, the co mpetitive relationship between these two products 
must be strong, if not very strong indeed.   
5.171.  Korea's position is that according to Article III: 2, imported products ought  not be taxed less 
favourably than competing domestic products.  Kore a further argues that where products are perfect 
substitutes, or 'like', no difference in tax treatment can  be tolerated.  Where products are not 'like', but 
are still 'directly competitive or substitutable', the argument continues, there is more room for tax 
differences, as long as they do not have a protectionist effect. 
(b) The Korean Tax System 
5.172.  Korea proceeds to give an explanation of its internal tax system.  It states that it has 32 
different types of taxes, which are largely divided in to national and local taxes.  Korea further states 
that like other countries, it distinguishes between di rect taxes and taxes on goods and services.  Unlike 
some other countries in Korea the share in total ta x receipts of indirect taxes is much higher than 
direct taxes.
102 
5.173.  Korea notes that all alcoholic beverages are subject to several  taxes, such as value added tax, 
liquor tax and education tax. The latter two taxes, as  applied to certain imported alcoholic beverages, 
are disputed in this case. 
i) The Liquor Tax 
5.174.  Korea notes that the Liquor Tax Law was enacte d in 1949, and has been amended more than 
twenty times since.  An important step in the development of the Liquor Tax Law was the change 
from a specific tax system to an ad valorem  tax system in 1968.103  According to Korea, the reason for 
this alteration was mainly that the Korean legislatur e wanted to raise taxes in  proportion to the prices 
of products.  It is of some significance, notes Korea,  in view of the allegations that Korea's taxes are 
protectionist, that at the time of enactment of the Li quor Tax Law, and at the time of the change to an 
ad valorem  system, Korea had very little imports of liquor.  
5.175.  Korea notes that the parts of its Liquor Tax Law th at are relevant to this case are contained in 
the general provisions and in the chapter deali ng with imposition.  In the general provisions, a 
description is given for each drink in such way that it sets the requirements as to the content of each of the liquors in order to fit into the classification of the Liquor Tax.  The section of the law dealing with 
imposition fixes the rates which apply to each partic ular group of liquors. The descriptions in the law 
determine the different applicable rates, thus, Korea concedes imposing a different tax rate on 
standard soju and whisky. 
                                                     
 
102 In 1994, for instance, according to OECD methodology, the share of indirect taxes amounted to 
43.4% of total tax revenue in Korea, whereas the comp arable figure for the United States was 17.9%.  The 
Korean figure for 1996 (predicted) is 43.7%. 
103 In this respect, the Korean liquor taxe s differ from the li quor taxes at issue in Japan – Taxes on 
Alcoholic Beverages II , which were specific.  WT/DS75/R 
 WT/DS84/R 
 Page 51 
 
 5.176.  However, Korea argues that the complainants attempt to create the mistaken impression that 
the law's very structure reveals a protectionist intent.
104  According to Korea, the reality is different. 
For a long time, soju was the only spirit subject to liquor taxes.  Korea notes that though the law's definition was broad, it covered only what was known.  Over time, othe r spirits were marketed, and as 
they appeared, new tax categories were created.   
5.177.  Korea notes that the Liquor Tax relates to spirits and beverages containing at least 1% of 
alcohol. The persons falling under the Liquor Tax are either manufacturers of alcoholic beverages 
supplying from their factory, or importers. These pe rsons pay taxes on the basis of the price at the 
time of delivery, when the beverages are delivered from a factory, or, when the liquors are imported, 
on the basis of the CIF plus duty price. 
5.178.  Korea further notes that the applicable tax rate s on the alcoholic beverages are described in 
the Liquor Tax Law.
105 The tax system and the applicable rates have evolved over time. The 
applicable rate does not depend on the origin of the liquor.  Korea presents the following rates that 
purportedly apply to the dis tilled beverages in dispute: 
 
Drinks Ad valorem%  
Soju: 
a) standard (or 'diluted') soju b) distilled soju  
35% 50% 
Liqueurs106 50% 
General distilled spirits107 80% 
Whiskies, brandies 100% 
 
5.179.  Korea states that being a high-volume, common drink that Koreans usually consume with 
meals, standard soju is in a class of its own, and so  is distilled soju, being an artisanal drink, that is 
unique to Korea. 
5.180.  Korea notes that there is also a substantial domestic production of lique urs, general distilled 
spirits and, particularly, of whisky, that fall under the higher tax rates. 
5.181.  According to Korea, the liquor taxes are an im portant tool for the government of Korea to 
raise revenue. According to the most recently ava ilable figures, liquor taxes amounted to 3.52% of 
national tax revenues.108 Their share in indirect taxes represente d 9.08%. The largest contributor to the 
liquor taxes traditionally has been beer, which is mostly domestically produced, which accounts for 
69% of the Liquor Tax revenues in 1996. 
                                                      
104 See EC first submission, at para. 24; US first submission, at para. 24. 
105 Article 19(2). 
106 Examples of 'liqueurs’ are Insam (ginseng) ju, Ogapiju, Bailey's, Grand Marnier, and Kahlua. 
107 Examples of 'general distilled alcoholic spirits’ are koryangju, rum, gin, and vodka. 
108 This percentage is based on figures from 1996 . In the two preceding years the revenue collected 
from the liquor tax was 3.54% and 3.53%. WT/DS75/R 
WT/DS84/R Page 52 
 
 
ii) The Education Tax 
5.182.  Korea states that in addition to the Liquor Tax, an education tax is levied.  According to 
Korea, Education Tax is an earmarked tax, meani ng that the revenues collected through the Education 
Tax can only be used for the specific purpose of improving the educational system.  The Liquor Tax 
regime is not the only regime that has an Education Tax.  Korea asserts that there are ten other 
regimes to which the Education Tax is attached, such as tobacco consumption tax, property tax and 
transportation tax. Likewise, taxpayers liable for th e payment of liquor taxes are also subject to the 
education tax.  In Korea's calculation, the revenu es generated by liquors in the education tax proceeds 
amount to 12.5%.  
5.183.  Korea states that the tax basis for the Education Tax, as levied on payers of the liquor tax, is 
the Liquor Tax corresponding to each kind of drink.  The Education Tax applies as follows: alcoholic 
beverages whose ad valorem  tax rate is higher than 80% are subject to 30% education tax on the 
amount of the Liquor Tax, and alcoholic beverages with an ad valorem  tax below 80% are subject to 
10% Education Tax. 
5.184.  Korea notes that the Education Tax is levied i rrespective of the origin of the products.  The 
proceeds of the Education Tax are allocated exclusively to the improvement of Korea's educational 
system, notably at the mandatory education level from primary to middle school.  
(c) Legal Analysis 
5.185.  Korea notes that the complainants argue that b ecause Korea imposes a different rate of tax on 
'soju’ than the rate which is imposed upon a numbe r of alcoholic beverages, its tax system unfairly 
burdens imported spirits, to the bene fit of the domestic spirit 'soju’. 
i) The purpose of Article III of the GATT is to  prevent protectionism, not to harmonise taxes 
5.186.  According to Korea, Article III, perhaps more than any other provision of the GATT, steps 
into a realm which is traditionally the province of national sovereignty -- the domestic tax system.  
5.187.  Korea notes that as each Member joins the WTO, it brings with it its individual tax system, an 
intricate web of rules built up over many years reflecting a mixture of government objectives (ranging 
from social policies to the need to raise revenues).  
5.188.  Korea further states that no Member of the WTO has the same rate of internal taxation for all 
products, and the tax differences that have bu ilt up throughout the years may not always seem 
completely coherent.  However, the argument  conti nues, it is not the role of the GATT to attempt to 
render each tax system internally coherent, and nor is it the provin ce of GATT to harmonise the tax 
systems of its many Members.   
5.189.  Korea takes note of the 1992 Panel report in United States  - Measures Affecting Alcoholic and 
Malt Beverages  in which it was stated: 
The purpose of Article III is not to harmoni se the internal taxes and regulations of 
contracting parties, which differ from country to country.
109 
In Korea's view, tax harmonisation is a sensitive ma tter even between countries that have achieved a 
high level of integration, such as the member states of the European Communities.  
                                                      
109 Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages , adopted on 19 
June 1992, DS23/R, BISD 39S/206, 276, at para. 5.71 -  5.72.  WT/DS75/R 
 WT/DS84/R 
 Page 53 
 
 5.190.  Korea further argues that it should be noted that  Article III is not intended to encroach upon 
the powers of WTO Members to pursue their legitimat e objectives through their tax systems.  In this 
regard Korea draws attention to a stat ement by the Appellate Body put in Japan -Taxes on Alcoholic 
Beverages , in which it said:  
Members of the WTO are free to pursue their own domestic goals through internal taxation or 
regulation so long as they do not do so in a way that violates Article III or any of the other commitments they have made in the WTO Agreement.
110 
5.191.  Korea, therefore asserts that Article III of the GATT is only meant to step into this sensitive 
realm of taxation in certain narrowly circumscribed  circumstances, in order to pursue a specific 
objective. According to Korea, the fundamental purpo se of Article III is to avoid protectionism and to 
oblige the WTO members to provide for equality of  competitive conditions for imported products in 
relation to domestic products.  As the Appellate Body put it in Japan - Taxes on Alcoholic Beverages 
II: 
The broad and fundamental purpose of Article III is  to avoid protectionism in the application 
of internal tax and regulatory measures. Toward  this end, Article III obliges Members of the 
WTO to provide equality of competitive cond itions for imported products in relation to 
domestic products.111 
ii) The analysis required under Article III:2 
5.192.  Korea states that reconciling the anti-protectioni st purpose of Article III:2 with the need to 
recognise each WTO Member's discretion to maintain  and develop its own tax policy has not been an 
easy exercise. 
5.193.  Korea further states that the Malt Beverages  panel construed the so- called 'aims and effects' 
test.  Under that test, as long as the tax system introduced product distinctions for policy purposes that were unrelated to the protection of domestic produc tion, the resulting tax differences could not violate 
Article III:2.
112 According to Korea, this approach did not  find favour with the Appellate Body in 
Japan - Taxes on Alcoholic Beverages  II.  In Korea's view, the Appellate Body (as well as the Panel in 
the first instance) ruled that the aims and effects test strayed too far from the text of Article III:2, 
ignoring the distinction made between  the two prohibitions contained, respectively, in the first and the 
second sentence of this provision. The first sentenc e tolerates no differentiation whatsoever between 
tax rates that apply to 'like' products. The second sen tence imposes constraints on tax differentials that 
apply to 'directly competitive a nd substitutable products'.  
5.194.  Korea further argues that according to the Appe llate Body, the wording of the first sentence 
leaves no room to inquire whether a tax rate differen tial, which applies to 'like' products, was really  
introduced with protectionist 'aims and effects'.  By  this argument, differential tax rates applying to 
'like' products violate Article III:2.  
5.195.  Korea argues, however, that this does not mean that the Appellate Body was insensitive to the 
concerns of the WTO membership about preserving discretion to develop individual tax policies.  
Korea notes that in its report, the Appellate Body took great pains to underline 'how narrow the range 
of "like" products is meant to be'.113  Korea further notes that the Appellate Body, affirming the 
                                                      
110 See Appellate Body Report on Japan - Taxes on Alcoholic Beverages  II, supra ., p. 16. 
111 Appellate Body Report, supra ., p.16. 
112 Panel Report on United States - Measures Affec ting Alcoholic and Malt Beverages , supra ., 
para. 5.25. 
113 Appellate Body Report on  Japan - Taxes on Alcoholic Beverages II , supra ., p. 20. WT/DS75/R 
WT/DS84/R Page 54 
 
 Panel,
114 also clarified that 'like' products are a subset  of directly competitive and substitutable.  In 
Korea's view, this indicates that Article III:2 only com es into play when the products at issue are in a 
particularly close relationship (they should be at least "directly competitive or substitutable").  Where 
there is no relationship, or an insufficiently cl ose relationship between two products, argues Korea, 
the WTO Members retain the sovereignty to impo se taxes according to their own discretion.  
5.196.  Korea argues that the determination of whether two products are 'like’ or directly competitive 
and substitutable products is based  upon an overall appreciation, on a case-by-case basis, of their 
qualities and their relationship.  Korea refers to one  general remark regardi ng both the determination 
of 'like’ products and of directly competitiv e and substitutable products  which was made in Japan - 
Taxes on Alcoholic Beverages II , which allegedly emphasised that a particularly appropriate test to 
define whether two products are 'like’ or 'dir ectly competitive or substitutable products’ is the 
'marketplace’.115  Korea notes that while noting that there might be other means to identify the broader 
category of directly competitive and substitutable pr oducts, the Appellate Body  upheld this reasoning, 
stating that the: 'GATT 1994 is a commercial agreement, and th e WTO is concerned, after all, with 
markets.' 116 
5.197.  Korea also states that it is useful to make some preliminary comments about the threshold 
condition of Article III:2: i.e. how does one analy se whether there is a suffi ciently close competitive 
relationship between the Korean sojus and the rema ining imported liquors?  Korea poses the question, 
when are products sufficiently competitive for the purposes of comparing their tax rates under 
Article III.2? 
5.198.  Korea argues that to answer this threshold questio n, it is useful to recall first the factors that 
are relevant to establish a competitive relationship between two products and then analyse the degree 
of competition that will trigger the applicati on of Article III.2, first and second sentences. 
iii) Relevant factors 
5.199.  According to Korea, first, one must determine whether the products at issue are at least 
roughly comparable. Where potable liquids are concer ned, it makes little sense to compare soft drinks 
with alcoholic beverages for example. Consumers w ho want a soft drink will not consider alcohol a 
suitable alternative. 
5.200.  Korea further states that within the broad category of alcoholic beverages, a further 
distinction can be made according to product characteristics, such as:  
- Raw materials  - Are products rice-based, grain-based , potato-based, tapioca-based, etc? 
Which additives are used? In Kor ea's view, these elements may influe nce the taste of the beverage, 
and the consumer's perception in general.  
- Production process  - Are the alcoholic drinks based on fermentation only, or on distillation? 
Are they aged, and if so how, before being sold? According to Korea, these are factors that may 
influence the final appearance and taste of the drink,  but also its image in the marketplace. Ageing in 
wooden casks, for instance, gives a drink an 'artisan al' image, that may make quite a difference to 
consumers, even though objectively it is debatable whether more industrial pr oduction processes (e.g., 
mere storage in metal containers ) result in inferior products.  
                                                      
114 Panel Report on Japan - Taxes on Al coholic Beverages II , supra ., supra, para. 6.22. 
115 Ibid. 
116 See Japan - Taxes on Alcoholic Beverages II , Appellate Body Report, supra ., p. 25. The Appellate 
Body reiterated this reasoning in its more recent report in Canada - Certain Measures Concerning Periodicals , 
supra, p. 28.  WT/DS75/R 
 WT/DS84/R 
 Page 55 
 
 - Physical characteristics
 - of the finished products. Are the products similar in terms of their 
appearance, the degree of alcoholic strength? 
 Other notable factors determining whether two prod ucts compete revolve around price and end use.  
- Price  - Are the products at issue in the same price range?  According to Korea, if prices differ 
greatly, two seemingly similar products cannot be cons idered directly competit ive.  Korea notes that 
in Japan - Taxes on Alcoholic Beverages II , the complainants argued that Japanese shochu and the 
imported liquors were in the same price range before tax.117  Korea further notes that Japan does not 
appear to have contested this.  Korea asserts that the price differences in Korea between standard soju 
and the disputed imported liquors are very considerable. 
- End uses  - Do consumers use these products in the same way? Do they drink a particular 
drink straight or mixed; with meals, or on other occasions?  Korea states that these elements were highlighted in Japan - Taxes on Alcoholic Beverages I .
118  Korea argues for instance, that depending 
on the food they usually eat, c onsumers will show a preference for different alcoholic drinks during 
meals. In countries with a spicy food tradition, consumers may favour strong alcohol that cleans the 
palate, when eating meals.  In countries where sp icy food is not a tradition, consumers will by 
definition have a different preference for an alcoholic drink that goes best with their national cuisine.    
5.201.  Korea argues that the existence, or absence, of  a competitive relationship can also be gleaned 
from other factors, such as the places of sale and c onsumption.  According to Korea, one relevant 
question in this connection is whether the disputed liquors are sold through th e same outlets, so that 
consumers are actually offered a choice between them. If not, this is an indication that they are not, in 
fact, competing. 
iv) The degree of competition or substitutability 
5.202.  Korea poses the question, how strong must comp etition between two pr oducts be, before one 
can speak of a directly competitive and substitutable,  or even a 'like' product relationship within the 
meaning of Article III:2? 
5.203.  Korea argues that it is good policy to give a strict reading to the terms of Article III:2. In 
Korea's view, given that the WTO is an organisati on which brings together a large number of diverse 
countries, and that it has no mandate to harmonise tax policies, the threshold to review taxes under 
Article III:2 GATT (i.e., the competitive relationshi p between differently taxed products) is both 
important and substantial. 
5.204.  According to Korea, for 'like' products, the competitive relationship must be very strong 
indeed. Korea cites the Appellate Body report on Canada - Certain Measures Concerning 
Periodicals , in which it was stated that 'like' products are 'perfect substitutes'.119  
5.205.  Korea argues that in relation to the examina tion of the legal obligation under Article III:2 
second sentence, the existence of competitive relationship is also an essential requirement for the 
determination of whether products can  be determined to be directly competitive and substitutable.  In 
Korea's view, unlike 'like’ products, substitution does not have to be perfect between the products.  
Korea asserts that the texts of Article III:2 second sen tence and its Interpretative Note require that the 
                                                      
117 See Panel Report in Japan - Taxes on Alcoholic Beverages II , supra ., at para. 4.82. See also the 
more recent Canada - Certain Measures Concerning Periodicals , Appellate Body report, at p. 30, where the 
Appellate Body, in finding a directly competitive and substitutable relationship between certain imported and 
domestic periodicals, approvingly cited evidence of 'considerable price competition' between the two. 
118 See Panel Report on Japan - Taxes on Alcoholic Beverages I , supra .,  para. 5.7. 
119 Appellate Body Report on Canada - Certain Measures Concerning Periodicals , supra ., p. 31. WT/DS75/R 
WT/DS84/R Page 56 
 
 competitive relationship must still be strong before  the products can be considered directly 
competitive and substitutable. This is why the text refers to " directly  competing or substitutable 
products". 
5.206.  In Korea's view, the complainants have not show n that there is any close relationship between 
the imported products and soju.  Korea therefore, is of the view that they have been unable to show 
actual competition on the market between the produc ts and are now trying to introduce the argument 
that the absence of actual competition was due, at least in part, to the tax measures. 
5.207.  According to Korea, such a loose interpretation of Article III.2 runs counter to the text of the 
Interpretative Note to Article III.2.  This Note  adds that 'only where competition was involved' 
between two 'directly competitive or substitutable'  products could a tax differential conceivably 
amount to a violation of the second sentence of Artic le III:2. In Korea's view, this language strongly 
suggests that there must be actual competition between the directly competitive or substitutable products before their tax rates are to be compared.  
5.208.  Korea further argues that it is clear that in the present case the comp lainants have neither 
shown that imported liquors actually compete with the Korean sojus, nor have they shown that these 
liquors would directly compete with each other in th e absence of the tax differential.  Korea refers to 
the argument by the complainants that there is a substantial measure of price elasticity between the 
Korean sojus and imported liquors.  According to Kor ea, the complainants seek to argue that various 
product combinations are in competition with each ot her, on the grounds that relatively small changes 
in the price of soju will persuade Korean consum ers to switch to imported liquors such as whisky.  
Korea notes that in support of this argument the European Communities subm itted a market survey,
120 
which has been endorsed by the United States. 
5.209.  Korea points out that given the considerable price differences (even pre-tax) and different end 
uses between these liquors, the complainants' conclu sion flies in the face of common sense.  Korea 
adds that another study funded by the Eur opean Communities, and conducted by the same 
organization but not for legal proceedings, found that "soju in particular remains unaffecetd by 
imported drinks".121 
5.210.  Korea submits that this particular study (the 'Dodwell' study) constitutes poor evidence.  
Korea puts forward the following reasons for its as sertion that the Dodwell study cannot be relied 
upon as constituting evidence of  product substitutability: 
v) Problems in the Dodwell Report 
 Internally inconsistent results  
5.211.  Korea expounds upon the peculiarity and problems,  namely flaws in design or oddities in the 
reported results.  Korea mentions as an example that  in chart 2, the percentage choosing soju rises 
when price of soju increases from 1,100 to 1,200 won,  even though all other prices are held constant.  
Korea argues that this seems to imply a positivel y-sloped demand curve, which is, as the United 
States noted before the Japan – Taxes on Alcoholic Beverage II  case, “contrary to one of the 
fundamental tenets of micro-economic theory.122  Moreover, Korea observes, the percentage choosing 
premium and standard scotch rises as the price of soju rises from 1,000 to 1,100 won but falls as the 
                                                      
120 See EC Annex 13. 
121 EC Commission, Your Guide to Exporting Food Products to Korea, Alcoholic Beverages 1997 
(Sofres Report), p.22. 
122 Panel Report in Japan – Taxes on Alco holic Beverages II,  supra .,  at para. 4.86.  WT/DS75/R 
 WT/DS84/R 
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 price of soju rises from 1,100 to 1,200 won.  Korea notes that such odd findings are frequent: indeed, they appear in every chart.
123 
5.212.   Korea argues that there is no theoretical reason why the quantity demanded of one good 
should not fall as the price of a related good rises, a lthough the implication that soju and whisky, for 
example, are complements in consumption, so th at a fall in the price of whisky would increase 
consumption of soju, might seem to many economists implausible.  Korea notes that the difficulty with the Dodwell report is that it sometimes show s the quantity of scotch demanded rising as the price 
of soju rises, and sometimes falling.  Korea finds the facts reported, though curious, are less troubling 
than their lack of internal consistency. 
5.213.  Korea suggests that consumers in actual markets are unlikely to be so random in their 
responses to price changes.  Kor ea concludes that the members of the Dodwell sample may have 
treated the Dodwell question with less gravity than the report ’s authors might like to believe. 
 Standard and premium soju  
5.214.  Korea points to another peculiarity in the treat ment of standard and premium soju.  Korea 
observes that in the Dodwell report, the premium soju is offered as a choice side-by-side with 
western-style spirits in the pairwise choice between wh ite spirits and standard soju and in the pairwise 
choice between brown spirits and standard soju.  Thus, Korea notes, in the Dodwell “brown spirits ” 
test, respondents are offered a choice between scot ch, cognac and premium soju on the one hand, and 
standard soju on the other; and in the white spirits  test they are offered a choice between vodka, gin, 
rum, tequila, liqueur, and premium soju on the one hand, and standard soju on the other. 
5.215.  Korea argues that grouping soju with western-type  spirits rather than w ith standard soju is 
eccentric, and suggests a lack of familiarity with these two soju products.  According to Korea, 
standard and premium soju are regarded as close subs titutes in Korea.  Korea states that premium soju 
is more expensive than standard soju —the “current price ” of premium soju in the Dodwell report is 
2,400 won as compared to 1,000 won for standard soju.  Korea notes, however, that is hardly a 
compelling case for putting premium soju in the same group as 20,000 won scotch or 32,000won 
cognac.
124 
                                                      
123 In chart 1, the percentage choosing premium scotch falls as the price of soju rises from 1,100 to 
1,200 won even through all other prices —including that of premium scotch—are held constant; in chart 3, the 
percentage choosing premium soju falls as the price of standard soju rises from 1,100 won to 1,200 won; in chart 4, the percentages choosing gin and tequila both fall as the price of soju rises from 1,000 won to 1,100 
won; in chart 5, the percentage choosing tequila falls as the price of soju rises from 1,000 to 1,100 won, and the 
percentages choosing vodka, gin and premium soju all fall as the price of soju rises from 1,100 to1,200 won; and in chart 6, the percentages choosing liqueur and premium soju both fall as the price of soju rises from 1,000 
to 1,100 won, and the percentages choosing vodka and gin both fall as the price of soju rises from 1,100 to 1,200 
won. 
124 According to Korea, taxation of premium soju is id entical to that of standard soju, and the natural 
division between soju on the one ha nd, and western-style spirits on th e other would on its face have given 
clearer results.  Rejection of the natural division seems to  be a major flaw is the design of the Dodwell study, 
and it would be interesting to know how it came about and why it was maintained.   
Korea claims that, as it is, the outcome of the stud y is blurred by interactions between standard and 
premium soju, which account for much of the change reported.  The firs t Dodwell results, for example, are 
based on holding at current levels the price of brown and white spirits(and premium soju) while the price of 
standard soju is hypothetically raised from 1000 to 1200 won.  The reported result is that standard soju loses 5.2 percentage points to “brown spirits. ”  Three of these points, however, ar e gained by premium soju.  Against 
white spirits, standard soju loses 5 percentage  points, but 4 are gained by premium soju. 
According to Korea, if these results are treated seriously, as presumably  they were by the authors of the 
report, they strongly suggest that standard and premium soju are close substitutes in consumption.  That finding WT/DS75/R 
WT/DS84/R Page 58 
 
 
 Problems  
5.216.  Korea states that studies of the Dodwell type must be carefully designed if they are not to fall 
foul of bias.  Korea points out that the Dodwell re port clearly has not managed this.  Korea discusses 
two sources of bias and claims that either is suffi cient to eliminate the credibility of the Dodwell 
Report. 
Choice of respondents  
5.217.  Korea points out that no reason is given for the exclusion of males above the age of 49 or of 
the rural population when the Dodwell report states “It was decided to select as respondents for the 
research 500 Korean men in 3 Korean cities aged between 20 and 49 who have purchased soju in the 
last month. ”
125  
5.218.  Korea states that no information is provided on how and where the same was selected, or on 
how its members were induced to spend their time answering the survey questions.  Korea notes that 
no information is given on the drinking habits of respondents —for example, where they typically 
purchase alcohol, or how much they consume(alth ough questions 5-13 deal with these matters).  
Korea further notes that no information is prov ided on the actual characteristics of the sample —for 
example, average age, occupation, income —that would permit a check on whether the sample is even 
representative of “Korean males aged between 20 and 49 who have purchased soju in the last month. ” 
5.219.  Korea argues that the restriction and exclusi on of the rural population are not the only ones 
placed on the sample.  Korea indicates that p. 3 of the report announces that “additional criteria for 
the respondents were whisky purchase in the last 3 months. ”  Korea notes that no reason is given for 
rejecting persons who have not purchased whisky in  the last three months.  Korea conjectures that, 
possibly, the results of the study in the absence of this condition were disappointing.  Korea notes that 
it is certainly true that a good way to obtain a strong response to a fall in the price of whisky and a rise 
in the price of soju is to select a sample of persons  that drink both soju and whisky(and, of course, a 
whisky purchase in the last three months and a soju  purchase in the last month is consistent with a 
purchase of both in the last week, day or hour). 
5.220.  Korea states that the effects of selection bias ar e evident, regardless of  the motivation for the 
additional restriction,.  Korea points out that in the Dodwell sample, at current prices, 72 per cent of respondents select soju when asked to choose betw een brown spirits and soju; and 72 per cent select 
soju when asked to choose between white spirits and so ju (Korea refers to the Dodwell study, p. 6).  
Korea notes, however, that the actual share of soju  in consumption of distilled spirits in Korea, 
however, is about 95 per cent.    
5.221.  Korea asserts that the discrepancy between tho se who prefer soju at current prices in the 
Dodwell study and the true figure is very large
126  Korea nevertheless states that the difference 
                                                                                                                                                                     
might have been expected to lead the au thors of the Dodwell report to use the natural division.  It is curious that 
it apparently did not have that effect. 
125 The Dodwell Report at p. 2. 
126  The figure of 72 per cent is used by the authors of the Dodwell report (p. 6).  According to Korea, 
an alternative would have been to take the percentage of the sample choosing either st andard or premium soju at 
current prices: 84.8 per cent then choo se soju and 15.2 per cent brown spirits proper when offered that pair, and 
86.2 per cent choose soju and 13.8 per cent western-type wh ite spirits of that pair.  This reduces one discrepancy 
between the Dodwell sample and actual market shares —the Dodwell percentage choosing brown spirits proper 
fall to only five times actual market share.  But it also highlights other discrepancies.  In the Dodwell sample 
14.85 per cent of those choosing soju opt for premium soju: in fact, premium soju takes about 4 to 5 per cent of 
total soju sales.  In the Dodwell sample, 13.8 per cent choose western-type white spirits, which have an actual market share of 1.8 per cent.  WT/DS75/R 
 WT/DS84/R 
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 between 72 per cent of the sample and 95 per cent th at choose soju in reality is likely to seriously 
understate how unrepresentative the sample is.  Korea attributes the discrepancy to the fact that 
respondents were given a pairwise choice between so ju and brown spirits, and then a pairwise choice 
between soju and white spirits.  They were not offered a three-way choice between soju or brown 
spirits or white spirits. 
5.222.  Korea acknowledges that some respondents may ch oose brown spirits rather than soju from 
that pair, but soju rather than white spirits when  offered that pair; while others might select white 
spirits rather than soju in that pairwise offering,  but soju rather than brown spirits.  Offered a 
three-way choice, all of those who reject soju in the pairwise choice will continue to reject soju.  
Korea, however, emphasizes that those who chose wh ite spirits when offered a choice between soju 
and white spirits need not be the same as tho se who choice brown spirits when offered a choice 
between soju and brown spirits.  Korea states that  it follows that the figure of 72 per cent choosing 
soju rather than brown spirits in the Dodwell samp le, and the similar percentage selecting soju rather 
than white spirits, gives the highest possible perc entage of those in the sample who would have 
chosen soju had they been offered a three-way choice. 
5.223.  Korea points out that the actual percentage choos ing soju in a three-way choice would be 72 
per cent only if all those who prefer white spirits to  soju also prefer brown spirits to soju and vice 
versa.  Korea notes that at the opposite extreme, though, if all of those choosing whisky over soju 
prefer soju to white spirits; and if all of those c hoosing white spirits rather than soju prefer brown 
spirits, the percentage opting for soju in  a three-way choice would be 44 per cent —28 per cent would 
reject soju in favour of brown spirits, and 28 per cen t would reject soju for white spirits.  Korea states 
that only 72 per cent of Dodwell respondents choose soju at current prices indicates the unrepresentative nature of the Dodwell sample: that a lower figure is avoided only by the failure to 
offer a three-way choice; and that in such a choice,  the number choosing soju might fall as low as 44 
per cent, puts the Dodwell report into a world en tirely different from that of Korean reality. 
5.224.  Korea argues that the Dodwell study is based  upon a sample of persons who are strongly 
biased towards western-type spirits, relative to the Korean population as a whole.  Korea asserts that 
the Dodwell sample is not a credible sample.  Ko rea states that, even leaving aside other grounds for 
doubt, the response to hypothetical price changes of  a group so unrepresentative cannot be taken to 
reflect anything of the responses of the Korean population as a whole to real price changes. 
 The single choice drink  
5.225.  Korea indicates that the Dodwell study respondents are confronted with an either-or choice.  
Korea notes that according to the Dodwell script, interviewers say: “As you can see, there are five 
types of spirits and photos of typical brands of these types.  Which spirit would you choose at these 
prices? ” 
5.226.  Korea states that reliable information about how different prices might change drinking 
habits —that is, whether a person who is a regular so ju drinker might switch to becoming a regular 
whisky drinker were the price of soju higher and the price of whisky lower —might be relevant in this 
                                                                                                                                                                    
 
According to Korea, these discrepancies strongly suggest sample bias.  The Dodwell report, though, 
does not provide enough information to translate percentages of Dodwell respondents into a figure directly comparable with actual market shares, so that it does not allow calculation of whet her the comparisons above 
understate or overstate the degree of bias.  One proble m is that Dodwell responden ts are asked to choose a 
single bottle: in fact, drinkers are likely to consume different drinks at differ ent times.  Another problem is that 
those choosing soju in the Dodwell sample, for exampl e, might on average consume more soju than those 
choosing whisky consume whisky.  The implied market share of soju would then be more than 72 per cent.  To 
approach actual market shares, Dodwell soju choosers, if they drank nothing but soju, would have to consume a volume of soju about 13 times greater than Dodwell whisky drinkers, if they drank nothing but whisky. WT/DS75/R 
WT/DS84/R Page 60 
 
 case.  However, Korea argues, that is not what the Dodwell interviewers ask about.  Korea notes that 
they ask which bottle a respondent would choose at the different prices.  Korea points out in the 
Lexecon/Hindley Report that respondents might perf ectly naturally interpret the Dodwell questions 
asking: “If you saw these prices the next time you bought a bottle of spirits, which bottle would you 
choose? ”  Korea notes that such questions opens the po ssibility that some respondents interpreted the 
hypothetical prices as a one-time offer: “If you saw these prices the next time you bought a bottle of 
spirits, but knew that usual prices would be back in  force the time after that, which bottle would you 
buy?  ”  Korea emphasizes that some Dodwell respondents may simply be saying that they would try a 
bottle of high-price cognac were it temporarily on offer at such a low price. 
5.227.  Korea argues that respondents in terpreting the question as asking “would you try a bottle of 
cognac if it was offered at this price? ” are almost certainly more likely to answer affirmatively than 
those interpreting the question as asking “would these prices cause you to change your drinking 
habits? ”.  Accordingly, Korea concludes, the ambiguit y in the question almost certainly increases the 
number saying they would buy a bottle of brown or white spirits at a lower price. 
5.228.   Korea emphasizes that there is absolutely no reason to suppose that respondents are speaking 
about a change in their drinking habits —that their answers imply that if soju rose in price from 1,000 
won to 1,200 won, they would switch their regular drink, during meals for instance, from soju to cognac at 32,000 won or scotch at 20,000 won. 
5.229.  Korea argues that market surveys, carried  out specifically for the purposes of legal 
proceedings at the request of an interested party, are, of course, to be treated with caution .  T h e  
analysis must be rigorous, and bias must be avoide d at all cost.  According to Korea, the Dodwell 
study does not meet these standards.  Korea sums up what it perceives to be the most glaring defects 
of this study: 
(i) It is not at all clear whether the sample  of Korean consumers used for the analysis 
was representative.  
(ii) The questions posed were, in Korea' s view, ambiguous.  Korea argues that the 
question 'which spirit would you choose at this different price?’ for example, might have been interpreted by respondents as aski ng whether they would change their habit 
of drinking soju with meals and switch instead to a western-type spirit; or as the 
different question of whether, at the hypothetical lower price, they would buy an experimental bottle of a western-type drink.   
(iii) Korea argues that the conclusions draw n from this study by the complainants are 
fanciful. According to Korea, it does not  rebut the common sense presumption that, 
given the enormous price differences (even before tax) between standard soju and 
western-type liquors and their different e nd uses, no appreciable number of Korean 
consumers consider them to be substitutes.
127   
5.230.  Korea further argues that in contrast, more cr edence can be given to a study, which was not 
prepared specifically for regulatory purposes, but wh ich tries to explain in objective terms to exporters 
the situation on the Korean market.   Korea refers  to a recent report initiated by the European 
Commission recently, which stated: 
Soju is consumed widely, from the young to th e old, and is the most popular traditional drink 
in Korea. Soju in particular remains unaffect ed by imported alcoholic drinks. Furthermore 
                                                      
127 See Attachment 2 of Korea, which is a critique by Lexecon Ltd and Dr. Brian Hindley (London 
School of Economics) of the Dodwell Study.   WT/DS75/R 
 WT/DS84/R 
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Soju, is insulated from economic downturns and maintains a loyal following of steady consumers.
128 
5.231.  Korea asserts that the constant and independe nt demand for soju is not the result of any 
protective government policies.   Korea refe rs to the same EC study which notes that: 
"The Korean alcohol market is no longer a mark et protected by the government with market 
shares contested by local producers. In fact , it is becoming a truly global market where 
multinational companies convene to  compete with one another fo r the lucrative and promising 
Korean market".129 
(d) Product-by Product Analysis 
5.232.  Korea submits that as competitive relationshi ps differ from product to product and from 
market to market, the United States and the Europ ean Communities bear the burden of proving for 
each individual product combination that a 'like’ or 'directly competitive and substitutable’ relationship exists in the Korean market before they  can put the applicable tax rates into question.  
5.233.  Korea states that, without assuming the complain ants' burden of proof, it will demonstrate the 
failure of the complainants to dischar ge this burden in the following way: 
(i)  that the complainants have confused  various products that are called soju.  
(ii)  Korean soju is a different product from Japanese shochu.  (iii) Korean standard soju is unlike distille d soju. Korea argues that these are different 
products in terms of inter alia their raw materials, production process, taste, price, 
place of consumption, end use, and their mark eting. Korea also submits that they are 
subject to different tax rates: 35% for standard soju and 50% for distilled soju. 
5.234.  Korea, therefore argues that both diluted soju and distilled soju must be compared 
individually to each of the imported liquors in questi on.  Further, it states that although premium soju 
is a variation of diluted soju, Premium's price is somewhat higher, though still far below the price of 
the imported liquors. Premium soju represents only a small volume of diluted soju sales (currently, 
around 5%). In the discussion below of diluted soju due account is taken, where necessary, of any of 
premium's special features.
130 
5.235.  Korea notes that the only products that the Un ited States and the European Communities have 
alleged are 'like’ are standard soju and distilled so ju and vodka.  Korea states that it will therefore only 
make representations about the lack of a 'like produc t’ relationship as far as vodka is concerned. In its 
view, it goes without saying that Korea does not accept that  any 'like product’ relationships exist in 
this case.131 
5.236.  Korea also seeks to point out the very consid erable price differences that exist between the 
imported liquors and diluted soju.  According to Ko rea, the complainants recognize these differences 
                                                      
128Sofres Report, p.22 
129 Ibid., p. 12. 
130 For instance, in giving average prices of standard  soju, the higher price of premium is taken into 
account. 
131 Korea is mindful of the fact that in the most recent Japanese liquor taxes case, a 'like' product 
relationship was found to exist between one product pair: Japanese shochu and vodka. However, given the 
differences between Japanese shochu and the Korean soju s, as well as the differences between the Korean and 
the Japanese markets, this holding is inapplicab le to the case at hand, according to Korea.  WT/DS75/R 
WT/DS84/R Page 62 
 
 at actual market prices.
132 However, Korea argues that these pr ice differences remain considerable, 
even when the disputed taxes are el iminated.  Korea points out that this is shown by the complainants’ 
own expert study, the Dodwell Study.133 Korea's position is that although it contests the results of the 
Dodwell Study, the raw price data provided in that study appear to be genera lly correct.  Korea feels 
that these data are so compelling that it has not fe lt it necessary to go beyond the data set forth by the 
complainants.  In its view, the one exception is whisky, where, given its importance to this case, 
Korea has supplemented the Dodwell data with its own figures.  
5.237.  In short, Korea is seeking to show that an ine xpensive local meal drink such as diluted soju is 
not in direct competition with expensive western-type  liquors. In the alternative, Korea is seeking to 
show why the complainants have not shown that Korea's tax system meets the other criteria of 
Article III:2, assuming that the Panel would still  find a competitive relationship between some 
products,  
5.238.  Korea states that contrary to what the compla inants are alleging, the so-called soju based 
cocktails are not soju.   According to Korea, these are sweetened mixtures, with a low alcohol 
percentage (10-15%), that were introduced in 1994. They are not comparable to either standard or 
distilled soju. Korea adds that to make the distinc tion, manufacturers never use the word 'soju’ in the 
brand names for these products. They are classified di fferently, like liqueurs, according to the liquor 
tax law.  Korea points out this classification also covers such imported liqueurs as Bailey’s, Grand Marnier, Kahlua, etc. Liqueurs are subject to a tax ra te of 50%.  It is unclear to Korea what, if any, 
complaint the European Communities and the Un ited States are formulating in this respect. 
5.239.  Korea also argues that contrary to EC assertions , sales of soju-based cocktails did not increase 
by 1250% in 1995.  According to Korea, the taxe d volume of soju-based co cktails increased by 419% 
in 1995, from 1,583 kl (1994) to 8,218 kl (1995), and that in 1996 sales decreased by 8% (to 7,562); 
in 1997 by 22% (to 5,893) kl).
134 
i) Diluted soju 
Diluted soju and Whisky 5.240.  Korea argues that diluted soju and whisky ar e entirely different products, regardless of the 
perspective from which one looks at them.  Korea points out that, firstly, the physical difference between these two products is immediately obvious to the eye and to the palate.  Even more striking, 
according to Korea, are the market differences between  the way that diluted soju and whisky are sold 
and consumed in Korea. Korea states that the prim ary differences boil down to this: in Korea, diluted 
soju is the drink one finds on the dinn er table, the drink that is consumed  with meals. As such, it is an 
inexpensive beverage.  According to Korea, diluted soju is not drunk in bars or clubs. Whisky, by 
contrast, is an expensive drink that is primarily co nsumed in high-class bars and clubs -- hardly ever 
with meals. 
5.241.  According to Korea, these factors  show that there is no actual competitive relationship 
between diluted soju and whisky , and a removal of the tax differential would not create direct 
competition between those two drinks either. 
5.242.  Korea argues that at first glance, one can see that  diluted soju is a 'white’ spirit, transparent 
and colourless, while whisky is a 'brown’ spirit, of a translucent golden-brown colour (an element 
                                                     
 
132 Sofres Report, at p. 53 (1997), reproduced in Attachment 3. 
133 Pre-tax prices are provided in  the Dodwell Study on page 20, in the column marked 'NET’. See 
Attachment 4.  
134 Source: National Tax Administration.  WT/DS75/R 
 WT/DS84/R 
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 much prized by consumers). Korea adds that, d iluted soju has an alcoholic strength of 25% by 
volume, while the alcoholic strength of whisky is at least 40% by volume. 
5.243.  As to their organoleptic qualities, Korea states that the most important types of whisky - 
Scotch, Irish, Bourbon and Canadian - have in common a very typical flavour and smell. It states that 
the elements that are often mentioned in connecti on with whisky are that it has a warm, smooth and 
smoky flavour. According to Korea, one of the obj ectives in the production process is, as with wine, 
to develop the taste and aroma imparted to the beverage as a result of the raw materials used for its production (maize, barley, rye or malt) and its ageing in wooden casks. 
5.244.  Korea further argues that, on the other hand, diluted soju has quite a 'rough’ flavour and tends 
to leave a stinging sensation in the mouth and throat.  Korea submits that this is a function of the raw 
materials of which standard soju is made and its production process. In Korea's view, the emphasis in 
the production process of diluted soju is on maki ng the product as cheaply as possible, not, as with 
whisky, on ageing and adding value a nd subtle flavours. That is why, according to Korea, standard 
soju tends to have a 'cold’ mouth feel that makes the drink suitable for consumption with the typically 
spicy Korean cuisine for which whisky is not suited.  Hence, Korea concludes, as a matter of taste, 
Korean consumers do not consider whisky a nd diluted soju as substitutes for each other. 
5.245.  Korea further states that diluted soju is the al coholic beverage that Koreans prefer with their 
meals. It is an effective foil for the hot and spicy food Koreans prefer, and Koreans consider that it is 
important to have some food when consuming diluted soju, in order to protect the stomach from the drink’s harshness.  
5.246.  Korea concedes that it may seem unusual that Ko reans prefer a distilled alcoholic beverage 
with their meals.  Korea points out that in many cultures, particularly western ones, the alcoholic 
beverage found at the table is usua lly a fermented beverage with a lo wer alcohol content, such as wine 
or beer. It is in fact a western notion that distilled alcoholic beverages are not drunk with meals, but as 
straight drinks or cocktails. However, Korea points out  that not all cultures share this trait, and gives 
as an example the Chinese, who allegedly also enjoy distilled alcoholic beverages with their meals.  
Finally, Korea notes that as in most countries, whisky is not consumed with meals in Korea. 
5.247.  Korea argues that these differences have follo w-on effects.  In conjunction with meals, 
standard soju is often consumed at home, while whis ky is not.  Whisky is instead consumed primarily 
in high-class hotel bars, night clubs, room saloons , and karaoke bars. Dilu ted soju not only not 
consumed in those places, it is not even on offer. Ko rea adds that when diluted soju is drunk away 
from home, it is mainly in Korean restaurants (including barbecue houses), mobile street vendors and 
inexpensive Chinese restaurants, where whisky is not normally available. 
5.248.  Korea therefore states that the Hankook Stud y introduced by the European Communities
135 
begs the question.  It allegedly shows that whisky is available in shops, hotels, danlanjujum (karaoke 
bars), Japanese restaurants, cafés, bars, night-clubs  and discos. According to Korea, however, it does 
not show that soju is available in all of these ou tlets. Furthermore, argues Korea, it omits to mention 
the outlets in which diluted soju is drunk, but wh isky is not available, such as the outlets where 
Koreans typically eat (Korean restaurants, incl uding barbecue houses, mobile street vendors and 
inexpensive Chinese restaurants). 
5.249.  Korea states that in addition to the fact that dilu ted soju is a 'meal drink’ while whisky is not, 
another element which shows in a most definitive wa y that diluted soju and whisky are not directly 
competitive and substitutable is their large difference in price. According to Korea, whisky is not 
nearly in the same price range as standard soju.  
                                                      
135 EC Annex 10. WT/DS75/R 
WT/DS84/R Page 64 
 
 5.250.  Korea asserts that in order to exclude any possibl e distortive effect from the disputed taxes, it 
will only compare pre-tax prices.
136 At this level, in Korea's an alysis, striking price differences 
emerge from the Dodwell Study. According to Korea,  Premium Scotch whisky is 12 times the price of 
diluted soju. North American whiskies are 10.8 times the price of diluted soju, and standard Scotch 
whisky is 7.2 times the price of diluted soju. Even the cheapest whisky, bottled in Korea, is cited as 
6.3 times the price of standard soju.137 In Korea's view, these figures show that diluted soju and 
whisky are far from being in the same price range.   
5.251.  To further support that point already made th rough the Dodwell data, Korea provides in the 
following table, average pre-tax prices for the past three years using its own figures.  Korea explains 
that because these figures are calculated by dividing  the total taxed value by the total taxed volume, 
they show the weighted average (pre-tax) prices of  whisky and diluted soju  (including premium soju) 
in Korea.  In Korea's view, the results138 show more pronounced price differences: 
(in Korean won, pre-tax) 1995 1996   1997 
Standard soju (360 ml) 289.94 305.11 322.46 
Whisky (360 ml) 3401.27 3582.09 4111.50 
Factor of: 11.73 11.74 12.75 
 
5.252.  Korea submits that these price differences are main tained even if taxes are harmonised, either 
down to the diluted soju level, or up to the whisky level.  According to Korea, this is a compelling 
indication that whisky and diluted soju would not be in direct competition, even if the tax differential 
were eliminated. 
5.253.  Korea points out that this is not to say that whisky sales would not rise if the tax on whisky 
were reduced.  It concedes that this might well be the case, just as in the past tax rate reductions on whisky have led to increased whisky sales. Korea poi nts out, however, that whisky would still not be 
in direct competition with diluted soju.  Accordi ng to Korea, their price and other differences would 
remain too important and diluted soju sales woul d continue to develop largely independently.
139  
5.254.  Korea states that this observation was also  made by the recent European Commission study 
already cited: 
                                                      
136 Pre-tax prices are provided in  the Dodwell Study on page 20, in the column marked 'NET’. See 
Attachment 4 Korea. 
137 According to Korea, it is to be noted that this is  not a representative price for domestic whisky.  For 
some reason, the Dodwell Study has split up the domestic brands (BIK stands for 'bottled in Korea') and has 
listed some of them among Premium Scotch Whisky as well.  An example is the leading domestic brand 
(Imperial Classic), which is an expensive brand.  
138 The underlying data are set ou t in Attachment 5 of Korea. 
139 Korea states that the complainants' allegation that in  recent years diluted soju  sales have been eroded 
by growing sales of imported liquors is improbable. See EC first submission, at para. 51. The only thing they 
show is a slight (2%) reduction in the market share of diluted soju on the total spirits market from 1992 to 1996 
(EC first submission, at Annex 6). In absolute terms, however, diluted soju sales rose by almost 13% (EC first submission, at Annex 5). During those five years, the spirits market increased in  size (more than 15%); and 
diluted soju sales grew somewhat more slowly than sa les of imported liquors. Increased income, the relative 
maturity of the market for diluted soju, etc., are more lik ely explanations to explain th e difference in growth rate 
than any competition between whisky and diluted soju.  WT/DS75/R 
 WT/DS84/R 
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Soju in particular remains unaffected by im ported alcoholic drinks. Furthermore Soju, is 
insulated from economic downturns and maintains a loyal following of steady consumers.140 
5.255.  Korea also notes that the compla inants have also not taken into  account external factors such 
as currency fluctuations that also have an impact on sales of imported whisky.  
5.256.  Accordingly, Korea concludes that it is not unde r any legal obligation, by virtue of Article 
III.2 GATT, to reduce taxes on whisky to diluted soju levels (or, for that matter, to increase taxes on 
standard soju to whisky levels).  In Korea's view, these two products are simply not sufficiently 
related on the Korean market for a ta x differential to raise GATT concerns. 
5.257.  Korea submits that there are also other factors that contribute to the conclusion that diluted 
soju and whisky are not directly competitive and s ubstitutable.  Korea cites fo r instance, the marketing 
strategies for both drinks follow from the distin ct consumption patterns and the price aspects 
described above. According to Korea,  the target consumer is clearly different for both drinks and the 
producers and importers market the drinks accordingly.  According to Korea, diluted soju is marketed 
as an everyday drink, consumed during meals, barbecues -- not in luxurious surroundings. It is 
contended that these advertisements typically show  Korean citizens in day-to-day clothes having 
diluted soju while eating. In contrast, according to Korea, whisky is positioned as a high class luxury 
drink that is meant for special occasions. The adver tising is allegedly meant to appeal to consumers 
who are prepared to pay a considerable price for this privilege.141 
5.258.  Korea also argues that each product has its ow n branding strategy. Korea contends that no 
trademark for whisky is used for sales of diluted so ju, neither is a soju trademark used for sales of 
whisky. Korea states for example, that the Jinro comp any sells its domestic whisky under the 'Imperial 
Classic' brand, whereas its diluted soju is sold as 'Jinro Gold'. In Korea's view, this is yet another 
indication demonstrating that both products do not compete, and ar e not substitutable on the Korean 
market. 
Diluted soju and Brandy/Cognac 
5.259.  Korea argues that there are a myriad of differe nces between diluted soju and brandy/cognac.  
Some of these differences are apparent at first gl ance.  Korea contends that in their packaging, 
brandies/cognacs are presented in an elegant fashi on in keeping with their distinguished character. 
This makes these drinks very suitable for gifts.  The same cannot be said about diluted soju, bottled in 
common plastic or glass bottles and geared toward frequent consumption, rather than to occasional 
consumption. 
5.260.  Korea further argues that another striking differe nce is in the appearance of the alcohol itself: 
brandy/cognac is generally a deep golden brown colo ur and has substantial body, while standard soju 
is a white clear spirit, with little body. Brandies/cogn acs have an alcohol content of at least 40%, as 
opposed to diluted soju’s 25%.  Further, the flavour  and aroma of brandy has been much celebrated, 
and described as 'velvety’ and full-bodied, with a powerful and pleasant bouquet. Part of the typical 
flavour of brandies/cognacs can be attributed to the fact that they are derived from fermented fruit.  
Korea also points out that in addition, brandies/cognacs undergo an important ageing process in oak casks (e.g., in order to bear the name 'cognac’, this sp ecial brandy must be aged for at least 6 years in 
                                                     
 
140 Sofres Report, at p. 22 (1997). See Attachment 3 of Korea. 
141 See Attachment 6 of Korea fo r typical Korean advertisements for diluted soju and whisky. 
According to Korea, the advertisements submitted by the complainants are misleading in this regard.  Many of 
them are directed not to the Korean ma rket but to foreigners (see US, Exhibit D, which is a 'Sky Shop’ duty free 
advertisement offered to international airline passenger s; Exhibit F, which is an advertisement in English 
published in an international industry journal; or Exhib its H and I, which are advertisements in the Japanese 
language for the Japanese market). WT/DS75/R 
WT/DS84/R Page 66 
 
 wooden casks).  It is contended that diluted soju on the other hand is most often made of tapioca, and 
has a much more industrial production process with no ageing.   Suffice it to say that the resulting 
diluted soju has none of the refined characteristics of brandies/cognacs. 
5.261.  Korea further states that the price of brandy/c ognac compared to diluted soju clearly spells 
out that competition between these products is improbabl e:  pre-tax, brandy is 19.2 times as expensive 
as diluted soju.
142   In Korea's view, this is certainly not 'within a relatively short range’ of prices. 
5.262.  Korea submits that consumers perceive bra ndies/cognac and diluted soju as completely 
different products and use them in completely diffe rent ways.  According to Korea, brandies are very 
expensive luxury drinks, and are consumed in plac es in keeping with their stature: room saloons, 
clubs, hotel bars, and other luxurious  premises where standard soju is not on offer.  Korea adds that 
brandy/cognac would not be consumed with a meal while diluted soju is the traditional cheap Korean 
drink essentially drunk during meals. It  is contended that it is drunk (often in rather large quantities) 
by ordinary folks in less illustrious settings than br andy, such as with a meal at home or in a family 
restaurant.  Korea states that a request for a gl ass of cognac such as Rémy  Martin in these settings 
would likely be met with incredulity.  
5.263.  According to Korea, these differences are furthe r reflected in the fact  that the marketing 
strategies of diluted soju and brandies are essentiall y different. Korea states that of all the drinks 
concerned by this dispute, brandy probably has the most luxurious image, and is marketed as such, in 
its packaging, advertising, the target consumer cla ss, and of course, its price range. The marketing of 
diluted soju, is, as stated before, concentrated on me al consumption and is the 'common’ man’s drink.  
Diluted Soju and Vodka  
5.264.  Korea states that vodka is the only product for which the United States and the European 
Communities have claimed a 'like’ relationship w ith diluted soju.  Korea raises doubts as to the 
evidence brought by the complainants for alleging 'l ikeness’ of diluted soju and vodka.  According to 
Korea, out of six physical characteristics of vodka and diluted soju which the United States compared, 
only two corroborate their point of view.  Korea notes that the Panel in the Japan - Taxes on Alcoholic 
Beverages II  stated that "'like products’ need not be iden tical in all respects".  However, Korea further 
notes that this statement was imme diately followed by an insistence that "the term 'like product’ 
should be construed narrowly…."143   
5.265.  Korea states that as far as the alleged 'likeness' is concerned, it should be noted that vodka and 
diluted soju do not fall under the same tariff classi fication.  Vodka is allegedly classified under HS 
Classification 2208.60.00, while diluted soju falls un der HS Classification 2208.90.40.  Korea also 
mentions that there are other differences that sugg est that there is no direct competitive relationship 
between these two products.  Korea states that even  though the difference between standard soju and 
vodka is not as striking as the differences between diluted soju and whisky , brandy, and cognac, 
described above, diluted soju and vodka are not like.   However, Korea points out that both diluted 
soju and vodka also resemble tap water and paint thinner-- a sign, according to Korea, that 
appearances can be deceptive.   
5.266.  Firstly, Korea states that consumers are unlikel y to treat vodka and diluted soju as substitutes 
for each other in light of the price differences be tween them.  Even the comparison of the pre-tax 
prices of diluted soju and vodka shows that vodka  is 5.7 times the price of diluted soju.144  According 
                                                      
142 According to the Dodwell Study submitted by the complainants, page 20.   
143 Panel Report on Japan - Taxes on Al coholic Beverages II , supra ., para. 6.21. 
144 According to the Dodwell Study, at p.20.  WT/DS75/R 
 WT/DS84/R 
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 to Korea, if these products were truly as 'like’, in competition, or substitutable for each other, it would 
be difficult to understand how such a vast price discrepancy could exist. 
5.267.  Korea further argues that vodka and diluted soju are not consumed in the same ways or in the 
same places.  In Korea's view, this follows, not only from the price difference, but also from the 
difference in alcohol percentage (vodka: 40%; sta ndard soju: 25%).  Korea contends that vodka is 
primarily a 'mixing’ drink, and that there are even  recipe books dedicated to cocktails one can make 
with vodka. According to Korea vodka is mostly consumed, though at considerably lower volumes 
than whisky, in room saloons, hotel bars, night club s, karaoke bars, in short, places where meals, and 
standard soju, are not offered.  
5.268.  Korea also states that d iluted soju is drunk straight in a typical small glass and is decidedly 
not a mixer. Korea contends that the outlets for diluted soju are generally eating establishments, and 
they are more 'ordinary’ than those at which vodka is offered.  It is contended that one can buy soju in 
places like barbecue houses, restaurants, mobile st reet vendors and Chinese restaurants, while one 
cannot generally buy vodka there.   
5.269.  Korea further states that diluted soju is a vol ume drink, which vodka is not.  According to 
Korea, the small volumes of vodka sold in Korea are not attributable to the tax differential.  Whisky, 
with a higher tax than vodka, sells at considerably la rger volumes in Korea.  In Korea's view, the more 
likely explanation for vodka’s small sales volume is si mply that Korean consumers have no particular 
taste for it.   
5.270.  According to Korea, in light of all these diffe rences, vodka and diluted soju are certainly not 
'like' products, and they are also not directly competitive and substitutable.  
Diluted Soju and Gin 
5.271.  Korea states that even though diluted soju and gi n look alike, there is more to these products 
than meets the eye.  Firstly, Korea states that gi n is usually 40% alcohol while diluted soju is only 
25% alcohol.  Secondly, gin is derived from maize an d flavoured with certain aromatics and spices, in 
particular juniper berries, which impart to gin a unique flavour and aroma, reminiscent of spices -- a 
taste which is not comparable to any other liquor.  By  contrast, diluted soju is made with tapioca or 
potatoes, and has a more harsh and neutral flavour .  Korea argues that, accordingly, a consumer 
desiring the specific taste of gin will not settle for so ju. Conversely, a Korean consumer interested in 
soju will not turn to gin with its typical, even overbearing, taste.  
5.272.  Korea further states that another reason why co nsumers would not substitute gin for diluted 
soju is the fact that gin is a product which is significantly more expensive than diluted soju.  
According to Korea, even without taking into acc ount the disputed taxes levied on both drinks, the 
price differential between the average price of d iluted soju and gin amounts to a factor of five.
145  
Korea maintains that at harmonised tax rates this large price difference would remain.  
5.273.  Korea argues that the fact that consumers do not consider gin and diluted soju to be 
substitutable for each other is borne out in the patte rns of consumption and places of sale.  According 
to Korea, the vast majority of diluted soju is dr unk straight, with meals.  Gin on the other hand is 
served as a long drink, not straight, and is not dru nk during meals.  Korea contends that gin is an 
'occasional’ drink in Korea, only rarely purchased on  the Korean market even  compared to whisky. 
Compared to diluted soju consumption volumes, gin is a mere drop in the bucket, showing that in 
terms of demand, gin is not a substitute for diluted soju.  
                                                      
145 According to the Dodwell Study submitted by the co mplainants, p. 20 (see Attachment 4 of Korea). WT/DS75/R 
WT/DS84/R Page 68 
 
 
Diluted Soju and Rum 
5.274.  Korea states that rum comes in  two varieties, light and dark , and while light rum looks like 
diluted soju, dark rum does not.  However, Korea st ates that both varieties of rum are very different 
from standard soju.  Firstly, Kor ea argues that diluted soju has an alcoholic strength of 25% by 
volume, while rum is at least 38% alcohol by volume.   Secondly, Korea argues that rum is distilled at 
less than 96% by volume from the juice of cane sugar or molasses, specifically so that the distillate 
retains the specific organoleptic characteristics imparted  to it from those raw materials.  Thirdly, rum 
is aged.  According to Korea, the result is a swee tness and a caramel flavour and smell that is smooth 
and appealing.  Korea notes that, on the other hand , diluted soju is made from more neutral raw 
materials (tapioca, potatoes, corn), and is not ag ed.  It has a 'rough’ flavour and tends to leave a 
burning sensation in the mouth and throat.  According to Korea, therefore, due to this difference in 
taste, a consumer would not be willing to accept ru m when he wants diluted soju, or vice versa. 
5.275.  Korea further argues that like with the othe r liquors, consumers are even less likely to 
consider these two products as substitutes for each ot her in light of the difference in price between 
them.  Korea states that pre-tax, rum is alr eady 6.2 times more expensive than diluted soju.
146 
5.276.  Korea states that in addition to, and likely because of, the physical and price differences, 
diluted soju and rum are consumed in very differe nt fashions.  Rum is a llegedly usually mixed as a 
cocktail and sold at bars and night clubs, where dilute d soju is not even availa ble while diluted soju is 
almost exclusively drunk neat and is norma lly served as an accompaniment to food.  
5.277.  Korea argues that these differences are borne out  in the marketing of both products:  rum is 
presented as a special and exotic beverage, intended for consumption in elegant establishments such 
as those mentioned above.  Diluted soju on the other hand, is the commoner’s drink, and is marketed 
as such.   
5.278.  Korea therefore concludes that, as with gin, the disparity in the volumes of rum sold and the 
volumes of diluted soju sold should be kept in mi nd.  In other words, diluted soju is a commodity, 
while rum is a special, 'niche’ drink.  
5.279.  Korea submits that it has presented a product-by-product analysis of the relationship of 
diluted soju and the imported liquors at issue.  Korea considers that the conclusion of this analysis is 
that none of these products is in a directly comp etitive and substitutable rela tionship with any other 
(and, of course, that vodka, and for that matter, none, of the imported beverages is 'like’ diluted soju).  
5.280.  Korea further submits that even if the Panel c onsiders that any one of the imported products is 
directly competitive and substitutable for standard soju, there is still no violation of Article III. That is 
because the complainants have failed to prove, as  is required under Article III:1, that the tax 
differential at issue in this case is 'so as to  afford protection to domestic production.’  
5.281.  Korea argues that, firstly, it sh ould be recalled that in Japan - Taxes on Alcoholic 
Beverages II ,  a protectionist effect was found in the combination of customs duties and the tax 
differentials, which 'isolated’ Japanese shochu from competition. Korea contends that this 
combination does not exist in Korea.  Korea su bmits that although it levies a (GATT-compatible) 
customs duty, its market for soju is not 'isolated’  at all.  Korea recalls once more the recent report 
published by the European Commission:  
The Korean alcohol market is no longer a market protected by the government with market 
shares contested by local producers. In fact , it is becoming a truly global market where 
                                                      
146 Ibid.  WT/DS75/R 
 WT/DS84/R 
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multinational companies convene to  compete with one another fo r the lucrative and promising 
Korean market.147 
5.282.  Korea further argues that making diluted soju basically involves mixing joojung with water, 
and in Korea the vast majority (a pproximately 70%) of the joojung used to make diluted soju is 
imported in a semi-finished state.  Korea adds that  when joojung is locally produced it is primarily 
made from imported ingredients (notably tapioca).  A ccording to Korea, therefore, even if the Panel 
concludes that standard soju is 'protected’ by th e difference in tax, one could only say that Korea 
protects one imported product at the expense of another. 
5.283.  Korea argues that on the other hand, if Kor ea’s diluted soju production is nevertheless 
considered substantial enough to am ount to domestic production, then it must also be considered that 
Korea has a domestic whisky industry as well.  Ac cording to Korea, the production of whisky in 
Korea is in fact similar to the pr oduction of diluted soju, in that concentrated whisky is imported, then 
mixed with water and caramel, and then bottled.  Korea states that this process, though it can be 
described in these simple terms, does add a substantial amount in value.148 From this perspective, 
therefore, by imposing a higher tax on whisky, Kor ea has in fact been penalising its own domestic 
whisky industry. 
5.284.  Korea also argues that the fact  that there are few imports of  soju (e.g., from Japan) can be 
explained by commercial realities, rather than regul ation:  Japanese shochu sells at prices that are 
much closer to western-type liquors in Japan.  
ii) Distilled Soju 
5.285.  Korea argues that if one could speak of a ‘soju market’, diluted soju would represent more 
than 99.8% of that market , and distilled soju, 0.2%.  
5.286.  Korea points out that the small volume of sales of distilled soju is indicative of the fact that 
distilled soju is a special artisanal product.  Korea st ates that it is in fact difficult to compare a product 
that is mass-marketed around the wo rld such as the imported liquors at issue in this case to such a tiny 
niche product, sold only in Korea.  According to Ko rea, distilled soju is not in the same league as 
these world-wide players. 
5.287.  Korea further states that because distilled soju  is prepared with great care and in small 
quantities, it is an expensive product in the price range of top-range whiskies and brandy/cognac.  
This is in contrast to diluted soju which is fa r less expensive than the imported products, and falls 
completely on the other end of the scale.   
5.288.  Korea also states that distilled soju comes in an expensive ceramic bottle and is most often 
offered as a gift to friends or colleagues, to be taken home and consumed there. It is marketed as such.   
Distilled Soju and Whisky 
5.289.  Korea argues that the differences in the appear ance of distilled soju and whisky are obvious. 
Distilled soju is a ‘white’ spirit, while whisky is a br own spirit.  As regards taste, whisky has a typical 
flavour, described as smooth, smoky and warm.  Kor ea adds that one can detect the taste and aroma 
imparted to the beverage as a result of its raw materials (maize, barley, rye) and its mandatory ageing in wooden casks for at least 3 years.  Distilled soju  has a full-bodied liquor with a clean aftertaste. 
                                                     
 
147 See Attachment 3 of Korea. 
148 Korea understands that the cost of raw materials as  a proportion of pre-tax prices can be comparable 
for standard soju and domestic whisky production.   WT/DS75/R 
WT/DS84/R Page 70 
 
 This flavour is achieved by using mainly rice or gr ain as a raw material.  Ko rea states that distilled 
soju can be, but need not be, aged (for a maximum of 2 years) in order to refine its flavour.   
5.290.  Korea also argues that distilled soju and whisky are used for very different consumer needs.  
Korea states that the most common way to drink whisky  in Korea is as a cocktail, on the rocks, diluted 
with water or another mixer while distilled soju is al most exclusively drunk neat, that is, not diluted or 
mixed.  
5.291.  Korea states that most whisky is sold in Kor ea through channels as bars , hotels, room saloons, 
night clubs, karaoke bars and restaurants while dis tilled soju is a typical artisanal ‘gift’ item and as 
such is mostly sold through reta il shops (and, recall, in very sma ll quantities).  Korea further states 
that distilled soju offered as a gift is then consumed at home, rather than in trendy bars like whisky.   
5.292.  Korea argues that consistent with these different patterns of consumption is  a different type of 
marketing:  whisky, a chic drink to be sipped in swanky venues; distilled soju, a traditional product to 
be offered as a gift.    
Distilled Soju and Brandy/Cognac  
5.293.  Korea argues that as with whisky, the differe nces between distilled soju and brandy/cognac 
are apparent at first glance.  Brandies/cognacs are br own spirits, contrary to distilled soju which is a 
clear white spirit.  In addition, Korea states that brandies have more body as they are aged for a longer 
period than distilled soju. As to their taste, bra ndies/cognacs have a warm and fruity taste, while the 
taste of distilled soju is full-bodied with a clean aftertaste. 
5.294.  According to Korea, the difference in raw mate rials and production processes is the origin of 
this difference in taste and appearance. Brandi es/cognacs are derived from fermented grapes, then 
aged in wooden casks, generally from 3 to 12 years. Distilled soju is usually made with rice and grain, 
and can only be aged for 2 years. 
5.295.  Korea argues that brandy/cognac is usually cons umed neat in a high-brow restaurant as a 
digestif.  Distilled soju, as mentioned above, is gene rally received as a gift, and therefore is consumed 
at home. Further, the marketing of distilled soju is specifically geared at offering the product as a gift, 
whereas brandy/cognac is more often consumed by th e glass in restaurants or high class drinking 
establishments. 
Distilled Soju and Vodka 
5.296.  Korea states that there are si milarities between distilled soju and vodka.  They are both white 
spirits, and they have similar degrees of alcoholic strength. However, Korea argues that, in light of 
other, more important differences in price, place s of sale and consumption, end uses and marketing, 
distilled soju and vodka cannot be considered as ‘like products’ or as directly competitive or 
substitutable products. 
5.297.  Korea argues that distilled soju is a very special product that has a different flavour from 
vodka. Vodka approaches ‘flavourlessness’, while the t aste of distilled soju is linked to its raw 
material.  Vodka and distilled soju are also not c onsumed in the same fashion or in the same places. 
Due to its absence of flavour, vodka is particularly suitable for use in mixed drinks and is most often 
consumed as long drink in Korea.  In so far as vodka is consumed in Korea, it is mostly sold through 
bars, discos, and room saloons.  By contrast, distille d soju is only consumed straight.  In general, 
distilled soju is sold through shops as it is a typical  artisanal gift item. When received as a gift, 
distilled soju is subsequently consumed by the recipient at his home.   WT/DS75/R 
 WT/DS84/R 
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 5.298.  According to Korea, the above differences are reflected in the marketing of these products.  
Distilled soju is marketed as a traditional beverage and an appropriate gift, while vodka is marketed as 
a drink suitable for cocktails to be consum ed while out on the town in the evening. 
Distilled Soju and Gin  
5.299.  Korea states that one of the most important di fferences between distilled soju and gin is their 
tastes.  Gin allegedly has an immediately recogni sable flavour, which is unique and distinct, due in 
particular to one of its raw materials: juniper berri es. Distilled soju is usually made of rice or grain 
and is not produced with such  distinctive added flavours.  
5.300.  Korea also states that consumers do not consume gin and distilled soju in the same way or in 
the same places.  The special flavour of gin is generally only appreciated as a long drink, not straight, 
and is most often consumed in up-scale locations, such as bars, room saloons and comparable places.  
Distilled soju, on the other hand, is always consumed  straight and never mixed.  Korea states that 
distilled soju is a typical gift, and subsequent to r eceipt is usually consumed at home, rather than out 
in bars and clubs. 
5.301.  Korea also states that distilled soju is market ed as a traditional Korean gift. Gin, on the other 
hand, is marketed as a drink suitable for cocktails to be drunk out on the town. 
Distilled Soju and Rum  
5.302.  Korea states that rum and distilled soju differ in  price, physical characteristics, organoleptic 
qualities, and are used by consumers to fill different  needs.  For these and other reasons distilled soju 
and rum are not directly competitive and substitutable.  
5.303.  Korea states that rum comes in both light and dark  varieties.  The light rum is a clear white 
spirit, and therefore could be said to resemble dis tilled soju. Dark rum however is a brown spirit, and 
does not resemble distilled soju.  
5.304.  Korea states that both types of rum have a very different flavour from distilled soju.  Rum is 
distilled from the juice of cane sugar or molasses in  such a way that the distillate has discernible 
organoleptic characteristics deriving from those raw materials; the result is a mildness and a caramel 
flavour that is smooth and appealing.  Unlike rum, distilled soju is usually made of rice and is a dry 
alcohol which does not have the same mild caramel flavour.  
5.305.  According to Korea, as a result of these differe nces, distilled soju and rum are consumed in 
very different fashions.  First of all, in so far as rum is consumed in Korea, the most common way to drink rum is as a cocktail in places such as bars, hotels,  and room saloons. By contrast, distilled soju is 
almost exclusively drunk neat, that is, not diluted or  mixed with other liquids.  Korea also argues that 
distilled soju is most often presented as a gift , which is bought by the giver in a shop, and 
consequently drunk by the recipient at home.  
Analysis of the "so as to afford protection" requirement 
5.306.  According to Korea, the marketing strategies of  rum and standard soju reflect the different 
geographical origins of the drinks.  Rum is marketed  as an exotic drink, which is ideally used as a 
cocktail during night-time occasions.  The marketing of distilled soju, on the other hand, reflects the 
traditional Korean life-style (illustrated by its presen tation in special Korean ceramic bottles, often as 
a set with ceramic cups).  WT/DS75/R 
WT/DS84/R Page 72 
 
 5.307.  Korea states that, as with diluted so ju, Korea has presented an explanation, 
product-by-product, of why distilled soju is not ‘lik e’ vodka or directly competitive and substitutable 
for any of the imported liquors involved in this case.   
5.308.  Korea states that even if the Panel disagrees w ith Korea’s point of view, the complainants 
have still failed to make out a violation of Article III .  In Korea's view, in order to prove a violation, 
the complainants must show that the tax differential at issue is ‘so as to afford protection to domestic 
production.’   
5.309.  Korea states that distilled soju is a traditional, artisanal product.  It is not a mass-marketed, 
international product such as the imported beverages concerned.  In other words, the demand for a 
product like distilled soju is specific and static -- it w ould be difficult to affect it a great deal in either 
direction by altering the price, especially not to th e degree at issue in this case. Indeed, despite the 
lower tax applied to distilled soju, its sales are still minuscule.  
5.310.  Korea wants the Panel to imagine, quod non,  that it found that whisky and distilled soju were 
directly competitive and substitutable products, and th at the other conditions of Article III were met. 
Korea would then be forced to harmonise the tax rates on these two products.  Korea submits that it 
could not lower the tax rate on whisky for distille d soju, as the impact on its revenues would be too 
great.  Instead, it would have to raise the tax rate  on distilled soju, crippling a tiny artisanal product 
which is part of its heritage, with  no benefit to the imported beverages.
149 
5.311.  According to Korea, the result of this analysis is that even if the Panel disagrees with Korea’s 
arguments that distilled soju is not directly co mpetitive and substitutable to any of the imported 
beverages concerned, the requirement of Article II I:1 has still not been met:  the complainants have 
not proved that the different tax applies ‘so as to afford protection’ to distilled soju. 
                                                      
149 According to Korea, in this regard, it could even be said that the special position of distilled soju for 
Korea merits an exception under Article XX(f) of the GATT.   WT/DS75/R 
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VI. REBUTTAL ARGUMENTS 
A. EUROPEAN  COMMUNITIES 
1. Shochu and soju 
6.1. The European Communities notes that accordi ng to Korea, the only difference between 
shochu and soju is that shochu contains two a dditives only (sugar and citr ic acid) whereas soju 
contains four to five more additives.  However,  according to the European Communities, it is still 
unclear whether there is a legal requirement to use any of those additional four to five additives or 
whether it is simply a characteristic of certain brands. 
6.2. The European Communities argues that all th e extra additives except one (mineral salt) 
supposedly found in soju but not in shochu are sweete ners.  Thus,  the EC view is that the alleged 
difference between soju and shochu appears to be not hing other than the fact that soju is somewhat 
"sweeter"  than shochu.  The European Commun ities adds that Korea does not specify how much 
"sweeter" soju must be.  According to the Eur opean Communities, there appears to be no legal 
requirement in Korea regarding the minimum sugar c ontent of soju. The analytical tests conducted by 
the Scotch Whisky Research Institute have allegedl y revealed no trace of this supposed difference in 
"sweetness" alleged  by Korea.150  
6.3. The European Communities further argues that at any rate, the difference alleged by Korea is 
a very minor one.  The European Communities asserts that Coca Cola, for example, also is slightly 
sweeter in some countries than in  others, so as to match different local tastes.  Significantly, Korea 
does not even allude to this suppo sed characteristic of so ju when it attempts to distinguish it from 
vodka and other distilled spirits.  
6.4. The EC view is also that Korea also implies that, unlike soju, the majority of shochu A is 
frequently aged and brown coloured.  According to  the European Communities, over  99% of shochu 
is white151 and non aged.152 
6.5. The European Communities also notes Korea' s contention that, unlike soju expressly 
manufactured for the Japanese market, "t rue" soju  consumed by the Ko rean minority in Japan is not 
treated as shochu by the Japanese authorities for customs and tax purposes.  According to the 
European Communities, this claim seems to be at odd s with the statements made by Japan before the 
1996 Panel on Japan - Taxes on Alcoholic Beverages II .153  The EC view is that even if Korea’ claims 
were correct, they would only go to show that Japan applied its Liquor Tax Law so as to afford protection to its domestic production of shochu not only vis-à-vis imports of western spirits but also 
vis-à-vis imports of soju. 
2. The Japanese market a nd the Korean market 
6.6. The European Communities argues that according to Korea, the main difference between the 
Korean market and the Japanese market would be th at in Japan the prices of shochu and of imported 
liquors are "within a relatively short range", wher eas in Korea soju is much less expensive than 
imported liquors. 
                                                     
 
150 See EC Annex 8. The EC states that although Korea attempts to discredit that research by describing 
it as a "partisan report",  it offers no evidence to dispute the findings of that report. 
151 The optical density of shochu, measured by the light of 430 nana-meter wavelength is, at the 
maximum, 0.08.  The usual optical density of Scotch whisky is between 0.45 and 0.70. 
152 See  Panel Report on, Japan - Taxes on Alcoholic Beverages II , supra ., para. 4.54.  
153 Ibid., para.  6.35. WT/DS75/R 
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 6.7. According to the European Co mmunities, Korea does not provide any evidence to support its 
allegations regarding the Japanese market, but inst ead makes a misleading reference to an argument 
made by the European Communities in the Japan - Taxes on Alcoholic Beverages II  case.  
6.8. The European Communities argues that the pri ces of shochu on the Japanese market vary 
considerably.  At one extreme, there is inexpensive standard shochu sold in bulky plastic bottles of 1.8 
to 4 litres or even in paper packages.  At the other extreme, there are premium brands sold in 0.7 litre 
bottles which are generally three to four times more expensive than standard shochu.
154  According to 
the European Communities, standard shochu still acc ounts for the majority of sales, like in Korea, 
even though sales of premium shochu are growing rapidl y.  The price range for western-style spirits is 
allegedly even wider than that of shochu, especially in the case of whisky and brandy. 
6.9. The European Communities explains that when it argued that in Japan the pre-tax prices for 
shochu and western spirits were within a relatively close range, it based itself on a comparison of the 
prices for premium shochu brands, on the one hand, and standard brands of  western spirits, on the 
other hand155.  According to the European Communities, even on that basis, the pre-tax prices for 
standard imported whisky were sometimes as much as twice the price for shochu.  It was never 
disputed by the EC that the prices of premium whisky or premium brandy in the Japanese market 
could be many times higher than the prices of standard  shochu. 
6.10. The European Communities notes that like Korea in  this dispute, Japan submitted to the Panel 
a comparison of pre-tax weighted average prices. According to that comparison, the pre-tax price for brandy and whisky were 13 times and 5 times highe r, respectively, than the pre-tax price for 
shochu A.
156 
6.11. The European Communities also notes Korea's clai m that another important  difference is that 
in Japan shochu A and shochu B are sold in comparable volumes and at similar prices.  The EC view is that this is correct but irrelevant.  The Europ ean Communities fails to see how this difference can be 
conducive to stronger competition between shochu and western spirits, as compared to soju.  
6.12. Finally, the European Communities notes that Ko rea invokes differences in drinking styles. 
According to Korea, soju is always drunk "strai ght", whereas shochu is drunk in other styles in 
addition to "straight",  such as diluted with warm  water and mixed in cocktails.  According to the 
European Communities, this is inaccurate as far as soju  is concerned.  The EC view is that soju is not 
always drunk straight, and in particular, it is also  drunk as cocktail, as attested by the growing sales of 
pre-mixes.  As to the fact that shochu is drun k with warm water (i.e. in a style which is not 
characteristic of any western spirit) the European Communities fails to see how this may have had the 
paradoxical result of making shochu more co mpetitive with western spirits than soju. 
3. All types of soju are one and the same product 
(a) Distilled and diluted soju 
6.13. The European Communities notes that Korea atte mpts to create an artificial distinction 
between the two basic types of so ju: distilled soju and diluted soju
157, with an obvious strategy: many 
of the alleged differences which, acco rding to Korea, make soju "unlike" or "not directly competitive 
                                                      
154 See EC Annex 1. 
155 See EC Annex 2. 
156 See EC Annex 3. 
157 The EC argues that "diluted soju" is a term used  in the Liquor Tax Law and other official Korean 
sources and not one created by the compla inants, as Korea seems to imply. See,  for example,  the decision of the 
Fair Trade Commission in Attachment 1 to Korea’s First Submission and the 1997 Korean Taxation Guide published by the Ministry of Finance in Annex 4 to this submission.    WT/DS75/R 
 WT/DS84/R 
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 or substitutable" with western-style liquors (includi ng in particular the differences in pricing) cannot 
be substantiated  when those liquors are compared to distilled soju. 
6.14. According to the European Communities, Korea see ms to be ready to "sacrifice" distilled soju 
in order to spare diluted soju.  In the EC view, that sacrifice would be more apparent than real, in view 
of Korea's statement that under certain conditions the producers of distilled soju may be designated as 
possessors of an "intangible cultura l asset".  The European Communiti es retorts that Korea carefully 
omits to say that this may entail an exemp tion from the Liquor Tax and the Education Tax.
158   
6.15. According to the European Communities, the r eality, however, is that distilled soju and 
diluted soju are but two varieties of the same product, as it should be obvious already from the fact 
that the two bear the same name.  The European  Communities notes that many other spirits are also 
produced in different types or varieties. In the case of whisky, for instance, it is possible to distinguish 
between malt Scotch, grain Scotch, blended Scotch, Ca nadian, Irish, Bourbon, Rye, etc.  According to 
the European Communities, in relative terms distilled so ju is no more different from diluted soju than, 
for example, malt Scotch from grain Scotch. 
6.16. The European Communities argues th at the distinction between distilled soju and diluted soju 
was not introduced in the Liquor Tax Law until 1991.159  In the EC view, it was a distinction created 
exclusively for tax purposes as no similar distincti on is found in Korea’s tariff schedule, where all 
soju is classified within a single heading with the description "soju".160 
6.17. The European Communities notes th at until the 1960s, most soju  sold in Korea was produced 
according to the method described in the legal defin ition of "distilled soju". The origins of what the 
Liquor Tax Law calls "diluted soju" go back to 1962,  when, in order to cope with a severe shortage of 
grains,  the Korean Government adopted a series of measures to encourage the use of ethyl alcohol. 
By the mid seventies, the Europ ean Communities further argues, distilled soju had given way to 
diluted soju.  According to th e European Communities, such sw ift transition was possible only 
because, in the eyes of Korean consumers, the two varieties of soju are the same product. 
6.18. The European Communities asserts that the diffe rences between distilled soju and diluted soju 
are aptly described by a decision of Korea’s Fair Trade Commission.161  According to the first 
"Established Fact" of that Decision, 
"Distilled soju is made from a mix of additiv es and water blended into an alcohol solution 
extracted by a method of ‘single-step’ distillation.  On the other hand, ‘diluted’ soju refers to 
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’.  Thus, the basic 
difference between those two types of soju lies in whether the alcohol was extracted by means of single-step distillation or continuous distillation." 
6.19. The European Communities notes that other spirits  such as whisky and brandy can also be 
obtained either by single-step distillation (also referre d to as "pot still" or "discontinuous") or by 
                                                     
 
158 See the 1997 Korean Taxation Guide published by Korea’s Ministry of Finance in EC Annex 4. 
159 The distinction was introduced in response to pres sure from the EC to eliminate the tax differentials 
between soju and the other distilled spirits. The creation of the category of distilled soju was but a fig leave, 
which allowed Korea to claim that "expensive" soju wa s no less taxed than "some" imported liquors  (namely 
the category of "liqueurs").  
160 See EC Annex 5. 
161 See Attachment 1 to First Submission of Korea.  WT/DS75/R 
WT/DS84/R Page 76 
 
 continuous distillation.  It further notes for instance,  that malt Scotch whisky is produced by pot-still 
distillation, while grain Scotch whisky is obtained by continuous distillation. 
6.20. The European Communities argues that the close sim ilarity of the two types of soju is attested 
by the fact that distilled soju and diluted soju can  be and are often blended with each other.  When 
distilled soju represents more than 20% of the total alcohol content, the admixture is taxed as distilled 
soju and not as diluted soju. Again,  a parallelism can be drawn to whis ky.  The most common type of 
Scotch whisky is blended whisky,  which is produced by mixing malt Scotch and grain Scotch. 
6.21. The European Communities further argues that th e other differences between diluted soju and 
distilled soju alleged by Korea are eith er exaggerated or irrelevant because: 
(a) there is no legal requirement to use only rice or grains for making distilled soju.  In 
accordance with the legal definition of di stilled soju, other raw materials containing 
starch can be used as well.  On the other hand, diluted soju can also be produced from 
grains;
162 
(b)  although diluted soju cannot be aged by la w, it is perfectly legal to blend previously 
aged distilled soju and neutral spirits  in order to make diluted soju;  
(c)  as stressed by Korea at another point of  its submission where it seeks to distinguish 
distilled soju from whisky, "distilled soju can be, but need not be, aged"; 
(d)  the price difference between distilled so ju and diluted soju are no larger than, for 
example,  the prices differences between certain types of whisky; 
(e)  there are also appreciable differences in taste between Premium diluted soju and 
Standard diluted soju or, for example, between Scotch Whisky and Bourbon; 
(f)  many other spirits are produced both artisanally and industrially; (g)  there is no legal requirement regardi ng the minimum alcohol content of either 
distilled or diluted soju. 
(b) Premium and standard diluted soju 
6.22. The European Communities reiterates that, a new segment of so-called "premium soju" 
brands is emerging rapidly within the category of d iluted soju.  Premium soju is characterised by a 
milder taste, the use of flavourings and/ or ageing and more sophisticated packaging.
163 All this makes 
premium diluted soju even more similar to west ern-style  spirits than standard diluted soju. 
6.23. The European Communities argues that Korea cannot deny that premium diluted soju is the 
same product as standard diluted soju, since this is  not a distinction which is reflected in Korea’s 
regulations.  Instead, Korea allegedly attempts to minimise the importance of premium soju by 
presenting it as an exception of minor importance and then ignores it in the remainder of its 
submission.  
                                                      
162 For instance, according to the So fres Report, the Premium Soju brand Kim Sat Gat uses rice or 
barley. See the Sofres Report, p. 23.  
163 See the Sofres Report, at pp. 23-24  WT/DS75/R 
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 6.24. The European Communities notes, however, that this "exception" accounts for a volume of  
sales which exceeds the combined sales volume of a ll imported spirits.  The EC claimed that premium 
diluted soju may have accounted for as much as 10 percent of soju sales in 1997.
164 
4. Soju and vodka are like products 
 The standard for the interpretation of "like products" 
6.25. The European Communities argues th at Korea seems to consider that it is sufficient to point 
to the existence of any difference, however minor, between two liquors, such as for instance a vaguely 
defined  difference in taste, in order to excl ude a finding of "likeness" for the purposes of GATT 
Article III:2, first sentence. 
6.26. According to the European Communities, as clarified by the Appellate Body in  Japan - 
Taxes on Alcoholic Beverages II ,  in Article III:2, first sentence, the notion of "like" product must be 
construed "narrowly".165  Nevertheless, the EC view is that it is also a well established principle that 
in order to be "like" two products need not  be "equal" or "identical" in all respects.166  The European 
Communities notes that according to Japan - Taxes on Alcoholic Beverages I : 
[m]inor differences in taste, colour and other properties (including differences in 
alcohol contents) do not prevent products from qualifying as like products.167 
6.27. According to the European Communities, Ko rea’s position appears to be based on the 
mistaken notion that in order to be "like" two products must be "perfectly substitutable".  The 
European Communities argues that contrary to Korea’s allegations , the Appellate Body has never 
taken such an extreme view, and that Korea’s reasoning is a classical non sequitur .  The European 
Communities further argues that in Canada - Certain Measures Concerning Periodicals,168 the Panel 
noted that a case of perfect substitutability would fall within Article III:2, first sentence, in order to 
reject an argument by the defendant to the effe ct that between the products concerned there was 
"imperfect substitutability" only.  According to  the European Communities, the Appellate Body, 
however, did not thereby imply that two products must  always be "perfectly substitutable" in order to 
be "like".  Indeed, such an interpretation would ma ke Article III:2, first sentence, inapplicable except 
in cases of overt origin based discrimination between identical products. 
6.28. The European Communities asserts that, in orde r to escape the implications of the two Panel 
reports on Japan - Taxes on Alcoholic Beverages  , Korea over-emphasises the importance of the 
                                                      
164 According to footnote No 30 of Korea’s First Submission, in 1996 the total taxed volume of 
premium soju was 35,108 kl. In comparison, the total volume of imports of  whisky, cognac, rum, gin and vodka during the first eleven months of 1996 was 22,286 kl (see EC’s First Submission, Annex 7). 
Also according to footnote No 30 of Korea’s First Submission,  in 1997 total taxed volume of premium 
soju was 43.878 kl. During the same year, the total taxed volume of "whisky" was 24.530 kl (see Attachment 5 to Korea’s First Submission, ). 
There is no legal definition of "premium soju". Th e discrepancy between the market share of premium 
soju estimated by the EC in its First Submission (a t para. 54) and the share mentioned by Korea may be 
explained  by the fact that Korea uses a narrower definition of premium soju. 
165 Appellate Body Report on  Japan - Taxes on Alcoholic Beverages II , supra ., pp. 19-20 
166 See Panel Report on Japan - Taxes on Alcoholic Beverages  II , supra ., para. 6.21.  See also  the 
Panel Report on Japan - Taxes on Alcoholic Beverages I , supra ., at par. 5.5, referring to the Panel Report on 
United States - Taxes on Petroleum and certain Imported Substances , supra  at para. 5.1.1, where the Panel 
found that some of the imported and domestic products, albeit not identical, were like products since they served 
substantially the same uses. 
167 Ibid., para. 5.9. 
168 Appellate Body Report on Canada - Certain Measures Concerning Periodicals , supra ., p.28 WT/DS75/R 
WT/DS84/R Page 78 
 
 "consumers’ tastes and habits" as one of the releva nt criteria for a "like" product determination.  
According to the European Communities, that crite rion was indeed mentioned by the Working Party 
on Border Tax Adjustments ,
169  which has been cited with appr oval by the Appellate Body in Japan - 
Taxes on Alcoholic Beverages170 and Canada - Certain Measures concerning Periodicals .171 
6.29. The European Communities argues however, that in practice, past panels have given little 
weight to "consumers’ tastes and habits" when maki ng "like product" determinations.  Instead, they 
have focused on objective factors such as the physi cal characteristics of the products and their end 
uses. According to the European Co mmunities, the reason for that approach is that "consumers’ tastes 
and habits", unlike the physical characteristics of products and their objective end uses, are influenced 
by prices and, consequently, also by taxes. Allege d differences in "consumers’ tastes and habits" may 
have been created, or at least "fossilised", throug h discriminatory internal taxes and cannot, therefore, 
constitute a valid justification for contin uing to apply those discriminatory taxes. 
6.30. According to the European Communities, an example of this approach is provided by the 
Panel report in Japan - Taxes on Alcoholic Beverages II : 
[E]ven though the Panel was of the view that the "likeness" of products must be examined 
taking into account not only objective criteria (s uch as composition and use by consumers) 
the Panel agreed with arguments submitted to  it [...] that Japanese shochu (Group A) and 
vodka could be considered as like products in terms of Article III:2 because they were both 
white/clean spirits, made of similar raw materials, and their end uses were virtually identical [...] Since consumer habits are variable in time and space and the aim of Article III:2 of 
ensuring neutrality of internal taxation as re gards competition between imported and domestic 
like products could not be achieve d if differential taxes could be used to crystallise consumer 
preferences for traditional domestic products, th e Panel found that the traditional Japanese 
habits with regard to shochu provided no reas on for not considering vodka to be a "like" 
product.
172  
6.31. The European Communities asserts that Korea i nvokes the fact that vodka is allegedly more 
expensive than soju as one of the reasons that ma ke those two spirits "unlike".  According to the 
European Communities, the differences in prices be tween diluted soju and vo dka have been grossly 
overstated by Korea, whereas distilled soju may,  in fact, be more expensive than vodka. 
6.32. The EC view is also that prices are not relevant  for a "like" product determination.  According 
to the European Communities, prices are not one of the criteria  mentioned  in the Working Party on 
Border Tax  Adjustments.  Nor are they mentioned as a relevant criterion by the Appellate Body in 
Japan -Taxes on Alcoholic Beverages or Canada - Certain Measures affecting Periodicals .  The EC 
view is that it is not aware of any single case in which prices have been taken into account for a "like" 
product determination, whether for the purposes of  Article III:2, or of any of the other GATT 
provisions incorporating that notion. 
6.33. In fact, notes the European Communities, in Japan - Taxes on Alcoholic Beverages II , the 
Panel rejected in categorical terms an argument by Japan  to the effect that local spirits were not "like" 
imported ones because they were less expensive: 
[T]he Panel was of the view that "like" products do not become "unlike" merely because of 
differences in prices, which were often influe nced by external government measures (e.g. 
                                                      
169 Report of the Working Party on Border Tax Adjustments , BISD 18S/97, para. 18.  
170 Appellate Body Report  on Japan - Taxes on Alcoholic Beverages  II, , supra ., p. 20. 
171 Appellate Body Report on Canada - Certain Measures Concerning Periodicals , supra ., p.21. 
172 Panel Report on Japan - Taxes on Al coholic Beverages II , supra ., para. 5.7.  WT/DS75/R 
 WT/DS84/R 
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customs duties) and market conditions (e.g. supply and demand, sales margins). The Panel 
was convinced that such an interpretation would run counter to the objective of Article III:2 to 
avoid that discriminatory or protective intern al taxation of imported products would distort 
price competition with domestic like or direc tly competitive products, for instance by creating 
price and consumer categories and hardeni ng consumer preferences for traditional home 
products.173  
6.34. The European Communities also argues that ther e are two additional reasons for disregarding 
prices when making a "like" product determination.   The first reason is that Article III:2, first 
sentence,  purports to establish a hard-and-fast ru le. Once it is determined  that two products are 
sufficiently similar to be "like",  it is irrefuta bly presumed that any difference in taxation between 
them will afford protection to the domestic produc tion and, therefore, must be condemned.  The 
European Communities continues that implicit in th is presumption, there is also the assumption that 
products which are sufficiently similar to be "lik e" must of necessity be "directly competitive or 
substitutable".  According to the EC view, Korea’ s interpretation would undermine that assumption 
and require complainants to prove that products which are sufficiently similar to be "like" are also 
"directly competitive and substitutable" in terms of price.  The European Communities argues that if a 
such view was upheld, the presumption established in  the first sentence of Article III:2 would lose 
much of its effectiveness and the clear textual di stinction between the first and the second sentences 
of Article III:2 would become blurred.  
6.35. The European Communities argues that the sec ond reason is that Korea’s reliance upon price 
differences for justifying a different tax treatment is fraught with dangerous implications for the world 
trade system.  According to th e European Communities, the present dispute is concerned with a 
situation where imported products te nd to be more expensive than the local products.  Yet, if prices 
were deemed relevant for a "like" product determ ination, it would be open for developed country 
Members to claim that cheap imports from low co st developing country Members are too inexpensive 
to be on the same market with identical local  products and to impose higher taxes on those imports.  
In the EC view, the mere possibility for a developi ng country Member to demonstrate before a Panel, 
in respect of each single category of products, that its exports do compete in terms of price with identical products of the importing country is likely to  be an ineffective deterrent against this kind of 
abuses. 
(a) Vodka and diluted soju 
6.36. The European Communities also argues that Korea is able to identify only one single 
difference between vodka and diluted soju, namely that vodka has a higher alcohol content than 
diluted soju.  According to the European Communiti es, whereas diluted soju is usually bottled at an 
alcoholic strength of 25%, vodka has between  37%  and  40% alcohol content by volume
174. 
6.37. The European Communities further not es that the two Panel Reports on Japan - Taxes on 
Alcoholic Beverages  have established that differences in alco holic content do not suffice to make two 
liquors "unlike".  In particular,  Japan - Taxes on Alcoholic Beverages II  concluded in unequivocal 
terms that: 
                                                      
173 Ibid., para. 5.9 (b) 
174  This difference is not reflected in the Liquor Tax Law, which sets no minimum alcohol content for 
either diluted soju or vodka. WT/DS75/R 
WT/DS84/R Page 80 
 
 
[A] difference in the physical  characteristic of alcoholic st rength of two products did not 
preclude a finding of likeness, especially since alcoholic beverages are often drunk in diluted 
form.
175 
6.38. According to the European Communities, this conclusion was not based on the observation of 
the specific "tastes and habits" of the Japanese cons umers but purported to ha ve a general validity on 
all markets. 
6.39. The European Communities also notes that Korea, while admitting implicitly that vodka and 
diluted soju are virtually identical, denies that they  are "like" by pointing to differences in customs 
classification, end-uses and pricing. 
6.40. In the EC view, the alleged differences regard ing end uses are the same as those invoked by 
Korea with respect to other spirits.  They ar e allegedly either overs tated or irrelevant.  
6.41. The European Communities argues that the diffe rence in customs classification is totally 
irrelevant.  The European Communities notes that Korea’s tariff is based on the 1996 version of the 
Harmonised System (HS).  Under the previous versi on of the HS, vodka was allegedly classified into 
the same basket heading as soju (HS 2208.90, "other ").  In the 1996 HS classification, it was allegedly 
decided to create a separate position for vodka (H S 2208.60) simply because that spirit had become 
one of the most internationally traded spirits a nd not because in the meantime it had developed new 
physical characteristics or end uses which made it " unlike" soju and all the other liquors falling within 
HS 2208.90.  
6.42. According to the European Communities, for th ese reasons, the alleged differences in prices 
are also irrelevant.  The EC view is that in any event, Korea grossly overstates the actual differences. 
The pre-tax prices for soju shown in the Dodwe ll Study, on which Korea bases its comparison, are 
prices for standard diluted soju.  The pre-tax pr ices for premium diluted soju are between two and 
three times higher.176  If an adjustment is made to take in to account differences in alcohol content, the 
pre-tax price for a bottle of imported vodka is two to three times higher than the pre-tax price for a 
bottle of premium soju.177  In the EC view, in relative terms the difference in prices between premium 
diluted soju and vodka is the same as the differe nce between standard and premium diluted soju and 
much less than the difference between either prem ium or standard diluted soju and distilled soju. 
(b)  Vodka and distilled soju 
6.43. The European Communities asserts that it has identified two differences between distilled 
soju and vodka: 
(a) unlike vodka, distilled soju cannot be filt ered through white birch charcoal, although 
it can be filtered through any other materials; and 
(b)  distilled soju must be obtaine d through non-contin uous distillation. 
6.44. The European Communities asserts  that Korea does not even mention these two differences in 
its argument.  The EC view is that this confirms that, as claimed by the EC, those differences in 
manufacturing process have little impact on the final ch aracteristics of the products and do not prevent 
vodka and distilled soju from being "like" products. 
                                                      
175 Panel Report on Japan - Taxes on Al coholic Beverages II , supra ., para. 6.23. 
176 See EC Annex 6. 
177 See EC Annex 7.  WT/DS75/R 
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 6.45. The European Communities notes th at in Korea’s submission, the main difference between 
distilled soju and vodka would be a difference in taste:  "Vodka approaches ‘flavourlessness’, while 
the taste of distilled soju is linked to its raw material". 
6.46. According to the European Communities, this  difference, however, is clearly minor and 
cannot preclude a finding of "likeness".  Once agai n, it is necessary to recall that according to Japan - 
Taxes on Alcoholic Beverages I  : "[M]inor differences in taste, co lour and other properties (including 
differences in alcohol contents) do not pr event products from qualifying as like products."
178 
6.47. The European Communities argues th at in terms of flavour, distille d soju is no more different 
from vodka than, for example, Japanese shochu B,  which is also obtained by non-continuous 
distillation of, inter alia , grains. 
6.48. The European Communities further argues that in  order to compensate for the absence of any 
significant difference in physical characteristic s between distilled soju and vodka, Korea invokes 
differences in end uses and marketing.   
5. Soju and the other distilled spirits are direc tly competitive and substitutable products 
(a) Standard for the interpretation of  "directly competitive and substitutable" 
6.49. The European Communities notes that at several points of its submission, Korea argues that 
the notion of "directly competitive and substitu table products" must be applied "strictly". 
6.50. According to the European Comm unities, the restrictive interpretation of the terms "directly 
competitive or substitutable" advocated by Korea finds no support in the text of Article III, and that it 
is refuted by the drafting history of GATT 1947 as well as by prior panel reports. 
6.51. According to the European Communities, during the discussions within the Geneva 
Preparatory Committee and subsequently at the Ha vana Conference, the delegates discussed a number 
of examples of "directly competitive or substitutable products" which indicate clearly that the drafters 
had in mind a rather broad interpretation of t hose terms. Those examples included apples and 
oranges;179 linseed oil and tung oil;180 synthetic rubber and natural rubber;181 coal and fuel oil;182 and 
tramways and buses.183  
6.52. The European Communities argues that past pa nels which have interpreted the notion of 
"directly competitive or substitutable products" have  also refrained from taking the narrow approach 
advocated by Korea.  The Eu ropean Communities also argues that the two Panel reports on Japan - 
Taxes on Alcoholic Beverages  reached the conclusion that all distilled spirits were directly 
competitive or substitutable products.  Another exampl e, according to the Eu ropean Communities, is 
provided by the Panel report on EEC - Measures on Animal Feed Proteins , which concluded that 
vegetable proteins and skimmed m ilk powder were "directly competitive or substitutable" products for 
the purposes of applying the second sentence of Article III:5.184 
                                                      
178 Panel Report on  Japan - Taxes on Al coholic Beverages I ,  supra ., para. 5.9. 
179 EPCT/A/PV.9, at 7. 
180 E/CONF.2/C.3/SR.11 p. 1 and Corr.2. 
181 Ibid., p.3 
182 E/CONF.2/C.3/SR40, at 2. 
183 Ibid. 
184 Panel Report  on EEC - Measures on Animal Feed Proteins , supra. , para. 4.3.  WT/DS75/R 
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 6.53. The European Communities also notes that Kor ea, in order to justify its restrictive 
interpretation of "directly competitive or substitutabl e", argues that the purpose of Article III:2 is not 
to harmonise tax policies but to avoid protectionism. 
6.54. The EC view is that it would agree that the purpose of Article III:2 is to avoid protectionism, 
but nevertheless takes issue with Korea’s contention that this purpose commands a "strict" reading of  
the notion of "directly compe titive and substitutable" product. 
6.55. The European Communities notes that in  Japan - Taxes on Alcoholic Beverages II ,  first  the 
Panel and then the Appellate Body concluded that  the notion of "like product" must be construed 
"narrowly" in the first sentence of Article III:2.   According to the European Communities, this 
interpretation was deemed necessary in view of the fact  that, as put by one of the complainants in that 
dispute, Article III:2, first sentence, is like a "guillotine": once it has been established that two 
products are like, any tax differential between them  is deemed prohibited, without it being necessary 
to ascertain whether the tax differential is  applied "so as to afford protection".
185 
6.56. The European Communities notes further that in contrast, there is no indication in Japan - 
Taxes on Alcoholic Beverages II  that the notion of "directly competitive or substitutable" product 
must also be construed "narrowly" or "strictly".   According to the Eur opean Communities, this 
reflects the different wording and structure of the second sentence of Article III:2.  Unlike the first 
sentence of Article III:2, the second sentence makes e xpress reference to the first paragraph of Article 
III.  This means, in the EC view, that in order to  establish a violation of Article III:2, second sentence, 
it must be determined first, as one of three separat e requirements, that the tax differential is "applied 
.... so as to afford protection to domestic produc tion".  According to the European Communities, 
therefore, a "strict" or "narrow" reading of the terms "directly competitive or substitutable" is not 
warranted in order to ensure that onl y protectionist measures are condemned. 
6.57. The European Communities notes that in the sam e vein, Korea also argues that Article III:2 
second sentence applies only where there is "act ual" competition, as opposed to "potential" 
competition.  According to Korea, this interpre tation is "strongly suggested" by the Interpretative 
Note to Article III:2 and,  in particular,  by the terms  ".... where competition was involved".  
According to the European Commun ities, those terms, however, refe r to "competition" only, without 
requiring that it must be "actual" competition. "Potential" competition is already "competition" within the meaning of the Note. 
6.58. According to the European Communities, the us e in the Interpretative Note of the terms 
"competitive" (and not "competing") and substitutable (i nstead of "substitute") is a further indication 
that the GATT drafters envisaged the application of Article III:2 not just in  instances of "actual" 
competition but also where there is  "potential" comp etition.  This is allegedly even clearer in the 
equally authentic French and Span ish versions which refer to  " .... un produit directement concurrent 
ou un produit qui peut
 lui être directement substitué..  ." and "... un producto directamente competidor 
o que puede  substituirlo directamente... ",  respectively.   
6.59. The European Communities argues that Korea’s interpretation is also refuted by prior 
Appellate Body and Panel reports which have recognised the relevance of "potential" competition for 
the purposes of Article III:2. 
                                                      
185 The European Communities states that giving a narrow meaning to "like products" is also justified 
by the inescapability of violation in case of taxation of foreign products in excess of domestic products.  WT/DS75/R 
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 6.60. The European Communities recalls that Japan - Taxes on Alcoholic Beverages I   stressed that 
internal tax measures should not be used to "crystallise" consumer preferences for domestic products.
186  
6.61. The same view was reiterated in Japan - Taxes on Alcoholic Beverages II: 
[t]he responsiveness of consumers to the various products offered in the market]  .... may vary 
from country to country, but should not be influen ced or determined by internal taxation. The 
Panel noted the conclusions in the 1987 Panel Report that a tax system that discriminates 
against imports has the consequence of creati ng and even freezing preferences for domestic 
goods. In the Panel’s view this meant that cons umer surveys in a country with such a tax 
system would likely understate the degree of  potential competitiveness between substitutable 
products.187 
6.62. The European Communities also notes that the re levance of  potential competition has also 
been recognised by the Appellate Body in  Canada - Certain Measures Affecting Periodicals : 
[W]e are not impressed either by Canada’s argument that the market share of imported and 
domestic magazines has remained remarkably cons tant over the last 30-plus years, and that 
one would have expected some variation if comp etitive forces had been in play to the degree 
necessary to meet the standard of "directly competitive" goods. This argument would have 
weight only if Canada had not protected th e domestic production of Canadian periodicals 
through, among other measures, the import proh ibition of Tariff Code 9958 and the excise tax 
of Part V.1 of the Excise Act.188 
6.63. According to the European Communities, the relevance of potential competition for the 
application of Article III:2, second sentence, flows fro m the well established principle that Article III 
does not protect export volumes but expectations  on the competitive relationship between imported 
and domestic products.189  Those expectations may exist even if there is no "actual" competition yet 
between imported and domestic products due to protective tax measures. 
6.64. The European Communities further argues that, Korea’s position would have the absurd result 
of actually rewarding those Members who apply the most protectionist tax measures.  If a Member 
applies a tax in such a way as to completely excl ude imports of a competitive product,  it would never 
be possible for other Members to show that there is  "actual" competition between that product and the 
protected domestic product and, therefore, that such measures violate Article III:2.  Meanwhile, a 
Member applying a less protectionist tax measure which restricts but does not pre-empt "actual" 
competition between domestic and imported goo ds would be found to violate Article III:2 
6.65. The European Communities notes th at Korea, in support of its peculiar interpretation of 
Article III:2, emphasises that this provision is pe rhaps the GATT provision "that treads most heavily 
                                                      
186 Panel Report on Japan - Taxes on Alcoholic Beverages I ,  para. 5.7. At the same paragraph, the 
Panel added that:  
"The increasing imports of "western-style" alcoholic beverages into Japan bore witness to this 
lasting competitive relationship and to the po tential products substitu tion through trade among 
various alcoholic beverages." 
187 Panel Report on Japan - Taxes on Alcoholic Beverages , para. 6.28 
188 Appellate Body Report on Canada – Certain Measures Concerning Periodicals , supra ., at 28. 
189 See e.g. Working Party on " Brazilian Internal Taxes ", adopted 30 June 1949, II/181, 185, at para. 
16; Panel Reports on United States - Taxes on Petroleum and Certain Imported Substances , supra ., para. 5.1.9, 
United States - Measures Affecting Alcoholic and Malt Beverages , supra ., 271; and United States - Measures 
affecting the Importation, Sale and use of Tobacco , adopted on 4 October 1994, DS44/R, paras. 99-100.  WT/DS75/R 
WT/DS84/R Page 84 
 
 upon national sovereignty."  Korea implies that si nce taxation is at the core of the Members’ 
sovereignty,  Panels should a dopt a deferential standard whenever taxes are concerned. 
6.66. According to the European Communities, this argum ent is totally misguided.  In the EC view, 
it is instructive to compare the wording of Articles III:2 and III:4 of GATT.  Article III:4, the general 
national treatment provision, is concerned only w ith discrimination between "like products".  In 
contrast, Article III:2 is concerned with discrimin atory taxation not only between "like products" but 
also between the larger category of "directly compet itive and substitutable" products.  In the EC view, 
this shows that the GATT drafters were well aw are that discriminatory ta xation may be one of the 
most pernicious forms of protectionism and, for th at reason, aimed to provide stricter rules with 
respect to internal tax measures th an with respect to other intern al regulations, rather than the 
opposite. 
(b) Physical characteristics 
6.67. The European Communities notes that Korea’ s submission lingers upon the differences in 
physical characteristics between soju and other spirits. Korea implies that those differences are 
sufficient to conclude that soju and other spirits are not "directly competitive or substitutable" with 
each other. 
6.68. The European Communities states that it is n ecessary to recall that two products do not have 
to be similar in terms of physical characteris tics in order to be "directly substitutable and 
competitive". As noted in Japan - Taxes on Alcoholic Beverages II ,  
"competition can and does exist among the produc ts that do not necessarily share the same 
physical characteristics. In the Panel’s view, the decisive criterion is whether they have 
common end uses..."
190 
6.69. The European Communities argues that it is obvious that if two pr oducts have similar 
physical characteristics, this constitutes a strong indication that they are "directly competitive or 
substitutable". According to the European Communiti es, in the present case, the similarity between 
soju and the other distilled spirits is such that it is a sufficient reason for the Panel to conclude that all 
of them are "directly competitive or substitutable".   
6.70. The European Communities does not deny th e existence of differences in physical 
characteristics between soju and other spirits.  A ccording to the EC view, if there were no such 
differences, it would have claimed that soju and th e other distilled spirits are "like" and not simply 
"competitive or substitutable". 
6.71. According to the European Communities, the differences invoked by Korea are, in essence, 
the same shown in EC Annex 9.  In the EC view therefore, there seems to be no disagreement with 
Korea as to the nature of the diffe rences, only as to their significance. 
6.72. In the EC view, those differences are relativ ely minor and do not prevent soju from being 
"directly competitive or substitutable" with other di stilled spirits.  Indeed, according to the European 
Communities, many of the differences invoked by Ko rea, such as differences in alcohol content, 
colour or flavour, would not be sufficien t even to exclude a finding of "likeness".191 
6.73. The EC claims its position is supported by the two Panels on Japan - Taxes on Alcoholic 
Beverages , which allegedly concluded that all dis tilled spirits were "directly competitive or 
                                                      
190 Panel report on Japan - Taxes on Alcoholic Beverages II , supra ., para. 6.22. 
191 Ibid., para. 5.9.  WT/DS75/R 
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 substitutable" on the Japanese market, notwithstanding their different physical characteristics.  Even 
if, as claimed by Korea, Japanese shochu was not "lik e" Korean soju, it rema ins that the differences 
between Korean soju and the other types of distille d spirits alleged by Korea are the same as the 
differences between Japanese shochu and those spirits. 
(c) End uses 
6.74. The European Communities notes Korea's argument  that soju and the other spirits are not 
used in the same way by Korean consumers and, for that reason, are not "directly competitive or 
substitutable."  Korea also points to differences in drinking style, drinking occasion and place of 
consumption. 
6.75. According to the European Communities, firs tly,  Korea seems to rely on the mistaken 
premise that in order to be "directly competitive or substitutable" two products must compete or 
substitute each other in respect of all possibl e economic uses.  According to the European 
Communities, that narrow view has been rejected by the Appellate Body in Canada - Certain 
Measures Concerning Periodicals .
192  In that case, Canada argued that US magazines were not 
"directly competitive or substitutable" with Cana dian magazines because, while they provided a 
reasonable substitute as an advertising medium, they  were poor substitutes as an entertainment and 
communication medium. Thus, according to Canada, US and Canadian magazines were only "imperfect substitutes". The Appellate Body dism issed this argument by pointing that a case of 
"perfect substitutability" would fall within Article III: 2, first sentence and ruled that all the magazines 
concerned were directly competitive or substitutable. 
6.76. The European Communities furthe r argues that similarly, in Japan - Taxes on Alcoholic 
Beverages I ,  the Panel based its conclusion that Japan ’s Liquor Tax Law violated Article III:2, 
second sentence, on the finding that there existed direct competition or substitutability among the liquors  concerned, "even if not necessarily in resp ect of all the economic uses to which the product 
may be put"
193 
6.77. According to the European Commun ities, these two reports make it very clear that in order to 
establish that two products are "directly competitive or  substitutable", it may be sufficient to show that 
they are "directly competitive or substitu table" in respect of certain uses. 
6.78. Secondly, according to the European Communities,  the consumption patterns of soju and the 
other spirits concerned in this dispute are much more diverse and flexible than Korea’s simplistic 
presentation would suggest.  According to the Eur opean Communities, Korea would have the Panel 
believe that soju is always drunk straight and with  meals and only at certain types of outlets, whereas 
western spirits are always drunk in styles other than  straight, before or after meals and at different 
types of outlets. In the EC view, the reality is mu ch more complex than this black-and-white picture. 
According to the European Communities, although the consumption patterns of soju and western 
spirits are not identical, there is a substantial degree of overlapping and, therefore, competition 
between the two categories. 
6.79. The European Communities furt her argues that Korea’s submission focuses exclusively on 
the most traditional consumption patterns and disr egards the rapid emergence of a new drinking 
                                                      
192 Appellate Body Report on Canada - Certain Measures Concerning Periodicals , supra, p.28. 
193 Panel Report on Japan - Taxes on Alcoholic Beverages I , supra,  para. 5.7. WT/DS75/R 
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 culture which is increasingly comparable to that  of other developed countries, especially among 
young consumers.
194 
6.80. Thirdly, in the EC view, consumption patterns are affected by prices, which in turn are 
affected by tax differentials.  It is certainly not a coincidence if in the present case the less taxed 
product is consumed more often with meals195  or if the more taxed products are more often found at 
expensive outlets than at less expensive ones.  According to the European Communities, it is 
necessary to discern those differences which may reflect  the genuine "tastes and habits" of the Korean 
consumers from those which have been created or, at least, "fossilised" by discriminatory taxation.  
6.81. Finally, the EC view is that Korea’s sweepi ng and categorical statements regarding the end 
uses of the different types of spirits are not sup ported by any evidence whatsoever, even though Korea 
is in possession of the necessary market surveys.  A ccording to the European  Communities, the Panel 
should draw appropriate inferences from Ko rea’s refusal to discl ose those surveys. 
(d) Drinking styles  
6.82. The first difference alleged by Korea is that soju is always drunk straight. The EC view is that 
this is simply not true. The most frequent style for dr inking soju is straight. But soju is also consumed 
in other styles, including mixed with other non-alco holic beverages, especially by young consumers. 
This is attested by the growing sales in recent y ears of soju-based pre-mixes, of which some samples 
have been provided to the Panel.  For tax purposes,  soju-based pre-mixes are not considered as soju 
but as liqueurs. Nonetheless, the success of tho se pre-mixes proves that Korean consumers enjoy 
drinking soju mixed with other beverages.196 
6.83. Furthermore, western-style spirits also are consumed straight.  In particular, straight is the 
most frequent drinking style of brandy. Similarly, wh isky is most often consumed alone,  diluted with 
water or on the rocks, all of which are effectively "straight".  
(e) Drinking occasion 
6.84. The European Communities notes that, according to  Korea, soju is consumed always with 
meals.  In the EC view, this is an over-simplificatio n.  Soju is often, but not always, consumed with 
meals. For instance, according to the European Communities,  sojubangs  are one of the most typical 
places for drinking soju. Yet sojubangs  are bars and not restaurants.  In  addition, it is the EC view that 
                                                      
194 See the Sofres Study, pp 3-7.  According to the Sofres Report (at p. 4), the main changes in the 
Korean drinking culture are: 
 - Consumers prefer premium drinks for their taste and aroma, 
 - Consumers (young generation) prefer western style atmosphere  
- A drinking culture where 3 to 4 people, instead of a large group, gather to drink in moderate amounts, 
- A drinking culture where people drink li ghtly at home with family members.  
195 The EC claims that Korea defies economic logic when  it states that "In Korea,  standard soju is the 
drink one finds on the dinner table, the drink that is consumed with meals. As such it is an inexpensive 
beverage" (Korea’s First Submission, para. 130) 
According to the European Communities, it seems more logical that soju has acquired the status of  
"every-day meal drink"  because it is inexpensive, rather than the opposite. If soju had been subjected to import 
quotas and then to dissuasive import duties and very high discriminatory internal taxes, it could have never achieved that status.     
196 The Sofres Report describes this development in the following terms, at p.24: 
"Also the sale of other liquors in the form of soju cocktail (lemon flavoured soju, cherry flavoured soju, etc.) have been introduced since 1994, targeting the young generation.  The 
sale of soju cocktails have exploded and in July 1995, sales were up 12.5 times compared to 
the same period of the previous year. This is proof of the changing consumption patterns of Korean consumers."  WT/DS75/R 
 WT/DS84/R 
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 soju-based cocktails are rarely consumed with meal s.  On the other hand, other spirits can be and 
sometimes are drunk with meal s, even if admittedly le ss frequently than soju.  
6.85. The European Communities further notes that according to Korea, the reason why Korean 
consumers drink soju and no other spirit with thei r meals is because soju has a unique "harsh" (or 
"rough") flavour that goes well with Korean hot and spicy food. 
6.86. According to the European Communities, this "c ulinary exception" argument, however, is far 
from convincing.  In the EC view, the traditional t astes and habits of Korean consumers alone are not 
sufficient to explain why soju is consumed more of ten with meals.  Koreans do not eat hot and spicy 
food all the time.  Nor does all soju respond to th e "harsh/rough" description, as allegedly evidenced 
by the advertisement for the soju brand Ji nro Bisun which praises itself on being "mild".
197  In the EC 
view, there are other spirits which may go just as well with hot and spicy food, such as vodka or, as 
pointed out by Mexico in its oral intervention be fore the Panel, tequila.  Finally, the European 
Communities states that the peculiarities of Korean  cuisine would not explain why, according to 
Korea, soju predominates in  "inexpensive Chinese re staurants" but not in the rather more expensive 
Japanese restaurants.   
6.87. According to the European Communities, one of  the main reasons why soju is more often 
consumed with every-day meals than western-style spirits is simply because western-style spirits are 
more expensive, to a large extent as a result of prot ective taxation.  In the EC view, if western-style 
spirits were taxed as soju, they would be less expe nsive and Korean consumers could afford to drink 
them with meals more often. 
6.88. The European Communities also notes that Ko rea does not claim that distilled soju is 
consumed with meals, yet until the 1960s most so ju was distilled soju.  The European Communities 
asks whether this means that Koreans’ allegedly trad itional habit of drinking soju with meals did not 
start until the 1960s? or rather, as it seems more plausi ble, that most Koreans cannot afford to drink 
their every-day meals with the now rather expens ive distilled soju and instead tend to keep it for 
special occasions and drink it in smaller doses than required to accompany a meal, just like they do 
with western-style spirits?   
(f) Place of consumption 
6.89. The European Communities refers to Korea's cl aim that soju is typically drunk in places 
where western-style spirits are not available yet, such as "Korean restaurants, mobile street vendors 
and inexpensive Chinese restaurants". 
6.90. The EC view is that it is true that western-style spirits still have little presence in certain types 
of outlets, but that cannot be explained, as Korea pretends, simply as the result of "consumers’ tastes 
and habits."  In the EC view, it is surely not coin cidental that those outlets where the penetration of 
western spirits remains the lowest are also the least expensive.  
6.91. According to the European Comm unities, Korea’s submission tota lly disregards the existence 
of a clear trend towards wider availability of wester n-style spirits.  The EC position is that only a few 
years ago, western-style spirits could be foun d only in upmarket restaurants and entertainment 
establishments. Since then, as shown by the Hankook survey included in the EC First Submission, 
western style-spirits have gained considerable dist ribution penetration and are now available at a wide 
range of outlets.  According to the European Co mmunities, the continued application by Korea of 
protective internal taxes stands as an obstacle to that trend. 
                                                      
197 Attachment 6 to Korea's First Submission. WT/DS75/R 
WT/DS84/R Page 88 
 
 6.92. The European Communities states that in this re gard, it is instructive to compare the Korean 
and Japanese markets.  According to the Eur opean Communities, only a decade ago, Japanese 
izakayas  (the equivalent of traditional Korean restaura nts) used to serve only shochu, sake and beer, 
whereas western-style snack bars  would serve western drinks but not shochu.  Today, shochu and 
western style spirits are allegedly usually available at both izakayas   and snack bars . 
6.93. The European Communities further argues that it is  important to note that a considerable and 
growing proportion of both soju and western-style spirits is purchased for consumption at home.  In 
the EC view, this is totally ignored in  Korea’s submission.  Specifically, the EC industry estimates 
that between 30 % and 35 % of western spirits and more than 20 % of soju are consumed at home.  
6.94. According to the European Communities, as ev idenced by the Hankook survey, western-style 
spirits are sold for home consumption  through the full range of retail channels, where they compete 
head-on with soju.
198  The European Communities further cl aims that as shown by the photographs 
attached to its First Submission, retail establishments  of different types often display soju and other 
distilled spirits side-by-side on the same shelves. 
(g) Gift giving 
6.95. The European Communities notes that in the case of distilled soju, Korea advances the 
additional argument that its main use is for gift givi ng.  The EC view is that although this may be so, 
western-style spirits, and in particular whisky a nd brandy, are also often offered as a gift.  The 
advertisements for Robbie Dhu and Johnny Walker  Gift Set includes two advertisements promoting 
specifically the purchase of whisky for gift-giving.199 According to the European Communities, Korea 
incurs in an even more embarrassing contradictio n when, in comparing diluted soju and cognac,  it 
states that the latter is "very suitable for gifts." 
(h) Pricing 
6.96. The European Communities also not es that Korea contends that the pre-tax prices of soju are 
much lower than the pre-tax prices of western style spirits.  Korea alleges that, because of that price 
difference, there cannot be competition be tween soju and western-style spirits. 
6.97. The European Communities takes issue with Ko rea’s contention that it is sufficient to 
compare pre-tax prices in order to exclude "any possible distortive effect from the disputed taxes." 
6.98. The European Communities states fo r example, that tax differentials may affect the relative 
importance of the different price segments within  each tax category.  The European Communities 
refers to the Panel Report in  Japan - Taxes on Alcoholic Beverages II,   in which it was stated that one 
of the consequences of a protective system of intern al taxes may be to make it more difficult for the 
cheaper brands of the more heavily taxed products to enter the market.200  The EC view is that in 
Korea, this effect is attested by  the fact that premium brands account for a disproportionate share of 
imports,201 whereas the cheapest brands of western spir its are virtually absent. On the other hand, 
lower taxes have given to soju producers an advant age to target in particular the low end of the 
market. 
                                                      
198 Ibid. 
199 Attachment 6 to Korea’s First Submission. 
200 Panel Report on Japan - Taxes on Al coholic Beverages II , supra ., para. 6.33 (d). 
201 See the Sofres Report, at p. 26.  WT/DS75/R 
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 6.99. The European Communities also argues that prot ective taxes limit the sales growth of the 
more heavily taxed imported categories and, as a resu lt, keep their unit costs at an artificially high 
level, as compared with less taxed domestic produc ts which are sold in much greater volumes.  
6.100.  In any event, according to the European Communities, absolute  price differences are not of 
themselves determinative of whether two products ar e "directly competitive or substitutable."  In the 
EC view, what really matters is the consumers’ r esponse to changes in relative prices.  The Dodwell 
study allegedly provides evidence of that type of  response.  The European Communities notes that 
Korea has criticised the supposed methodological flaws of the Dodwell study, but it has not put 
forward any contrary evidence showing that there is no significant degree of cross-price elasticity 
between soju and western spirits.  
6.101.  According to the European Communities, in the present case, absolute price differences are 
even less determinative in view of the nature of  the products concerned.  The European Communities 
adds that spirits are not like cars, which are purch ased by most consumers in developed countries only 
once every four or five years.  Spirits are c onsumable products, which can be purchased many times 
over a relatively short period of time.  Accordi ng to the European Communities, Korea’s argument 
assumes that each Korean consumer drinks always the same type of spirit.  In practice, however, most 
consumers, even if they prefer a certain type of spirit, may drink also other spirits depending not only 
on the occasion but also on the prev ailing prices for each of them.  
6.102.  In the EC view, the above reasons  explain why the two Panels on Japan - Taxes on Alcoholic 
Beverages  did not take into account absolute prices di fferences, even though such differences were 
also substantial in the Japanese market.
202 
6.103.  The European Communities further argues that at  any rate, the comparisons made by Korea 
grossly overstate the actual price differences.  Th e pre-tax prices for diluted soju shown in the 
Dodwell study, on which Korea has based its price co mparisons, are prices for standard diluted soju. 
The pre-tax  price for premium soju is between two and three times higher.203  In the EC view, if an 
adjustment is made to take into account the diffe rences in alcohol content, the pre-tax price for a 
bottle of standard whisky is about two to three times higher than the pre-tax price for a bottle of 
premium soju204. 
6.104.  The European Communities also argues that th e differences between the pre-tax prices for 
distilled soju and standard diluted soju are even larg er than the differences be tween the pre-tax prices 
for standard whisky and standard diluted soju.205 
6.105.  The European Communities notes that as additiona l evidence, Korea submits a comparison of 
the "weighted average prices" for whisky and soju .  According to the European Communities, that 
comparison, however, is meaningless.  The prices for whisky vary enormously.  Even if one considers 
only mainstream brands, the prices for standard bl ended whisky may be as much as ten times less than 
the prices for de luxe and single malt whiskies.  Th e EC view is that although to a lesser extent, the 
prices for soju also vary.  The pre-tax prices of pr emium diluted soju may be two to three times higher 
than the prices for standard dilu ted soju. According to Korea, pr emium soju accounts for 5 % of the 
                                                      
202 According to the European Communities, in  Japan - Taxes on Alcoholic Beverages I , supra ., the 
Panel ruled that price differences were irrelevant for a like product determination. Prices are not mentioned in 
the Panel’s analysis under the second  sentence of Article III:2. In  Japan - Taxes on Alcoholic Beverages II , 
supra ., differences in prices were examined by the Panel on ly in connection with Japa n’s argument that, because 
tax/price ratios were "roughly the same", the products were not taxed "similarly" (paras. 6.33-6.34) but not for the purposes of determining whether the products were "d irectly competitive or substitu table" (paras. 6.28-6.32) 
203 See EC Annex 6. 
204 See EC Annex 7. 
205 See EC Annex 6. WT/DS75/R 
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 total sales of diluted soju.  According to the Eu ropean Communities, ther efore, as a result, the 
weighted average price for all diluted soju calcula ted by Korea is virtually the same as the average 
price for standard diluted soju. 
i) Other alleged differences 
6.106.  The European Communities refers to Korea's claim that the advertising for soju is targeted at 
the "common man" whereas the advertising for west ern-style spirits targets the up-market consumer. 
In the EC view, the soju advertisements include d in Attachment 6 to Korea’s submission fail to 
support those allegations.  They do not show farmers or labourers but rather business men in shirts 
and ties.  According to the European Communitie s, Korea has carefully omitted to include in 
Attachment 6 to its submission any example of recen t soju advertising for premium brands, which is 
even more clearly targeted to the up-market Korean consumer.
206 
6.107.  The European Communities contends that Kor ea’s allegations regarding the differences in 
advertising imply that while soju is the poor man’ s drink,  whisky and other imported spirits are a 
luxury drink for the most affluent classes.  In the EC  view, this is totally misleading, as both soju and 
whisky are now widely consumed across social boundaries.207 
6.108.  The European Communities also notes that Korea makes the argument that the fact that some 
Korean companies which sell both whisky and soju do  so under different trademarks is an indication 
that the two products do not compete in the same  market, yet some of t hose companies use also 
different brands for premium dilute d soju and standard diluted soju. 
6.109.  According to the European Communities, even  less convincing is Korea’s argument that 
diluted soju does not compete with vodka, gin and rum because the latter are sold in small volumes 
whereas soju is a mass volume product.  In the EC  view this is because only a few pages later Korea 
reverses this argument without any apparent embarrassment in order to  claim that distilled soju is a 
"tiny niche product." 
6. The Dodwell study 
6.110.  According to the European Communities, until th e early 1990s, western spirits were virtually 
excluded from the Korean market by a combination of  trade barriers. In the EC view, too few sales 
figures are available to allow an econometric anal ysis of the substitution relationship between soju 
and Western style spirits.  This leaves a survey su ch as the Dodwell study as the only method.  In the 
EC view, Korea does not appear to question the ra tionale for the survey.  However, as Korea has 
presented a number of criticisms to the Dodwell re port, the European Communities responds to those 
criticism as follows- 
                                                      
206 EC Annex 12. 
207 The Sofres Report describes as follows the profile of the whisky drinkers (at p.  25): 
Whisky, an expensive drink perceived as the drink of the upper class, was used mainly for gift purposes and sold in upmarket restaurants and entertainment establishments. However, 
whisky is widely becoming more of a drink of choice among various age groups. With market 
liberalisation and overseas trav el liberalisation, many Kor eans have ready access to whisky 
and it is becoming well accepted by the general public.  In reflection to this trend, whisky 
consumption is increasing at a rapid pace".  
 According also to the Sofres Report (at p.23), in  the Korean alcohol market , Soju is a very popular 
product drunk by all classes.  WT/DS75/R 
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 (a) Alleged "inconsistency" of results 
6.111.  The European Communities notes that Korea point s to the fact that there are a number of 
anomalies in the study. Notably, on a few charts there appears anomalous behaviour in terms of slightly higher soju purchases when prices for th e soju increase.  Accord ing to the European 
Communities, these anomalies are far less troublesome than Korea is suggesting: 
(a) Despite some unexpected sign reversals the results show very clearly and consistently 
that: 
(i) more people choose western spirits when the price of soju increases; and   (ii)  less people choose soju when th e price of other spirits decreases. 
(b) Anomalies are in practice limited to switching between western spirits. The moving 
away from soju when its price increases is very robust. 
(c) The anomalies affect only some 15 per cent of the observed changes in quantities. 
Moreover, if one were to compare only the selection at the 1000 Won price level with 
the selection at the 1200 Won price level only 5 (small) anomalies arise out of 48 
possibilities. 
In the EC view, this is far from being a bad result for a survey because, as Ko rea pointed out, it has to 
be kept in mind that the survey deals with fallible  human beings. A perfectly consistent result from 
interviewing five hundred people cannot be expected , and would actually be highly suspicious. The 
anomalies also run counter to the implicit insinuatio n that the survey results are biased by the patron 
of the study. 
(b) Standard vs. premium soju 
6.112.  The European Communities notes that the inclusio n of premium diluted soju as an object of 
choice biases the results upwards.  According to th e European Communities, this is not the case 
because: 
(a) Premium diluted soju is a close substitu te for standard diluted soju, as Korea has 
acknowledged.  Therefore, the inclusion of premium soju in the sample provides an 
extremely useful benchmark with which it can be compared the price reaction of the other spirits. The survey clearly establishes that the pattern of consumer choices of 
premium soju and other spirits is the same.  In both cases higher prices for standard soju lead to higher consumption of altern ative drinks (whether premium soju or 
others), even if the changes for wester n spirits are less pronounced. Therefore, the 
inclusion of premium soju in the sample a llows to demonstrate strongly that the other 
liquors in the sample are soju substitutes.  
(b) The study shows quite clearly the choices made by the surveyed persons. The fact 
that many people move to premium soju does not distract from the fact that many also switch to western-style drinks.  
(c) Lower prices for western drinks increase their consumption, even if the price for 
premium soju is lowered at the same time.  
(d) The elimination of premium soju from the choices would probably make more people 
pick any of the other spirits.  WT/DS75/R 
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 (c) Choice of respondents 
6.113.  According to the European Communities, the cr iticisms made by Korea with respect to the 
choice of respondents are also unfounded because: 
(a) The survey does not intend to estimate a cross-price elasticity. It is much less 
ambitious. Its purpose is solely to establish that soju and other liquors are in 
competition.   
(b) There is no direct link between the percentage of soju volume consumed by the 
Korean population and the number of people that prefer soju as a drink. It is very conceivable that the average soju drinker c onsumes larger quantities of soju than the 
average whisky drinker consumes whisky. Therefore the differences in percentage 
figures should not be over-dramatised. 
(c) Even if the percentage figures for wester n style drinks were too high, Korea claims 
nowhere that this would change the direc tion of change in consumer behaviour. In 
fact, the criticism of the "inconsistencies"  of the study implicitly acknowledges that 
consumers should move away from soju as so ju becomes relatively more expensive. 
This relationship is exactly what the survey  attempts to show, and Korea's acceptance 
of this basic tenet should be welcome. 
(d) The survey cannot show that in all markets and under all conditions people react to 
prices. However, it does show that at least in the (important!) market of male Korean city dwellers between 20 and 49, the issue of price differences is important. It is a 
simple question of survey economy to concentr ate on those interviewees that are most 
likely to give an informed answer. Furtherm ore, it is unquestionable that the surveyed 
population group is an important market segment for spirits. It is reasonable to assume that the established relationship also holds in other market segments.  
(d) Pair-wise choices 
6.114.  The European Communities reiterates that the fact  that the survey sample might have a higher 
preference for drinking western beverages than th e Korean sales volume figures suggest is of no 
consequence to the validity of the results.  In th e EC view, what matters is that a cross-price 
relationship is established. 
6.115.  The European Communities also st ates that it should be mentioned in this context that the 
separate paring of brown and white liquors actually biases the reaction to price increases downwards 
rather than upwards. The Europ ean Communities refers to Korea's explanation that a preference for 
white liquor does not imply a preference for brown liquor over soju. A person with a preference for 
brown liquor might therefore not be impressed by the rising soju prices to drink white liquor, and vice versa. In the EC view, this means the price reaction of the survey will be underestimated.  
(e) Single drink choice 
6.116.  The European Communities notes th at Korea claims that the phrasing of the survey question 
may be ambiguous.  In particular, Korea presumes th at the question could be interpreted as a unique 
and non-repeated sales offer. 
6.117.  In the EC view, it is difficult to see why this  should be the case, in particular since the 
phrasing of the question belongs to the standard repert oire of market surveys.  However, even if it 
were interpreted thus, it is quite clear that peopl e react to price changes and choose more imported  WT/DS75/R 
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 liquors, at the expense of soju.  This means clearly that the consumer interprets the liquors for choice 
as substitutes.  
6.118.  According to the European Communities, Ko rea would have preferred a phrasing "would 
these prices cause you to change your drinking hab its?"  In the EC view, this question would produce 
lower figures (which is actually why it is proposed).  The reason for this is simply that people are less 
able to make a statement about permanent behavi oural change. The European Communities add that 
the proposal of Korea also sits oddly with a remark earlier on the internal consistency of the results.  
6.119.  In the EC view, the conclusions of the survey  are quite clear: consumers are sensitive to the 
relative prices of soju and other drinks and change  their behaviour accordingly. This indicates very 
strongly that the consumers view Western liquors a nd soju as substitutes. According to the European 
Communities, Korea’s critique does not affect these conclusions. 
(f) Overall 6.120.  The European Communities also argued that the spirits markets have two defining 
characteristics.  First, spirits consumption is habitu al behaviour in that people tend to order the same 
drink they ordered on a previous given occasion.  Thus, behaviour changes onl y gradually.  Second, 
spirits are experience goods in that they must be purchased and consumed to be evaluated by 
consumers.  Descriptions do not suffice.  Market penetration increases slowly as it is necessary to get consumers actually to try the produc ts first.  Market surveys such as the Dodwell study must be 
evaluated in light of these factors.  
7. The Sofres report 
6.121.  The European Communities notes th at Korea, while disparaging the Dodwell study, places 
considerable reliance on another document commi ssioned  by  the European Communities and 
prepared by the same market research organisati on as the Dodwell study: the document entitled "Your 
Guide to Exporting Food Products to Korea - Al coholic Beverages"  (the "Sofres Report"). 
6.122.  In the EC view, although it is obvious that Ko rea has perused the Sofres Report for "quotable" 
passages, the results of that search are rather meag re:  just two short passages of two sentences each.  
6.123.  According to the European Communities, the Sofres report is a generic report intended to 
provide a description of the current market situati on, which may serve as a guide to the EC exporters. 
The Sofres report did not even attempt to address th e question tackled by the Dodwell study, namely 
whether a connection can be established between the price of western-style spirits and the sales of soju and vice-versa.  
6.124.  The European Communities further argues th at the Sofres Report relies on the assumption 
that, not just soju and western-style spirits, but a ll alcoholic beverages are part of the same market. 
For instance, market shares are calculated with resp ect to the entire alcoholic  beverages market, which 
would have been meaningless if the authors of the repor t had  considered that soju and other spirits do 
not compete on the same market.   
6.125.  The European Communities also ar gues that when the Sofres report states that "soju remains 
virtually unaffected by imported alcoholic drinks " it means simply that, despite the considerable 
increase in imports of whisky and other western-style liquors,  soju continues to account for the vast 
majority of sales of spirits.  At the same time, th e use of the term "virtually" before "unaffected" 
shows that the authors considered that there was actual, even if limited in terms of the volumes 
concerned, competition between soju and other west ern-style spirits.  In the EC view, the term 
"remains" clearly  indicates that the authors of the report did not regard the current predominance of WT/DS75/R 
WT/DS84/R Page 94 
 
 soju as a fixed and permanent feature of the Korean  market but as a temporary situation which could 
change in the future as a result of increased sales of western-style spirits. 
8. The Trendscope survey 
6.126.  The Trendscope survey addresses two questions, the first of which was – "in which of the 
following places have you drunk whisky/soju during the last six months." 
6.127.  According to the European Comm unities, the response to this question confirms that although 
soju is still consumed more often at traditional Korean venues and whisky at western-style or 
entertainment outlets, there is no rigid segregation between the two. 
6.128.  The European Communities further argues, that the survey show s that, contrary to Korea's 
allegations, there is already a significant degree of overlap.  Firstly, the European Communities 
alleges that soju is also consum ed in places where whisky has alr eady established a presence.  The EC 
view is that 8% of respondents declared to have drunk soju at Karaoke bars , which are still the main 
places for drinking whisky.  Furthermore, the Eu ropean Communities states  that the Trendscope 
survey shows that whisky is also drunk in places where soju has traditionally been the predominant 
spirit, such as Korean restaurants and bars. 
6.129.  The European Communities also argues that the survey confirms that home consumption at 
home is one of the main end-uses for both whisky and soju.  According to the European Communities, 
as much as 34% of respondents declared to have  drunk whisky at home whereas the percentage of 
respondents who had drunk soju at home was 43%. 
6.130.  The second question asked to the respondents was whether they had the habit of drinking 
whisky/soju with meals or without meals.  Accord ing to the European Communities, the response to 
this question confirms that whisky is also drunk with meals, even if less often than soju.  The 
European Communities clai ms that 7% of the respondents answ ered that they had the habit of 
drinking whisky with meals. 
6.131.  The European Communities further argues the survey also shows th at, contrary to the claims 
repeatedly made by Korea, soju is by no means always consumed with meals.  It is the EC view that 
the respondents who declared to have the habit of drinking soju with meals was just 36%. 
6.132.  As a complement to the second question, the r espondents were  also asked whether they had 
the habit of drinking whisky/soju with or without food.  According to the European Communities, the 
response to this question was very similar in both  cases: whereas the percentage of respondents who 
declared to have consumed whisky with food was 86 %, the percentage of respondent who declared to 
have drunk soju with food was 97%. 
6.133.  The European Communities concludes that both the Nielsen study and Trendscope survey 
show that despite the fact that western spirits have  been virtually excluded from the Korean market 
until very recently, and that western spirits remain subject to much higher taxes than soju, there is 
already a significant degree of overlap as regards thei r end-uses.  In the EC view, the extent of that 
overlap could only increase if the tax differentials between soju and western spirits were eliminated. 
9. The measures are applied  "so as to a fford protection to domestic production" 
6.134.  The European Communities argues that Korea h as not presented any meaningful argument in 
order to refute the claim that the measures at i ssue afford protection to its domestic production.  WT/DS75/R 
 WT/DS84/R 
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 6.135.  According to the European Co mmunities, Korea’s main defen ce is that whisky bottled in 
Korea from imported concentrated whisky should be considered as a domestic production.  In the alternative, Korea claims that  soju produced in Korea from imported neutral spirits should be 
considered as imported.  
6.136.  In the EC view, there is an obvious difference between those two situations.  Concentrated 
whisky has already all the essential characteristics of whisky and can be used only to bottle whisky. It 
is imported under the same tariff heading as bottled whisky (HS 2208.30) and is subject to the same 
import duties. 
6.137.  The European Communities further argues that in contrast, neutral spirits are a raw material 
which can be used to produce a variety of alcoho lic beverages, including for example vodka and gin, 
as well as other products,  such as heating fuel  or pharmaceutical products. Neutral spirits are 
imported under a different tariff heading and are subj ect to much lower import duty than soju.  In the 
EC view, if Korea takes the view that soju is the same product as neutral spirits, it should explain why it does not apply the same taxes to all liquors made from neutral spirits.  
6.138.  The European Communities further argues that at any rate, even if Scotch whisky bottled in 
Korea had to be considered as a domestic product, soju would still account for almost all of Korea’s domestic production of spirits. It is thus beyond question that by protecting soju, Korea protects its 
domestic production of sprits.  
6.139.  The European Communities asserts that in this regard, it is worth recalling that the existence 
of a substantial production of genui ne domestic whisky in Japan did not prevent the two Panels on 
Japan - Taxes on Alcoholic Beverages   from concluding  that Japan’s Liquor Tax Law infringed 
Article III:2, second sentence. 
208  Further, according to the Europ ean Communities, it is also worth 
noting that almost all Japanese shochu A is made from  imported neutral spirits.  Yet, the two Panels 
on Japan - Taxes on Alcoholic Beverages   had no hesitation to cons ider shochu A as a domestic 
production. 
6.140.  The European Communities argues, therefore, that  Korea’s allegation that soju is isolated 
from imports by "commercial realities", rather than regulatory action has not b een substantiated and is 
in any event totally irrelevant.  What matters is that imports of soju are and have always been 
negligible and, therefore, that by favouring so ju the Korean Government  can be assured that it 
protects a domestic production,  and a domestic production alone. 
6.141.  According to the European Communities, Korea’ s argument that the tax differentials cannot 
be protective because the pre-tax price differentials  are too large is logically flawed.  If the Panel 
found that the products concerned are "directly comp etitive or substitutable" despite the pre-tax price 
differentials, it would follow necessarily that those price differentials are not large enough to exclude, 
of themselves, the possibility that  the tax differentials may afford protection to domestic production. 
6.142.  The European Communities also notes that Korea denies emphatically that the Liquor Tax 
Law’s very structure and design reveals a protect ionist purpose, but fails to offer a minimally 
reasonable explanation for the Liquor Tax La w’s  many apparent inconsistencies. 
                                                      
208 According to the European Communities, in Japan - Taxes on Alcoholic Beverage I, supra.,  Japan 
argued that the Liquor Tax Law did not afford protection to domestic production because imports of special 
grade whisky accounted for merely 14.6 % of total sales of that product. This argument was disregarded by the 
Panel which only took into account th e fact that the less taxed produc t (Shochu) was produced almost 
exclusively in Japan.  Panel Report on Japan - Taxes on Alcoholic Beverages I ,  supra ., paras. 3.10 (f) and 5.11. WT/DS75/R 
WT/DS84/R Page 96 
 
 6.143.  The European Communities states for instance, that Korea attempts to explain the Liquor Tax 
Law’s product categorisation by saying that, orig inally, soju was the only product subject to the 
Liquor Tax Law and new tax categories were created onl y as other spirits appeared on the market.  In 
the EC view, this does not explain why it was consider ed necessary to add to the definition of soju a 
series of exceptions, so as to exclude the most important categories of imported spirits, nor does it 
explain why it was necessary to apply much higher rates on the newly created categories. 
6.144.  According to the European Comm unities, the closest that Korea comes to giving a coherent 
explanation for the Liquor Tax Law’s apparent lack of rationality is when it states that "as tax rules 
are developed, they must accommodate varying levels  of taxpayer resistance"  and  that  "in sum, 
taxes are a delicate balancing act for any government."  In the EC view, this means that if soju is 
subject to lower taxes it is simply because soju produ cers have more political weight than importers of 
whisky. 
6.145.  With respect to distilled soju, the Europ ean Communities notes that Korea advances the 
argument that equalising the taxes for distilled soju  and whisky would "cripple" the distilled soju 
industry with no benefit to the imported bevera ges industry.  According to the European 
Communities, this argument,  is totally irrelevant in order to determine whether the current system 
"affords protection to domestic production."  It is  also allegedly at odds with Korea’s previous 
allegation that demand for distilled soju is "specific a nd static" and that,  for that reason,  "it would be 
difficult to affect it a great deal in either direction by altering its price". 
B. UNITED
 STATES 
1. General: Violation of Article III:2 
6.146.  The United States notes that in its first submission, it showed that Korea’s application of 
preferential tax rates to soju discriminates agai nst vodka, a "like" product and against all other 
distilled spirits, which are directly competitive or substitutable, in violation of Article III:2.   
According to the United States, in response, Korea has principally argued that soju is a unique product 
in a unique market, and that a violation of Article I II cannot be alleged in light  of the differences it 
cites between soju and other distilled spirits.   
6.147.  The United States notes that Korea, in an attemp t to assist its attempt to distinguish western 
distilled spirits from soju, characterizes distilled soju  as a product distinct from diluted soju in an 
apparent willingness to sacrifice the tax preference fo r this "special" artisanal product that makes up 
0.2% of its total soju sales.   The United States argue s that the effort is to downplay the characteristics 
of distilled soju that are identical to those of w estern distilled spirits, such as its alcohol content and 
use of aging.   According to th e United States, however, the different  types of soju, however, are the 
same or "like" product for all practical purposes.209 
6.148.  The United States asserts that in the first inst ance, the two varieties have the same name.  
Both standard and distilled  are clear in appearance  and filtered similarly, and unlike vodka, which is 
taxed at 30 percent, the Education Tax rate of distill ed and standard soju is 10 percent.   The United 
States adds that although distilled soju is made  from discontinuous (pot still) distillation, the 
distinction has minimal tangible effect on the product .   Products such as whisky and brandy can be 
manufactured by either continuous distillation or  pot still (discontinuous) distillation.   The United 
States further argues that both types of soju are de rived from the same raw materials, and Korean law 
                                                      
209 The United States argues that it is not necessary, for purposes of Article III:2, to determine whether 
a product is the same product or simply "like." The drafters obviously avoided limiting the application of the 
national treatment disciplines to the "same" products for fear of definitional disagreements on the basis of minor variations in products.  WT/DS75/R 
 WT/DS84/R 
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 apparently does not require the use of any particular starch source such as rice; any starch source can be used.   Finally, the United States notes that, as to  their packaging, whether a product is marketed as 
"artisanal" or not is a reflection of the manufactu rer’s marketing savvy, rather than a fundamental 
departure from the nature of the product. 
6.149.  The United States argues that a better perspective on Korea’s emphasis on differences 
between standard and distilled soju (namely price, taste, and marketing) may be seen by comparing 
with another category of alcoholic  beverage such as wine.   According to the United States, wines 
cover a broad range of prices and qualities, yet it would be difficult to argue that a  $10 table wine and 
a $100 bottle of Bordeaux wine are not "like."  The price difference between inexpensive and 
expensive wine can vary by a factor of ten or more.  The United States continues that, similar to 
distilled soju, expensive wines are marketed in small volumes with dis tinctive advertising and 
packaging in order to emphasize uniqueness, and might, in the opinion of some, possess more complex bouquet and aroma than inexpensive wines.     
6.150.  According to the United States, therefore, varia tions in price, taste and marketing of products 
with similar end uses simply offer consumers altern ative choices and do not mean they are not the 
same or "like" products. 
2. Violation of Article III:2, First Sentence 
6.151.  The United States considers that vodka is "like" soju and that, under Article III:2 first 
sentence, Korea must eliminate any tax on vodka that  exceeds the tax on soju.  The US view is that 
Korea wrongly suggests that the absence of "pe rfect substitutability," the presence of minor 
differences in physical characteristics and productio n processes, differences in price, and differences 
in the end-uses in a particular market prevent two products from being "like."   
6.152.  The United States argues that Korea’s argument th at "like" products include only those that 
are "perfectly substitutable," has no basis in the te xt of Article III:2 or in Appellate Body reports, 
because if products were perfectly substitutable, they  would likely be identical.   The United States 
notes that in Canada - Certain Measures Concerning Periodicals , the Appellate Body noted that 
perfectly substitutable products would "fall within" the scope of "like" products,
210 but that does not 
mean that only perfectly substitutable products can be  considered "like" products.  According to the 
United States, the text of Article III:2 that refers to "like" products (in French, produits similaires ) 
avoids the obvious tax discrimination that could result between similar products that do not share 
every single characteristic and accordingl y are not "perfectly substitutable." 
6.153.  The United States further argues that, although the Appellate Body has clarified that the term 
"like" in Article III:2 must be narrowly construe d,  it is well established in GATT practice that 
products do not have to be identical to be considered "like" products.211   Korea’s insistence that 
minor differences such as alcohol content and add itives prevent two distilled spirits from being "like," 
runs directly counter to findings such as that in United States - Measures Affecting Alcoholic and Malt 
Beverages,  in which the panel considered a low-quality style of Mississippi wine made from a special 
"scuppernong" kind of grape to be "like" all other kinds of wine.212  The United States further notes 
that in Japan - Taxes on Alcoholic Beverages  I, taxes on alcoholic bevera ges, vodka and shochu were 
considered "like" products even though vodka was filtered differently .  The US view is that Korea’s 
                                                      
210 Appellate Body Report, p. 28. 
211 Japan - Taxes on Alcoholic Beverages I , supra ., para. 5.6 "minor differences do not prevent 
products [from] qualifying as "like"); U.S. - Taxes on Petroleum and Certain Imported Substances,  supra, 
(liquid hydrocarbon products although not identical were "like" crude oil and natural gas because they served 
substantially same end uses).  
212 BISD 39S/206, 276-77. WT/DS75/R 
WT/DS84/R Page 98 
 
 argument that in a few instances vodka might be made  of different raw materials than soju is not 
relevant if it does not affect aspects of the produc t identifiable to the consumer.  According to the 
United States, whatever the original starch source, it is ethyl alcohol from various sources that is used 
in the production of US vodka, Korean soju a nd Japanese shochu.  The production process allegedly 
varies only by filtration methods and level of dilutio n with water, resulting in minimal differences in 
the products produced. 
6.154.  The United States also argues that  Korea’s attempts to distingu ish vodka from soju exaggerate 
the importance of the attribute.  With respect to diluted soju, Korea has identified alcohol content as 
an important physical difference.  According to th e United States, the alcohol content of diluted soju 
is bottled at about 25%, while vodka is bottled at about 40%.  But the United States notes that the 
WTO Japan panel conclusively rejected the notion that a difference in alcoholic strength of two 
products precluded a finding of likeness, on the basi s of the simple observation that "alcoholic 
beverages are often drunk in diluted form."
213  
6.155.  According to the United States, such a differen ce in alcohol content does not even exist with 
respect to distilled soju.  The United States notes that  Korea, with respect to distilled soju, emphasizes 
the taste.  In the US view, any such difference in  flavour is probably linked to the distillation process 
rather than raw material, since vodka and soju are ofte n derived from the same raw materials.  In this 
regard, soju is no more different from vodka than Japanese shochu B, which is also obtained through a 
non-continuous (pot-still) distillation process. 
6.156.  The United States also argues that  the fact that vodka has now been placed in its own tariff 
heading in Korea’s schedules (2208.60) is also irre levant.  According to the United States, it was 
previously in the same basket category as soju ( 2208.90), but was broken into a separate heading to 
correspond to changes in the 1996 Harmonized System , which created a separat e category to reflect 
the vast international trade in the product. 
6.157.  The United States further argues that Korea’s emphasis on consumer tastes and habits as a 
dispositive factor in determining whether two products are "like" is also misplaced.  According to the 
United States, the original identification of this factor derives from the Report of the Working Party 
on Border Tax Adjustments .214  However, the United States notes that the report emphasized that the 
interpretation of "like" or "similar"  products "should be examined on a case-by-case basis," which 
"would allow a fair assessment in each case of th e different elements that constitute a ‘similar’ 
product."   
6.158.  According to the United States, Japan - Alcoholic Beverages I  and  II did not consider 
consumer tastes and habits to be significant in determining likeness where the market was previously 
restricted.  The United States further argues that a lthough the 1987 GATT panel agreed that in theory 
both objective factors and "the more subjective cons umers’ viewpoint" should be considered, it chose 
to disregard the "subjective" factor of "tra ditional Japanese habits" on the following basis: 
Since consumer habits are variable in tim e and space and the aim of Article III:2 of 
ensuring neutrality of internal taxation as regards competition between imported and 
domestic like products could not be achieved if differential taxes could be used to 
crystallize consumer preferences for trad itional domestic products, the Panel found 
that the traditional Japanese consumer ha bits with regard to shochu provided no 
reason for not considering vodka to be a "like" product.215 
                                                      
213 Panel Report on Japan - Taxes Alcoholic Beverages II , supra ., para. 6.23. 
214 BISD 18S/97, 102. 
215 Japan -  Taxes on Alcoholic Beverages I , supra, para. 5.7.  WT/DS75/R 
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 6.159.  The United States asserts that for the same reas ons, the same panel also disregarded Japan’s 
argument that differences in prices between local s hochu and imported distilled spirits could prevent a 
finding of "like."  According to the United States, th e panel "was of the view that ‘like’ products do 
not become ‘unlike’ merely because of differences . . . in their prices, which were often influenced by 
external government measures (e.g . customs duties) and market conditions ( e.g. supply and demand, 
sales margins)."  Further, according to the Unite d States, under the circumstances presented in the 
Japan dispute (a long history of protection, as in Ko rea), the panel considered that giving any weight 
to factors such as consumer traditions in a country or differences in price would run counter to the 
objective of Article III:2, by "creating different  prices and consumer categories and hardening 
consumer preferences for traditional home products."
216  In the US view, such reasoning is equally 
compelling in this dispute. 
6.160.  With respect to vodka, the United States argu es that Korea’s attemp t to draw a stark 
distinction between vodka and soju does not correspond  to the very similar physical attributes and 
manufacturing processes of these products.  Vodka is often made from the same grain-based neutral 
spirits as soju.  Although a little costlier, white birc h charcoal filtration produces virtually the same 
results as using other types of charcoal filtration --  and accordingly this difference did not prevent the 
Japan – Taxes on Alcoholic Beverages II  panel from finding that vodka and shochu are “like” 
products. The United States also cl aimed that it is also wrong to emphasize alcoholic strength as a 
dispositive factor in selecting a distilled spirit.  On ce they are prepared, many mixed drinks, such as 
vodka cocktails have a lower alcohol content than stra ight soju.  As determined by the panel in the 
Japan  case,  a difference in the alcoholic strength of  two products “did not preclude a finding of 
likeness, especially since alcoholic bevera ges are often drunk in diluted form. 
6.161.  The United States argues that, with respect to th e taste and sensation of the products, it is not 
the raw materials that are responsible for the so -called "stinging sensation" supposedly imparted by 
soju.  If this were true, then all spirits could and can claim a "stinging sensation in the mouth and 
throat",  since the raw materials are similar in many other spirits.  For example, Archer Daniels 
Midland Company’s grain neutral spirits are used for both soju and Smirnoff vodka (produced in the 
United States).  The claimed unique "cold" mouth f eel may come from the fact that soju, like vodka,  
is usually refrigerated before c onsumption.  Moreover, although Korea cites to “harshness” as a 
unique desirable characteristic of standard so ju compared to the smoothness or mildness of 
Western-style spirits, as the representative fro m the European Community pointed out, the 
advertisement in its submission for Jinro Bisun, produced by Korea’s largest producer of soju 
(Attachment 6), boasts how it is a "mild" one, th e same way Western-style spirits are marketed. 
6.162.  The United States also argued that as a factual ma tter, the characterization of Korean soju as 
unique is also at odds with the view of even the t op Korean soju producer Jinro.  On its Internet home 
page, Jinro sets out the following question:   “What is Soju?”  It provides the following response:  
“Jinro Soju, a sort of  vodka-like spirits  which began life in the 13th century, is the traditional Korean 
liquor . . .”(US Exhibit Q.)  Similarly, an Internet search reveals the description of soju by an 
apparently French Canadian food critic as “l a vodka coreene” (Korean vodka). (US Exhibit R.) 
3. Violation of Article III:2, Second Sentence 
6.163.  The United States reiterates that Korea’s tax es on imported distilled spirits in addition to 
vodka are applied so as to afford protection to dom estic production of soju, in violation of Article 
III:2, second sentence.   The United States notes that as set out by the Appellate Body in the Japan 
case, a violation of the second sentence requires three el ements to be shown.  First, the products must 
be directly competitive or substitutable; second, th e products must be taxed in a way that is not 
"similar"; and third, the measure must be applied so  as to afford protection to domestic production.   
                                                      
216 Ibid., at para. 5.9. WT/DS75/R 
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 According to the united States, Korea’s attemp ted defence has focused accordingly on the first 
element, substitutability, and the vast majority of the Panel’s questions also pertain to this element.    
(a) The Text 
6.164.  The United States argues that Korea, in attempti ng to show that soju does not compete with 
imported distilled spirits, mainly relies on the argument that in order for  products to be considered 
"directly competitive or substitutable," the complain ing parties must show that "actual competition" 
between soju and all distilled spirits is occurring on the Korean market for all end uses.  In the US 
view, although the complaining parties have show n actual competition and common end uses for most 
of the products in question, it is also potential co mpetition with imported distilled spirits that is at 
issue in this dispute.  The United States adds th at Korea’s legal interpretation is belied by an 
examination of the ordinary meaning of the relevant provisions, taken in their context, and in light of 
their object and purpose, as required under prin ciples of international treaty interpretation.
217 
6.165.  The United States argues that the overriding pur pose in Article III:2, second sentence is the 
incorporation as an obligation of th e objective stated in Article III:1, that taxes should not be applied 
so as to afford protection to domestic production.  The interpretive note to the second sentence, that it 
applies only "where competition was involved, betw een, on the one hand, the taxed product, and on 
the other hand, a directly competitive or substitutabl e product which was not similarly taxed" must be 
read in light of this overall purpose. 
6.166.  According to the United States, Korea’s argum ent that competition must be actual runs 
counter to the text of the interpretive note and the purpose of the central obligation.  The phrase 
"competition was involved" is more likely to m ean the situation where competition is presented, 
rather than where competition is "currently occurring for every use," as suggested by Korea.   Further, 
in the US view, this interpretati on is more consistent with other terms in Article III:2, because in 
addition to proscribing protective taxation between directly competitive products, the interpretive note 
applies to "directly substitutable" products.218   The United States further argues that the word 
"substitutable" is one that clearly shows the a pplication of the second sentence to potential 
substitution -- i.e. it means able to be substituted; it does not require a test of whether and how many 
products are currently being substituted.  The French  text, in the US view, underscores the application 
of the obligation to potentially competitive products even more clearly:  "un produit qui peut lui être 
directement substitué" (a product that can be directly substituted for the taxed product).  
6.167.  The United States further argues that the sc ope of the obligation to include potential 
competition is also consistent with the obligation in  Article III:4, which requires national treatment for 
"like" domestic and imported products.  According to the United States, the Article III:4 obligation 
has long been understood to apply to regulations th at "might adversely modify the conditions of 
competition" between imported and domestic products, regardless of current trade.219   
6.168.  The United States refers to the  United States -- Section 337 of the Tariff Act of 1930 case, 
wherein it was noted that the Article III:4 obligati on "calls for effective equality of opportunities"  for 
imported products, rather than  particular export volumes. 220  The United States further notes that the 
1949 Working Party Report on Brazilian Internal Taxes  takes the view that Article III:2, first sentence 
                                                      
217 See Article 31 of the Vienna Convention on the Law of Treaties. 
218 According to the United States, although the English text of the interpretative note is ambiguous on 
the point, the French translation appears to suggest that the word "directly" also applies to the word 
"substitutable."  Either way, it does not have implications for this dispute. 
219 Italian Discrimination Against Imported Agricultural Machinery , adopted on 23 October, 1958, 
BISD 7S/60, 64. 
220 BISD 36S/345, 386-87.  WT/DS75/R 
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 applies, "whether imports from other contracting parties were substantia l, small, or non-existent,"  and 
stresses their "potentialities as exporters."
221   Similarly, concerning Article III:2 second sentence, 
unless "directly competitive or substitutable" is interpreted as applying to potential   competition, its 
scope will be much narrower and permit the perpetua tion of unfair competitive conditions that result 
from protected markets.222  
6.169.  The United States argues further that the appli cation of Article III:2 to potential competition 
is also confirmed by GATT and WTO cases that have emphasized the distorting effect of past restrictions in the market.  Japan -- Taxes on Alcoholic Beverages I  disregarded traditional Japanese 
habits in determining that vodka  and shochu were "like," emphasizi ng that they resulted from past 
protection.
223  Japan -- Taxes on Alcoholic Beverages II  similarly noted that "consumer surveys in a 
country with . . . a [discriminatory] tax syst em would likely understate the degree of potential  
competitiveness between substitutable products."224  The United States also notes that  the Appellate 
Body in  Canada – Certain Measures Concerning Periodicals  had a similar response to Canada’s 
arguments that static market shares over 30 years s howed a lack of "direct competition."  It noted, 
"this argument would have weight only if Cana da had not protected the domestic production of 
Canadian periodicals through, among other measures,  the import prohibition of Tariff Code 9958 and 
the excise tax of Part V.1 of the Excise Act."225 
6.170.  The United States argues that Korea is also wrong to  insist that in order to be substitutable, 
products must be substitutable for all economic uses, such as consum ption in restaurants or as an 
accompaniment with Korean food.  According to the United States, although the GATT and WTO 
panels and the Appellate Body in the Japan case praised the concept of examining uses in a given 
market, as a practical matter they did not provide mu ch weight to consumer tastes and habits.  In the 
US view, the GATT Japan panel specifically noted that there was direct competition and substitutability as between all the liquors in disput e "even if not necessarily in respect of all the 
economic uses to which the products may be put."
226  More recently, in  Canada - Measures 
Concerning Periodicals , the Appellate Body specifically found  that the products in question were 
directly competitive or substitutable even if th ey were poor substitutes for certain purposes.227   
According to the United States, such  an approach is consistent w ith other GATT panel findings, such 
as the application of Article III:2 in EEC - Measures on Animal Feed Proteins  to products that were  
substitutable only "under certain conditions."228   In the US view, the products involved -- skim-milk 
powder on the one hand, and oilseeds, cakes and meal s, dehydrated fodder and corn gluten feed, on 
the other -- confirm the appropriate broad scope of  the term "directly competitive or substitutable." 
(b) Drafting History 
6.171.  The United States argues that the drafting history of the GATT 1947 supports the broad 
textual interpretation of the scope of "directly competitive or substitutable."  According to the United 
States, prior to the Geneva drafting session, the te xt of what became the second sentence of Article 
III:2 was not in the nature of an obligation and re ferred only to competitive products.  At the Geneva 
session, according to the United States, delegates di scussed the scope of the language that eventually 
provided the basis for the present obligation.  C oncerning which products would be compared, some 
                                                      
221 GATT/CP.3/42, adopted 30 June, 1949, II/181, 185. 
222 The United States believes that this interpretation is all the more compelling because the second 
sentence is meant to compensate for the narrow interpreta tion required of the term "lik e" in Article III:2, first 
sentence, as acknowledged by the panel and Appellate Body in the Japan - Alcoholic Beverages case. 
223 Japan - Taxes Alcoholic Beverages I , supra, para. 5.7. 
224 Panel. Report on Japan - Taxes on Al coholic Beverages II , supra, para. 6.28. 
225 Appellate Body Report on  Canada - Certain Measures Concerning Periodicals , supra, p. 28. 
226 Japan - Taxes on Alcoholic Beverages I , supra, para. 5.7. 
227 Appellate Body Report on Canada - Certain Measures Concerning Periodicals , supra, p. 28. 
228 BISD 25S/49, 63-64, adopted on 14 March, 1978. WT/DS75/R 
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 country delegates cited examples of  domestic and imported products that could be  "competitive" and 
trigger the application of the legal obligation.  These included quite broad categories of products, such 
as  domestic apples and imported oranges;
229  domestic linseed oil and imported tung oil;230 and  
domestic synthetic rubber a nd imported natural rubber.231 
6.172.  The United States further notes that the record  discloses that no disagreement was expressed 
by delegates with the breadth of these specific examples of "competitive" products, including the 
reference to apples and oranges.  In Havana, wh en the text of the legal obligation on national 
treatment was approved, the Chairman of the Sub- committee reported "only one  important change in 
substance" from the Geneva text.  Provisions for a negotiated elimin ation of discriminatory internal 
taxes in the previous draft evolved into to their outright elimination.232    
6.173.  According to the United States, at that point, the term "directly competitive or substitutable" 
was added in the text.  After adoption of the presen t text and interpretive note, one additional question 
was raised concerning examples of what might be  considered "directly competitive or substitutable 
products" for purposes of the interpretive note to Paragr aph 2.  One delegate allegedly asked if  "coal 
vs. fuel oil" and "tramways vs. busses" could be c onsidered directly competitive or substitutable.  
Another delegate allegedly noted the need for actua l cases in order to interpret the provision, but 
opined that such products were not  substitutable.  A third delegate , however, allegedly stated that 
decisions could not be made except in  relation to a particular factual s ituation, but that a tax on coal in 
a particular case might be designed to protect the fuel oil industry.233  In the US view, this comports 
with the Appellate Body’s finding in Japan-Taxes on Alcoholic Beverages  II that determinations are 
to be made on the basis of "all relevant facts," wh en examining  each of the "number of means" for 
identifying the "broader category of products that  might be described as ‘directly competitive or 
substitutable.’"234   
6.174.  The United States concludes that the examples di scussed in the drafting history show that the 
comparison of internal taxes on domestically prod uced soju, on the one hand, and imported distilled 
spirits, on the other, is well within the scope contemplated by the drafters.  The emphasis was 
obviously not on particular attributes of the produ cts such as physical characteristics, production 
processes, or quality, but on the ability of the produc ts to be used in the same manner, and the extent 
to which a government acted to protect a domestic product to prevent such substitution in its market.  
(c) Directly competitive or substitutable 
Physical characteristics 
6.175.  According to the United States, Korea's subm issions argue that some differences in 
production processes and physical characteristics prove  that soju and imported distilled spirits are not 
in fact “like,”  “substitutable” or “competitive” produ cts.  The United States argues that from a basic 
economic perspective, however, differences in production or physical characteristics are not a priori  
determinative of whether two produc ts are substitutable or directly competitive.  For example, cane 
sugar and artificial sweeteners ar e totally different in terms of production process and chemical 
composition, yet they clearly compete directly in co ffee houses and restaurants.  In order to determine 
substitutability, the Panel should consider whethe r the products in question compete for consumer 
spending on a category of goods.  In this case, a ll spirits should be considered as in competition 
                                                      
229 E/PC/T/A/PV/9, p. 7. 
230 E/CONF.2/C.3/SR.11, p. 1 and Corr.2. 
231 E/CONF.2/C.3/SR.11, p. 3. 
232 E/Conf.2/C.3/SR.40, p.1. 
233 E/Conf.2/C.3/SR.40, p. 2. 
234 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II , supra ., at p. 25.  WT/DS75/R 
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 because they compete for consumers’ spending on va rious products within the category of alcoholic 
spirits.  Similar production processes, physical char acteristics, and end uses are indicative of “like” 
products, but some differences in these factors do not establish that two products are not substitutable.  
Another factor in determining substitutability is the extent to which consumers respond to relative 
price increases in one product by increasing purchases of another.  These products are likely to be 
substitutes.  Thus, Korea’s reliance on minor differe nces in the production and physical characteristics 
as dispositive evidence of non-substitutability is misp laced.  Furthermore, Korea greatly exaggerates 
the differences between so ju and imported spirits. 
6.176.  The United States argues that it is unlikely that two identical products would not, to some 
degree, be substitutable, though they may not be perf ectly substitutable.  Even physically identical 
products might be packaged differently, marketed differently, or ultimately targeted at different 
consumer groups, but they would non etheless remain "able" to be substituted.  For example, two 
identical bottles of aspirin (with the same contents, price and packaging) are perfectly substitutable, 
whereas two bottles of aspirin with a different packag e size, branding, or price, but containing aspirin 
of the same chemical composition are not perfectly  substitutable but remain substitutable, with 
demand for one being influenced by the price of the other. 
6.177.  According to the United States, with respect to other Western distilled spirits, the Korean 
submission stresses difference in color as between whisky and soju as a factor that rules out 
competition between these products.  However, the Un ited States argues that color may not only differ 
as between types of spirits, but also within spirit cat egories.  For instance rum, tequila and shochu all 
have clear and amber versions, yet they do not b ecome different non-competing products because of 
it.   
6.178.  According to the United States, it is also wrong to emphasize alcoholic strength as a 
dispositive factor in selecting a distilled spirit.  On ce they are prepared, many mixed drinks, such as 
vodka cocktails have a lower alcohol content than st raight soju.  As determined by the panel in  Japan 
– Taxes on Alcoholic Beverages II ,  a difference in the alcoholic strength of two products “did not 
preclude a finding of likeness, especially since alcoho lic beverages are often drunk in diluted form.” 
6.179.  The United States agrees that flavour and arom a are important factors in selecting a distilled 
spirit, but again argues that a different flavor hardly precludes substitutability between classes of 
distilled spirits such as whisky, soju, vodka and ru m.  Indeed, the range of flavours and aromas within  
a class of spirit have as much of an impact on consumer choice as does the range of flavours and 
aromas between  classes of spirits.   In fact, soju itself is  available in different flavorings, such as 
honey and wood.  Under Korea’s theory, different fla vours of soft drinks such as Coke and Fanta do 
not compete, but it is doubtful that anyone familiar with the market would agree. 
6.180.  The United States further argued that Korea’s i nvocation of so-called distinguishing physical 
characteristics for other Western distilled spirits is  entirely arbitrary. The United States argues that 
Korea's citation of physical characteristics to distin guish soju from other Western distilled spirits are 
the same characteristics that happen to distinguish various kinds of Korean soju from each other.  For 
example, Jinro’s promotional material for its prem ium soju brands on its Internet home page cites 
factors such as a “rich smooth taste” and oak flavoring, the same factors Korea relied on in its first submission to distinguish soju from whiskey.
235  According to the United States, Jinro’s descriptions 
in fact confirm the competitive relationship between soju and Western spirits. 
6.181.  The United States further argues that, with respect to the taste and sensation of the products, it 
is not the raw materials that are responsible for the so-called "sti nging sensation" supposedly imparted 
by soju.  If this were true, then all spirits coul d and can claim a "stinging sensation in the mouth and 
                                                      
235 US Exhibit Q. WT/DS75/R 
WT/DS84/R Page 104 
 
 throat",  since the raw materials are similar in many other spirits.  For example, Archer Daniels 
Midland Company’s grain neutral spirits are used for both soju and Smirnoff vodka (produced in the 
United States).  The claimed unique "cold" mouth f eel may come from the fact that soju, like vodka,  
is usually refrigerated before c onsumption.  Moreover, although Korea cites to “harshness” as a 
unique desirable characteristic of standard so ju compared to the smoothness or mildness of 
Western-style spirits, as the representative fro m the European Community pointed out, the 
advertisement in its submission for Jinro Bisun, pr oduced by Korea’s largest  producer of soju, boasts 
how it is a "mild" one, the same way Western-style spirits are marketed. 
6.182.  The United States also challenges the Korean clai m that soju is uniquely suited to spicy food 
and unlike Western spirits, is consumed exclusively during meals in Korean restaurants or at home.  
According to the United States, that does not mean that Western-style spirits are not equally suitable 
for such use.   Other countries also have hot and spicy food, and consume distilled spirits other than 
soju.  For instance, in the United States, when consuming hot and spicy Mexican food, it is common 
to consume tequila in the form of a Margarita.  In  Poland, vodka is drunk with herring.   Consumers’ 
habits are not fixed, and can change with the intr oduction of alternative products.  Indeed, in Korea a 
considerable proportion of  imported Western-style di stilled spirits is not cons umed in bars and posh 
hotels, but at home, similar to soju.  The United States says it understands that after dinner at home, both soju and Western- style spirits are an option. 
6.183.  The United States argues that, as the GATT drafting history demonstrates, in order to be 
directly competitive or substitutable, products need not share a majority of physical characteristics, 
and a basic commonality of physical properties is suffi cient. The basic physical properties of soju and 
Western distilled spirit categories ar e essentially the same:  all are con centrated forms of alcohol that 
are produced through distillation and used for human consumption.  Their variations -- distillation 
method, appearance, taste, alcoholic content, and raw material inputs -- do not create any particular 
product not substitutable for the other.  The 1987 Japan  liquor panel did not consider the minor 
variations in distilled spir its important, instead stressing the flexib ility of use: “Alcoholic drinks might 
be drunk straight, with water, or as mixes. . . . [T]h e flexibility in the use of alcoholic drinks and their 
common characteristics often offered an alternativ e choice for consumers leading to a competitive 
relationship.”
236 According to the United States, this appro ach, consistent with the consideration by 
the drafters that oranges and apples are competitive, c onfirms that it is most appropriate to consider a 
broad commonality of physical characteristics.  
End Uses 
6.184.  According to the United States, in examining the current uses of distilled spirits in the Korean 
market, it should be recalled that already both soju  and Western-style distilled spirits are sold and 
advertised side by side.  In the Korean Air duty free magazine237 (US Exhibit D), presumably catering 
to both Korean and foreign travellers, Johnnie Walk er Blue Label, Johnnie Walker Gold Label and 
Moon Bae-Sool soju are advertised on the same page.  Moreover, as shown in  the pictures in U.S. 
Exhibit G, soju and Western-style spirits are sold t ogether in a range of retail establishments.  In the 
first picture, Cherry 15  is next to Seagram Extr a Dry Gin, and Alexander vodka is next to Korean 
premium soju (aged in oak) in a convenience store.  In the fourth picture,  Something Special Scotch 
whisky is next to Kim Sat Gat premium soju in a Seoul supermarket. The fact that these products are sold through the same retail channels is important evidence of direct competition in the market place. 
6.185.  The United States argues that Korea has implied that soju, because it is less expensive, is 
marketed to an entirely different group of consumers than Western spirits and therefore is not directly 
competitive with Western spirits.  The United States disagrees with that implication.  In fact, 
                                                     
 
236 See panel Report on Japan – Taxes on Alcoholic Beverages I , supra ., at para. 5.7.  
237 US Exhibit D.  WT/DS75/R 
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 according to the United States, given the greater degr ee of availability of Western spirits, it is more 
likely that many Koreans will consume both soju and Western spirits, differentiating the timing, 
degree and occasion of their consumption mix based on personal preferences and the relative prices of 
the two products.  Moreover, The United States ag rees with the representative of the European 
Communities that, as shown in Attachment 6 of th e Korean submission, soju is also aimed at 
businessmen in shirts and ties, and not farmers or fact ory workers.   This is exactly the same group of 
people Western spirits companies are targeti ng -- Korea’s middle and upper class professionals. 
6.186.  The United States also claims that Korea's na rrow approach to end uses looks at whether a 
distilled spirit is consumed before, during or after a meal; as a mixed drink, with ice, or straight; and 
what type of food is served at a restaurant.  In f act, Korea attempts to draw strict categories where 
none exists in the Korean market or any place el se US manufacturers are familiar with.  Before 
addressing the issue of mealtime consumption, the United States recalls recall that Korea says little 
regarding other sub-categories of usage in which ev en Korea admits Western distilled spirits compete, 
such as consumption in bars, after meals, and in  the home, or providing as a gift.  Korea, does, 
however, concede in its answer to U.S. question 3, th at some standard soju will also be consumed at 
home without a meal, as are western spirits. 
6.187.  According to the United States, Korea’s narrow appro ach to end use is also undermined by 
the GATT drafting history citing to apples and orange s as directly competitive products.  As stated by 
Korea, “A member of a group of products that are re lated in consumption need not be a substitute for 
all other members of the group -- just for some  other members of the group.”  In its second 
submission Korea refers to the U.S. citation of differing end uses for apples and oranges as evidence 
that such products may not be comp etitive or substitutable.  Although it is unlikely that oranges would 
be substituted as filling for apple pies, this does not preclude their substitutability for several other end 
uses, such as fruit juices, fruit je llies and jams, and overall fresh fruit consumption.   Differences in 
product end uses may vary, but they do not erect  a wall preventing substitution between differing 
types products within the same category. 
6.188.  The United States also argues that Korea's focu s on differences in consumption within the on-
premise and off-premise  market segments is not appropriate for purposes of Article III:2.  On-premise consumption covers  a broad range of establishments that  must be considered together for 
purposes of substitutability, particularly since the availability of Western spirits has continually 
expanded.  In addition, in the on-premise consump tion segment, serving particular distilled spirits is 
up to the discretion of the owner of the particular est ablishment.   In general,  establishments such as 
inexpensive Korean restaurants that appeal to low- income patrons are less likely to serve expensive 
high-end distilled spirits, and vice versa.  However, w ith all of the variability in types of restaurants, 
bars and night clubs in Korea, it is not realistic to assume distinct rigid categories with respect to marketing and distribution of distilled spirits, and Korea has shown no support for such allegations.  
6.189.  The United States further argues that in the o ff-premise sector, making generalizations about 
particular kinds of stores would be equally incorrect .  In Korea's retail sector, virtually all types of 
spirits are available in all types of establishments, yet in different proportions.  For instance, a small 
family-owned shop will have cases of soju availabl e and a few bottles of premium Scotch whisky on 
the shelves.  Conversely, upscale department stor es, such as Lotte and Shinsegae in downtown Seoul, 
will carry a preponderance of imported spirits, and may only have a small display for domestically-
produced soju.  The wide range of availability of  imported spirits is clearly established in the 
Hankook study submitted by the EC as well as photogra phs of a range of retail establishments in 
which soju and Western spirits share the same st ore shelves submitted by th e United States. Korea’s 
argument that such placement is unimportant b ecause in one photograph submitted by the United 
States, Gillette shaving foam is also apparent, ov erlooks the fact that the shaving foam is on a 
neighbouring set of shelves, not in the same group with the distilled spirits.   WT/DS75/R 
WT/DS84/R Page 106 
 
 6.190.  The United States notes that Korea's market fo r imported distilled spirits has been open for 
less than a decade, and is not a mature market with respect to consumer's awareness of, and 
receptivity toward, different types of spirits, their uses and places of consumption.  Even though there 
are some differences in the methods of consum ption compared to other countries, such as 
consumption of soju with Korean meals, it is wrong to assume, that end use must be identical for all 
uses under Article III:2.  Given the fact that the spirits industry has been barred from the Korean 
market until recently, the industry has not had the opportunity to address and capitalize on every possible usage of its products in Korea.  Howeve r, since all distilled spirits are fundamentally 
interchangeable, as Western spirit products become more  familiar to Korean consumers, it is expected 
that methods of consumpti on will continue to expand. 
6.191.  The United States claims that with respect to on-premise consumption, Korea has also 
implausibly maintained that there is no overlap be tween the types of restaurants or bars that serve 
soju, and those that serve imported spirits.  In fact, in its answers to U.S. question 4, Korea has already conceded at least some potential overlap between distilled soju and Western spirits when it 
recognizes that soju is offered in so-called “v ery expensive and traditional Korean and Japanese 
restaurants.” Given its earlier statement that Wester n spirits are sold in Japanese restaurants, Korea 
minimally acknowledges substitutab ility in such restaurants. 
Price 
6.192.  With respect to Korea’s arguments on the different prices of the various products, the United 
States claims that although  Korea glosses over the concept of substitu tability, it does not go so far as 
to claim that the existence of large pre-tax pr ice differentials precludes two products from being 
substitutable.  In fact, Korea acknowledges such subs titutability when it states that standard soju and 
premium soju, two products with a typical price diffe rential of more than 100%, are considered “close 
substitutes” in Korea. 
6.193.   The United States notes that the substitutability of alcoholic beverages in a wide price range 
is not uncommon.  Moreover,  a range of prices ex ists within several product types.  For example, 
whisky prices can range from ten to a hundred dollars  for a bottle.  The Korean submission frequently 
cites whisky as 11 times higher in price than soju , ignoring the price ranges within the whisky product 
category.   For example, pre-tax imported whisky prices (for 375 ml bottles) range from over 5,000 won  for premium scotch whisky to over 3,000 w on  for standard scotch whisky.  Thus, at the 
extremes, imported scotch whisky pre-tax prices are 7.2 to 12 times higher than standard soju, not 
including domestic bottled whisky which is 6.3 tim es higher.  Notably, imported standard scotch 
whisky pre-tax prices are only 3.6 times higher than premium soju. 
6.194.  The United States further argues that price di fferences are not of themselves evidence of a 
lack of actual or potential competition.  Chang es in consumer purchase behaviour are dependent on 
relative price changes, not absolute prices betw een competing products.  Constructing a price 
demarcation where products with relative prices ex ceeding a specific threshold are considered not 
directly competitive or substitutable ignores the re ality that these products are arrayed along a price 
continuum available to consumers in the marketplace.   The availability of products across a spectrum 
of prices in the Korean market attests to a commensurate range of differing consumer tastes and 
preferences for distilled spirits, as well as the desire of individual consumers to vary their individual 
consumption choice on the basis of occasion, place of consumption and other factors.  Moreover, 
purchases of distilled spirits, unlike purchases of it ems such as automobiles or homes, occur on 
numerous occasions over a relatively short time frame.   Consequently, at the margin, changes in 
relative prices between spirits, such as soju and Western spirits, may alter some  individual 
consumption decisions, but not all.    WT/DS75/R 
 WT/DS84/R 
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 6.195.  Furthermore, the United States notes that Korea’ s price analysis devotes substantial attention 
to comparisons of standard soju and the more upsca le whisky products, giving limited attention to the 
variability of prices within spirit categories such as whisky and soju.  For example, the pre-tax price 
of premium soju is two to three times higher than standard soju, and in some instances distilled soju 
pre-tax prices exceed those of Western spirits.   In comparing soju and whisky weighted average 
prices, the United States claims that Korea’s analys is failed to account for the variation of prices 
among differing whisky products.  Furthermore, when  adjustments are made for alcoholic content, 
pre-tax price differences between standard soju a nd Western spirits range from 3 to 6 times higher and 
for premium soju, 2 to 3 times higher. 
Broader substitutability of distilled spirits 
6.196.  The United States argues that there is evidence that Korean Consumers are not substantially 
different from other consumers around the world in the ways that they form tastes for alcoholic 
beverages.  According to the United States, the US, EC and Korean submissions show that the 
advertising for the products is similar and aimed at  similar audiences.  In fact, the advertisements 
would not be out of place in Western magazines except for the Korean print.  In addition, in Korea, as 
in the rest of the world, distilled spirits are sold in  stores, bars and restaurants, among other locations.  
In Korea, soju and Western spirits are purchased fro m the same shelves in different retail outlets.  
Thus, there is m market evidence supporting the US stat ements that all spirits should be considered as 
in competition because they compete for consumers'  spending on various products within the category 
of alcoholic spirits. 
6.197.  The United States argues that Korea’s implication that all distilled spirits are not a recognized 
category of competing goods is contradicted by both international and Korean practices.  There is a 
reason that the international convention on the Harm onized System, to which Korea is a party, has 
grouped all distilled spirits, including soju, under th e same customs heading.   This classification 
reflects the fact that on the international scene, di stilled spirits are considered a distinct product group 
that includes soju.  One need only look at a r ecent issue of an industry trade journal,  Drinks 
International
238  which puts out a list of the top spirits brands  in the world each year, to see that soju is 
considered a competitor to all other distilled spirits  in HS heading 2208.  On page 35 of the March 
1998 edition, one sees that Jinro Soju is ranked the number one spirits brand in the world. 
6.198.  The United States notes that  Korean government itself groups imports of soju with other 
distilled spirits in its implementation of the Harm onized System, and groups all alcoholic beverages 
together  -- soju, beer, vodka, whiskey, sake  etc. -- in a single liquor tax law.  In its responses to our 
questions, Korea admits that sake and beer compete with  soju.  It is self-serving to insist that the other 
products in its liquor law (such as imported distill ed spirits) do not compete, despite their being 
grouped together in Korea’s own laws.  
6.199.  According to the United States, several othe r factors support what should be the obvious 
conclusion that Korean consumers can be presumed to recognize the similarity of soju and imported 
spirits. Western spirits and Korean soju are sold  alongside each other in retail outlets, and their 
advertisements are aimed at a similar clientele wi th similar sales pitches.  The development, by 
Korea’s own soju producers, of bottling operations for imported whiskey is also significant.  These 
producers have obviously recognized that the prod ucts compete and are taking advantage of the 
distribution channels already develo ped for traditional soju brands.  
6.200.  The United States argues further that Korean manuf acturers have advertised soju in the same 
international media as Western distilled spirits and s eek to take advantage of characteristics of soju 
that are similar to those of Western distilled spirits .  The United States refers again to a recent edition 
                                                      
238 US Exhibit P. WT/DS75/R 
WT/DS84/R Page 108 
 
 of Drinks International .  Page 14 of the March 1998 issue cont ains an advertisement for Jinro Soju, 
which asks potential purchasers to “experience its unique smooth taste” and boasts of its “incomparable versatility for cocktails.”  It even shows soju in a glass “on the rocks” with a lemon 
slice and a maraschino cherry.  Obviously, Korea’ s top soju producer, Jinro, considers soju 
substitutable for Western distilled spirits and eminen tly suitable for a variety of their uses -- like 
Western spirits, not only drunk straight in a shot glass, but also “on the rocks” or mixed with other products to make cocktails. 
6.201.  The United States argues that Jinro’s recognition of  soju’s substitutability with other spirits in 
its international export markets is not reconcilabl e with the position of the Korean government in 
these proceedings that soju is not “like” or “dir ectly competitive or substitutable” with any Western 
distilled spirit.  Overseas, Korean soju competes on a le vel playing field with a ll other distilled spirits, 
but at home Korea rejects any notion that the products  are in competition, and insists on a reading of 
Article III that would protect soju through burdens ome taxes on imports.  The United States considers 
that this position finds no support in the letter or spirit of Article III:2. 
6.202.  The United States considers that there is also  some empirical evidence supporting the general 
notion that consumers budget for alcoholic beverages separately than other goods.
239    This study of 
consumers (Alley et al. ) reveals that the consumption of alco holic beverages is separate from their 
consumption of other goods.  Hence, “after compen sating for income changes, consumption of other 
goods is unaffected by price changes” of alcoholic beverages.240    Furthermore, in Alley and in two 
additional studies241 there is evidence of substitutability be tween domestic and imported spirits in 
Canada and Finland, respectively.  Accordingly, there is further support for the conclusion that all 
imported spirits compete with soju in the distilled spirits market in Korea. 
Korean market developments 
6.203.  The United States argues that the development of the premium soju market is a most 
important indicator of the fact that Western spirits  directly compete and are substitutable for soju.  
Soju sales increased significantly with the introd uction of premium soju, whose sales volumes have 
surpassed the combined sales of all imported spirits .  This development demonstrates that Korean 
consumers are receptive to trying and buying newly introduced types of spirits, including those with a 
higher prices.   Furthermore, development of premiu m soju is clearly intended to move soju up market 
by borrowing the cachet from imported spirits, which c ontradicts Korea’s contention that soju is only 
the cheap drink of “commone rs” or “ordinary folks”. 
6.204.  The United States argues that another developm ent in the Korean market further dispels 
Korea’s notion that soju is in a market of its own:  the production of flavoured soju and juice cocktails 
starting in 1995.  Although it may well be that much  of soju is consumed as described in Korea's 
submission, these market developments show that new forms, venues and usage of various distilled 
spirits will continue to develop in Korea.  
6.205.  The United States considers that market de velopments and present conditions in Korea 
directly undermine Korea’s reliance on pre-tax pr ice differentials as precluding substitutability 
between soju and Western spirits.  Despite comp etitive distortions created by Korea’s liquor tax 
                                                      
239 The United States cites A.G. Alley, D.G. Ferguson, K.G. Stuart, An Almost Ideal Demand System 
for Alcoholic Beverages  in British Columbia , 17 Empirical Economics 416 (1992).  
240 Id. at 414.  
241 The United States cites Andrikopoulos, et al., The Demand for Domestic and Imported Alcoholic 
Beverages in Ontario, Canada: A Dynamic Simultaneous Equations Approach, 29 Applied Economics 945-953 
(1997); Holm, Alcohol Content and Demand for Alcoholic Beverages: A System Approach, 20 Empirical Economics 75-92 (1995).   WT/DS75/R 
 WT/DS84/R 
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 system, demand for Western spirits, particularly whisky, has increased as the relative prices of whisky and soju declined ( there were 100% and 250% reducti ons in the applicable liquor tax rate and import 
custom duties, respectively.  During this period, sales of whisky in Korea increased over 136 percent 
as compared to a 13 percent increase in soju sales.  These differing rates of growth in sales of whisky 
and soju amidst tax and duty reductions on imports de monstrates that the products are in competition.  
6.206.  The United States claims that without precise data regarding Korean consumer purchasing 
activity, it is virtually impossible to determine with complete certainty that product demand, in this 
case whisky, is driven by factors unrelated to th e demand and price of the other product in question, 
i.e. soju.  However, the United States considers that several market developments suggest that 
changes in market share between soju  and whisky are not unrelated:   
1) A noticeable slow-down in soju sales occu rred in the early 1990's as the import duties 
in Korea were lowered on whisky and impor t restrictions were eliminated, propelling 
increased sales of whisky and other Western spirits.  
2) It was not until 1996, when a new soju pr oduct was introduced (premium soju), that 
soju sales rebounded.  Between 1995 and 1996, sales of soju increased by 5 percent, 
exceeding the growth rate for the pr evious three years combined.    
3) In 1997, in the midst of a sharp currenc y depreciation and economic difficulties, sales 
of Western spirits, particularly whisky, dec lined, while soju sales actually increased.   
Thus, according to the United States, the two concu rrent trends of Korean consumers trading up to 
Western spirits while trading up to premium domestic soju are a strong indication of the 
substitutability between Western spirits and soju.  
4. The Dodwell Study 
6.207.  The United States argues that the results of the Dodwell study provide ample evidence that 
Korean consumers treat soju and imported Western spirits as substitute products. The United States 
notes first that a cross- price elasticity study might be a helpful addition to the Article III:2 analysis, 
but it is not a necessary one.  The emphasis on case-by -case analysis in the drafting history of Article 
III, and the practice among GATT and WTO panels, make  it clear that it would not be appropriate to 
establish a general rule concerning the percentage shift in consumer preferences.  The complaining 
parties have not put forward any precise estimate, but some empirical results of studies conducted in various national markets indicate that there is a st atistically significant trade-off between types of 
spirits. 
6.208.  First, the United States notes that the Dodwell study was patterned after the ASI study utilised 
in the  Japan-Taxes on Alcoholic Beverages II,
242 in which the panel stated "contained persuasive 
evidence that there is significant elasticity of substitution among the products in dispute."243 
6.209.  According to the United States, the small anoma lies in the Dodwell study should not lead the 
panel to a conclusion that the Dodwell study reflects "independent movements of independent 
variables."  In the US view, drawing such a c onclusion on the results of the Dodwell study is 
tantamount to concluding that relative prices of soju, premium soju and imported spirits have no 
impact on consumption decisions.  In fact, the overall trends  in the Dodwell study should lead the 
Panel to the opposite conclusion:  consumer preferences in the Korean market for distilled spirits are 
significantly related to relative prices of  soju and imported distilled spirits.  
                                                      
242 Panel Report on Japan - Taxes on Al coholic Beverages II  ,supra ., para. 6.29. 
243 Ibid., para. 6.32. WT/DS75/R 
WT/DS84/R Page 110 
 
 6.210.  According to the United States, the anomalies pointed out by Korea are merely deviations 
from what is usual, normal or expected.
244  The US argument is that a study that relies on sampling to 
draw inferences about an overall population may yield results that contain some random variation, and 
therefore will be susceptible to occasional anomalous results.245  In the US view, what is important in 
the Dodwell study is that the overall trend  displayed in the sample responses suggests that relative 
prices are a factor in consumption of distilled sp irits, and that consumers normally will substitute 
imported spirits for soju as the relative price of soju rises. 
6.211.  According to the United States, the analysis of the Dodwell survey results as described in the 
first US submission detailed the percentage cha nges in those choosing Western spirits (excluding 
premium soju) as the relative price of standard soju ri ses.  Therefore, the aggregate effects of nearly 
all of the scenarios demonstrate that respondents increasingly choose Western spirits when faced with 
higher relative prices for standard soju.   
6.212.  The United States notes that Korea’s critique of the Dodwell study alleges flawed results and 
methodological weaknesses.  Yet, despite these a ssertions, the study establishes a connection between 
changes in relative prices of soju and western sp irits and purchasing behaviour.  The Dodwell survey 
followed the methodology of the ASI study, attempting to determine whether the typical Korean spirits customer varies consumption preferences betw een soju and Western spirits as relative prices of 
spirits change.   In the US view, the study did not a ttempt to determine the actual shares or shifts in 
market shares between spirits products, an objective that would not be relevant to this proceeding.  
Rather it sought to establish whether Korean spirits  consumers view the products as substitutable.  
The fact that the observed percentages of survey responses do not perfectly correlate with actual soju 
market shares does not undermine the study’s c onclusions, and focusing on it overlooks the study’s 
objective. 
6.213.  The United States notes that Korea further asserts  that the Dodwell study reflects a sample 
bias and posed ambiguous questions.   According to the United States, with respect to the survey 
questions, it is unreasonable to impute confusion to the entire survey population.  With respect to the 
sample, inclusion of survey respondents having rece ntly purchased soju and whisky suggests that, at 
least for brown spirits, respondents’ familiarity with  these products runs contrary to the assertion that 
the survey questions implied a one-time or experime ntal purchase.   Finally, the separation of brown 
and white distilled spirits does not affect the f undamental movement of respondents from standard 
soju to Western spirits as standard  soju’s relative price increased.   
6.214.  The United States also notes that  Korea questioned, as did the Panel, the grouping of premium 
soju with other Western distilled spirits in the Dodw ell study.  According to the United States, as with 
whisky (standard and premium), it was considered appropriate to establish more than one price point 
                                                     
 
244 In the US view, Korea’s critique of the Dodwell study focuses on random anomalies to the 
exclusion of the underlying findings that Korean consumer s view standard soju and imported spirits as substitute 
products.  For example, Korea’s critique highlights that  in chart 1 of the Dodwell study, the percentage of 
respondents choosing premium scotch falls as the price of standard soju rises from 1,100 to 1,200 won.  The 
critique ignores that in the same scenario a rising percentage of respondents chose standard whisky and cognac 
as soju prices rose.  In aggregate,  the percentage choosing Western spirits in this scenario actually rose, 
indicating respondents’ responsiveness to changes in the relative prices of Western brown spirits and soju.  
Moreover, the aggregate trends in nearly all the s cenarios indicate increasing pe rcentages of respondents 
choosing Western spirits amidst the relative rise of stan dard soju prices.  In focusing narrowly on selective 
inconsistencies Korea has obfuscated the underlying study results evidencing that respondents frequently choose 
to substitute imported spirits for standard soju as the re lative price of these products narrowed.  See First Korea 
Sub., Attachment 2, at pp. 4-5. 
245 In the US view, in only one of the price scenarios (medium brown spirit price levels) in the Dodwell 
study did the aggregate results run counter to theory.  However, it should be noted that in terms of respondents, a net of 3 respondents choose non-Western spirits as the relative price of standard soju reached its highest level.  WT/DS75/R 
 WT/DS84/R 
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 for diluted soju given that diluted soju products di ffered in price.  Setting a price benchmark for the 
soju category based on the actual prices for the higher price premium soju to the exclusion of standard 
soju would have ignored the majority of the overall diluted soju market.  Standard soju, due to its 
market share significance, was chosen as the benchm ark for comparison.  The fact that premium soju 
was selected as an alternative product, alongside West ern spirits, to standard soju, and that some 
respondents switched to premium soju, does not unde rmine the validity of the study’s conclusion. 
5. The measures are applied "so as to a fford protection to domestic production" 
6.215.  The United States does not address this issue in  its rebuttal submission, but in its oral 
statements argues that, with respect to this el ement of the case, the Appellate Body stated in Japan – 
Taxes on Alcoholic Beverages II , the protective application of a tax can most often be discerned from 
“the design, the architecture and the revealing st ructure of the measure,” which includes the very 
magnitude of the dissimilar taxation.   
6.216.  The United States further argues that Korea has la rgely ignored this element of the analysis.  
However, the Korean measures at issue do present a structure applied so as to afford protection to 
domestic production.  According to the United Stat es, the very large differentiation in tax rates 
between imported and domestic products, on the basi s of a law that consists mainly of arbitrary 
exclusions from the definition of Korea’s domestic product, soju, can only be considered protective.  
Moreover, in  contrast to the facts presented in the Japan  case,  the protection of soju in Korea can be 
equated even more directly with the protection of a domestic industry.  In Japan, there were 
significant imports of soju from Korea (which the panel in Japan – Taxes on Alcoholic Beverages II  
found were the same product as shochu),  but in Kor ea, there have been only negligible imports of 
soju -- or shochu --  from any other country.   
6.217.  The United States further notes that Korea makes the claim that soju cannot be considered 
“domestic” production at all, because its raw materi al is often imported.  According to the United 
States, this  assertion ignores Korea’s own legal st ructures, however.  It is true that the main 
ingredient for soju is ethyl alcohol, 70% of which is imported.  But, unlike whisky, ethyl alcohol is a 
raw material that can be used for a variety of e nd products.  Ethyl alcohol is classified separately 
under HS heading 2207,  and the process of manufactu ring soju results in a substantial transformation 
of that raw material, while any imported soju is classified under HS heading 2208.  Whisky, whether 
bottled or in bulk, is classified under HS heading 2208.  Thus, it is plain that soju is a domestic product, while whisky is exclusively imported. 
6.218.  Finally, according to the United States, Korea’s invocation of progressive social policies as a 
pretext for this discrimination is unrelated to the st ructure of its law, which is drawn on the basis of 
arbitrary physical characteristics and not on price of  the product.  While Korea may have a social 
policy objective of imposing lower internal taxes on inexpensive products purchased by lower income 
consumers, Article III does not permit Members to dr aw artificial product categories for tax purposes 
so as to discriminate against imports and protect  domestic production.  According to the United 
States, the same or similar arguments by Japan have been rejected in two panel proceedings. WT/DS75/R 
WT/DS84/R Page 112 
 
 C. KOREA 
1. The Nielsen Study 
6.219.  Korea states at the outset that in order to re but assertions of the complainants in the Dodwell 
Study and elsewhere in their submissions, it h as commissioned another study, carried out by the 
company A.C. Nielsen (Nielsen study).
246 
6.220.  Korea states that the Nielsen study concluded that while all Korean restaurants, Chinese 
restaurants and mobile street vendors sell standard soju, most cafés/western style restaurants and bars 
sell whisky.  The study also found that 29.3% of the respondents consumed alcoholic beverages at 
home with their meals, while 81% were found to have consumed such beverages with meals at 
restaurants.  The study claims that diluted soju was the alcoholic beverage predominantly consumed 
with meals.  Drinking diluted soju with meals was most popular at Korean restaurants (73%), 
followed by Japanese restaurants (18% ).  According to the study, of the seven beverages offered to 
the respondents, none were consumed with meals at  cafés/western styl e restaurants, bars and hotel 
bars.  Finally, the survey found that soju is predom inantly consumed straight (98.6%), while whisky is 
usually consumed "on the rocks" (with ice) (63.8%). 
6.221.  In Korea's view, therefore, the Nielsen study substantiates its argument that there is no 
demand substitutability between soju and the western- type drinks at hand in the Korean market.  
2. General comments 
6.222.  Korea argued in its first submission and continues to maintain that a violation of Article III:2 
cannot be made in the abstract.  According to Kor ea, in order to begin to prove the existence of a 
violation, the complainants must show that there is a ‘like’ or directly competitive or substitutable 
relationship between specific products in a specifi c market.  The decision as to whether two products 
have such a relationship is based upon an overall appreciation of many factors, such as their physical 
similarities, their end uses, price,  and consumers’ tastes and habits.  Two products may be similar to 
some degree in some ways, and different to some degree in other ways.  
6.223.  Korea claims that the complainants have prefer red to discuss each relevant criterion in the 
abstract and for all the products at once.  Taking each criteria separately allowed them to make generalisations about all the produc ts without addressing the specific arguments that Korea raised for 
each individual product.  In Korea's view, as a result of that approach, the complainants do not 
provide a total view of the relationship between any particular product pair.   
6.224.  According to Korea, the effect of this approach is three-fold.  First, it allows the complainants 
to gloss over or ignore differences between products .  Second, it allows them to highlight and 
exaggerate the importance of exceptional cases. Third, through this approach they make it more difficult for the Panel to have a clear overall view of any one product pair. 
6.225.  Korea also asserts that what the complainants l ack in evidence and argument, they try to make 
up for by allusions to Korea's past, its alleged protec tive measures, its lack of imports etc.  According 
to Korea, its past as a developing country is not at issue in this case.  What is at issue is Korea's 
market today.  Korea refers to a neutral stud y funded by the EC Commission which observed that: 
                                                     
 
246 Korea claims that unlike the D odwell Study, the Nielsen Study ha s focused on factual evidence 
rather than speculation.  Rather than asking respondents ‘what would you do?’, it has asked them ‘what do you do?’  WT/DS75/R 
 WT/DS84/R 
 Page 113 
 
 
The Korea market is no longer a market protect ed by the Government with market shares 
contested by local producers.  In fact, it is becoming a truly global market, where multinational companies convene to  compete with one another fo r the lucrative and promising 
Korean market.
247 
3. Generalisations about the Korean products 
6.226.  Korea notes that consistent with their contenti on that all distilled spirits are the same, the 
complainants also refuse to recognise differences in the Korean spirits at issue in this case, claiming 
that ‘soju’, whether it be standard  or distilled, is one product.   
6.227.  Korea has insisted from the beginning that standa rd soju and distilled soju are too different for 
these two products to be lumped together.  Korea seeks to show that in trying to rebut this fact, the 
complainants first draw support from the fact that st andard soju and distilled so ju share, in part, the 
same name.  According to Korea, the similarity in  the names of standard soju and distilled soju is 
meaningless (for example, one would not consider ‘b eer’ and ‘root beer’ to be ‘like’ or directly 
competitive or substitutable on the basis of their names).  
6.228.  Korea further notes that the complainants then go on to argue that the physical differences 
between standard soju and distilled soju are insi gnificant. However, those physical differences are 
obviously enough to affect consumer behaviour, as st andard soju and distilled soju do not compete, 
indeed do not have the same end uses, and are sold at  vastly different prices.  The complainants have 
not been able to counter those arguments.  In additio n, it should be noted that the distinction between 
standard soju and distilled soju existed prior to th is case, that these two products fall into different tax 
brackets,248 and that despite the EC’s statements to the c ontrary, distilled soju is not exempt from tax.  
6.229.  Korea states that another point made by the complainants is that the difference between 
distilled and standard soju is really not important because, " they can be, and are, often blended with 
each other."249  The complainants then point out that whis ky is often blended too.  Korea points out 
that the complainants again offer no proof whatsoev er for their allegation th at distilled and standard 
soju are often blended.  Accordingly, this exampl e of the reference to whisky is irrelevant to a 
comparison between standard and distilled soju.   
6.230.  Korea refers to what it calls another ast onishing, assertion of the complainants that, ‘swift 
transition’  occurred in the mid 1970s from distilled to standard soju, which and ‘was possible only 
because, in the eyes of Korean consumers, the two varieties of soju are the same product’250  Korea 
recalls that standard soju was introduced in 1962 b ecause, due to food shortages, distilled soju made 
of rice could no longer be produced . Production of distilled soju only started again in 1991. If a swift 
transition from one product to another following food s hortages is an indication of a close relationship 
between them, Korea recalls that Parisians also made a ‘ swift transition ’ from eating beef meat to 
eating rat meat during the Fall of Pari s in the 1870s, due to a food shortage.251  According to Korea, 
peoples’ behaviour in times of food shortage says very little about which pr oducts consumers would 
consider substitutes in normal circumstances.  
                                                      
247 See Sofres Report, Introduction. 
248 According to Korea, while the US notes that standard soju and distilled soju have the same rate of 
Education Tax (10%), they fail to mention that the liquor tax on distilled soju is 50%, while the liquor tax on 
standard soju is 35%.  Another mistaken attempt at trivialising the distinctions between distilled and standard 
soju is the EC’s assertion that the distinction in the ta x law was introduced only in 1991 (see EC written rebuttal, 
at para. 34), supposedly in response to pressure from the EC. In fact, the distinction was already made in 1962. 
249 See EC written rebuttal, at para. 38. 
250 See EC written rebuttal, at para. 35. 
251 See Horne, Alistar, The Fall of Paris: The Siege and the Commune 1870-71, London 1965. WT/DS75/R 
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 6.231.  Korea states that the complain ants argue that the only reason Korea wants to distinguish 
between standard soju and distilled soju is because it wants to ‘sacrif ice’ distilled soju, which makes 
up 0.2% of the ‘soju market’ in orde r to ‘spare’ standard soju.  Acco rding to Korea, it has no intention 
of sacrificing distilled soju.  While distilled soju di ffers from the imported beverages in different ways 
than standard soju, it still differs from them too greatly to be ‘like’ or directly competitive or 
substitutable for those products.  
6.232.  Korea further argues that this allegation that Ko rea is willing to ‘sacrifice’ distilled soju to 
‘spare’ standard soju is characteristic of another facet  of the complainants’ appr oach to this case.  In 
Korea's words, where it suits them, the complainants  trade their inverted telescope for a microscope, 
‘zooming in’ on exceptional cases that seem to support their argument. In the same way that looking 
at the situation from a great distance obscures the real ity, zooming in too closely also means that your 
view is distorted.   
6.233.  Korea notes that the complainants allege that Korea is willing to ‘sacrifice’ distilled soju 
because it only represents 0.2% of the ‘soju market’.  What this highlights is the fact that the 
complainants are asking the Panel to do the oppos ite:  they would like to use examples drawn from 
this 0.2% in order to prove a point about the other 99.8% of 'soju' sold in Korea, which is standard soju. For example, the complainants  want the Panel to ignore the subs tantial price differences between 
standard soju and the western-style liquors at issue in this case, on the basis of the high prices of that 
0.2%. 
4. Actual (or potential) competition 
6.234.  Looking carefully at the evidence and arguments  that the complainant have presented, Korea 
submits that the arguments are misleading, flawed, or  insufficient to meet the complainants’ burden of 
proof.  According to Korea, therefore, the complain ants have not established that there is a direct 
competitive or substitutable relationship, actual or potential, between soju and the imported distilled 
spirits that are within the scope of this dispute.  
(a) Physical differences 
6.235.  Korea points out that there are important physical  differences between the products at issue.  
These differences have an impact on consumer pref erences and hence on the competitive relationship 
between the products.  According to Korea, the co mplainants have attempted to trivialise those 
differences by looking at the products from a great distance, such that they can say that all the 
products have ‘essentially the same char acteristics’.   In Korea's view, however, even a slight physical 
difference might be enough to render two products not  competitive.  For example, if a consumer does 
not like the taste of one particular additive, its add ition to a product will eliminate that consumer as a 
potential buyer  -- even if that additive does little to change the appearance or chemical composition 
of the product.   
6.236.  Korea also points out that the complainants disp lay ignorance of the very real possibility that 
two products that are ostensibly similar might not  compete.  For exampl e, Korea cites the US 
argument that ‘under Korea’s theory, different flavours of soft drinks such as Coca-Cola and Fanta do 
not compete, but it is doubtful that anyone  familiar with the market would agree.’   
Korea disagrees 
with this.  According to Korea, the director ate of the European Commission responsible for 
competition law matters has more than once draw n a distinction between cola-flavoured carbonated 
soft drinks and other types of soft drinks, deciding in the recent Coca-Cola/Amalgamated Beverages  
merger that the relevant market  was the market for cola-flavoured carbonated soft drinks, explicitly  WT/DS75/R 
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 excluding other flavours of carbonated soft drinks.
252  National competition authorities have come to 
the same conclusion.253 
6.237.  Korea argues that, the European Communities, in its discussion of physical differences,  tries 
to take consideration back to the moment of distillatio n, at which point, it argues, 'all spirits are nearly 
identical' because ‘all of them are concentrated fo rms of alcohol.’  Korea argues that firstly, the 
principal test for whether products compete is the marketplace. Spirits are not sold at the point of 
distillation. Moreover, the difference in physical characteristics, starting with a difference in raw 
materials, is not negated by distillation.  In a ddition, there are important post-distillation processes 
that also have an impact on the physical characte ristics of products. Brown spirits, for instance, are 
generally matured in wooden casks and derive thei r flavour from this process, and from the original 
distilled ingredients.   
6.238.  According to Korea, the analysis at the point of distillation is meaningless as the subsequent 
addition of additives or ingredients can, and in the liquors discussed here, does, make a crucial 
difference for consumers when they choose a partic ular liquor in a particular market, such as the 
Korean market.  Korea concludes, therefore, that although all spirits may be ‘nearly identical’ at the 
point of distillation, the most casual observation cl early shows that does not mean that drinkers are 
indifferent between them. 
6.239.  According to Korea, if physical characteristic s at the point of distillation were meaningful, 
that would lead to the conclusion that products as di sparate as fuel or pharma ceutical products are also 
directly competitive and substitutable with, for example, vodka.254 
6.240.  Korea also asserts that the co mplainants try to use evidence about production process to make 
up for the essential evidence about ma rkets that is missing from their presentations.  According to 
Korea, no evidence offered by the co mplainants shows that ‘distilled spir its’ is a group that is relevant 
to consumer choice in the Korean market. Korea ask s: Why is ‘distilled spirits’ such a group rather 
than ‘brown distilled spirits’ or, ‘white distilled sp irits’? Why not ‘alcoholic beverages’ – spirits, wine 
and beer?  Why not ‘cold drinks’, alcoholic or not? 
6.241.  In Korea's view, any one of these might be a gr ouping relevant to consumption – or might not 
be. Whether it is or not depends on the tastes and pref erences of  consumers. According to Korea, the 
effects of a failure to adequately research re lations between products in  consumption cannot be 
escaped by reference to modes of production. In pa rticular, it cannot be demonstrated that distilled 
spirits is a relevant grouping for consumers on the basis that ‘having essentially the same 
characteristics, soju and other distilled spirits and liqueurs are objectively apt to serve the same end 
uses’. 
6.242.  According to Korea, a member of a group of pr oducts that are related in consumption need 
not be a substitute for all other members of the group – just  for some other members of the group.  
Korea states that a high-end Ferrari and a low-end Re nault Clio are both motor cars, and could be seen 
by a person of sufficiently limited imagination as ‘having essentially the same characteristics’ (four 
wheels, one engine, steering wheel) and to be ‘objec tively apt to serve the same end uses’. The fact 
that both are motor cars, though, is not enough to allow deduction of elasticity  of substitution between 
                                                      
252 Korea cites Commission Decision of 22 January 1997 declaring a concentration to be compatible 
with the common market and the functioning  of the EEA Agreement, Case No IV/M. 794 Coca-
Cola/Amalgamat ed Beverages , 1997 OJ L 218, p. 15.   
253 Korea cites for example Decision no 96-D-67 of the French Conseil de la Concurrence (Competition 
Council) of 29 October 1996, Coca Cola Beverages . 
254 Korea alleges that the EC stated  during its oral statement (p.12) that: neutral spirits are a raw 
material which can be used to produce a variety of alcoholic beverages, including for example vodka and gin, as well as other products, such as fuel or pharmaceu tical products. WT/DS75/R 
WT/DS84/R Page 116 
 
 them. Indeed, in the case of Ferraris and Clios, it seems very likely that the elasticity in substitution 
between the two products is nil: that if the price of  Clios changes by 1 per cent (or 10 percent or 100 
per cent), the effect on demand for Ferraris will be zero. 
6.243.  Likewise, according to Korea, given the notable  differences between st andard soju and the 
western-style liquors there is no reason to assume that there would be elasticity of substitution 
between them. The complainants need to  show this, but have failed to do so. 
6.244.  Korea also claims refers to the EC claim th at ‘according to Korea, the main difference 
between soju and gin is that gin is flavoured with juniper berries.’  According to Korea it is true that 
Korea argued that juniper imparts a very particular flavour to gin that some consumers do not like.  
However, this was one of many differences, not l east differences in price and end use, that Korea 
pointed out with respect of gin. 
6.245.  Korea notes, furthermore, that in interpreting th e term 'substitutable', the United States, rather 
than proving that for Korean consumers a western-style liquor like whisky is directly
255 substitutable 
for standard soju, despite the very considerable pr ice difference, cites the example of bottled water 
and tap water, two products that ostensibly have similar physical characteristics and similar end-uses. 
6.246.  According to Korea, products that conceivably can be substituted for each other yield a very 
broad field.  Korea states for example, that on e could say that woollen sweaters and coal can be 
substituted for each other.  If you are cold, you could e ither put on a sweater or throw another lump of 
coal on the fire.  Washing machines and socks coul d be substitutable.  The easier and cheaper the 
availability of laundry facilities, the fewer socks a person needs in order to have a constant clean 
supply.  With this view of substitutability, baby  carriages and wheelbarrows could be substitutable! 
(b) Price 
6.247.  According to Korea, on the basi s of the facts provided in the complainants’ Dodwell Study, it 
is apparent that there is a huge discrepancy in the pr e-tax prices of the products at issue.  Korea states 
that taking whisky and standard soju as an example,  the Dodwell Study data shows that the ratio of 
their prices varies from 6.3 to 12 times, with no overl ap in price at all. Furthermore, according to 
Korea, the weighted average figures that Korea provide d in its first submission showed that whisky is 
on average 11 times more expensive than standard soju.256  Large pre-tax price differences are shown 
for all the imported liquors at issue. This casts serious doubts on the existence of a directly 
competitive and substitutable relationship between  these products, and highlights an important 
difference between this case and Japan - Taxes on Alcoholic Beverages II  . 
6.248.  Korea points out that there are enormous pre-tax price differences.  Based on the figures 
provided by the Dodwell study, Korea fo und the following pre-tax price differences: 
  Standard soju v. whisky(premium)  ratio of 1 to 12 
                   whisky(North American) ratio of 1 to 10.8     whisky(standard scotch) ratio of 1 to 7.2 
      whisky(bottled in Korea) ratio of 1 to 6.3 
      brandy/cognac  ratio of 1 to 19.2       vodka   ratio of 1 to 5.7       gin   ratio of 1 to 5       rum   ratio of 1 to 6.2 
                                                     
 
255 Korea maintains that the United States, the European Communities and Korea are in agreement that 
the word 'directly' applies to both 'c ompetitive' as well as to 'substitutable. 
256 Korea refers to Attachment 5 to Korea’s first submission.  WT/DS75/R 
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 6.249.  Korea indicates that the Dodwell study data shows that the ratio of price difference varies 
from 6.3 to 12 times with no overlap in price at all.   Furthermore, according to Korea, the weighted 
average prices showed that whisky is 11 times more  expensive than standard soju.  In response to the 
European Communities ’ claim that weighted average prices are “meaningless, ” Korea states that a 
weighted average price is an accepted means of gett ing a typical price for a product.  Large pre-tax 
price differences are shown for all the imported liquo rs at issue.  This casts serious doubts on the 
existence of a directly competitive and substitu table relationship between these products, and 
highlights an important difference between this case and Japan —Taxes on Alcoholic Beverages II . 
6.250.  Korea considers that pre-tax price differences of  this magnitude must be taken into account in 
discussing whether it can reasonably be argued that any of these products are “like” or directly 
competitive or substitutable.  Korea argues that thes e price differences refute any argument that it was 
taxes that have “frozen ” consumer preferences.  Furthermore, ar gues Korea, as to directly competitive 
or substitutable products, it must be addressed whethe r, in the face of these price differences prior to 
the application of tax, the tax differentials at issue in this case can be said to “afford protection” to 
domestic production.  
6.251.  Korea argues that the complainants have been unable to provide a response to the proposition 
that large pre-tax price differential leads to the absence of a directly competitive or substitutable 
relationship. Rather than addressing the price discr epancy between standard soju and the imported 
liquors head on, the complainants attempt to divert  the Panel’s attention to premium diluted soju, 
which is the somewhat more expensive variety, re presenting some 5% of tota l diluted soju volume. 
6.252.  Korea refers to the EC argument that using pre-tax prices for the purposes of comparison does 
not remove the "distortive effect from the disputed taxes", because the tax has kept low-priced imports 
from entering the market.  Korea remind s the parties that, unlike Japan, it has ad valorem  taxes.  In 
Korea's view, while it might be argued that a high  specific tax would keep low-cost products out of 
the market, an ad valorem  tax is just that – it is linked to the price of the product, and therefore, the 
lower the price, the lower the tax amount. 
6.253.  Korea states that in determining whethe r two products are directly competitive or 
substitutable products, price cannot be excluded.  In  Korea's view, it is obvious that when one product 
is many times more expensive than another, it is  difficult to argue that those two products are in 
competition.  Korea notes that the US and EC co mpetition authorities consider price as one of the 
most relevant factors.
257  Korea also recalls that during the Panel meetings, the EC representative 
stated that competition law analysis was relevant to an analysis of Article III:2. 
6.254.  Korea draws attention to the importance of the reasoning in Japan – Taxes on Alcoholic 
Beverages II , wherein it was stated that:  
the extent to which two products are co mpetitive in economics is measured by the 
responsiveness of the demand for one product to the change in the demand for the other 
product (cross-price elasticity of demand).  Th e more sensitive demand for one product is to 
changes in the price of the other product, all other things being equal, the more directly 
competitive they are.258 
                                                      
257 Korea notes that in its written rebuttal the EC stat es that only consumers' responses to changes in 
relative prices are relevant and not absolute price differ ences).  In competition law, price is one of the assessed 
criteria to determine whether there is competition between products.  In such an analysis, prices are assessed 
both in nominal and relative terms (see Commission Decision of 22 July 1992, Case No. IV/M 190 Nestle 
Perrier, OJ L 356, p.1).  In Korea's view, the difference in nominal terms is of such a degree that it renders 
improbable any change in the consumers' re sponses resulting from relative price changes. 
258 Panel report, para. 6.31. WT/DS75/R 
WT/DS84/R Page 118 
 
 6.255.  Korea argues that common sense tells us that the larger the price differences between two 
products, the less influence a change in the price of  one will have on the demand for the other.  In 
Korea's view, the complainants have not been ab le to overcome this common sense presumption.  
6.256.  According to Korea, the price difference betwee n premium diluted soju and standard diluted 
soju is far less important than the price differen ce between standard diluted soju and western-style 
spirits.  Korea claims that premiu m diluted soju is, on average, less  than 80% more expensive than 
standard diluted soju,
259 and the difference in price reflects th e other very small differences between 
premium and standard diluted soju.    
6.257.  Korea also refers to an assertion by the Eur opean Communities, which in Korea's view is 
unfounded: ‘western-style spirits are more expensive,  to a large extent as a result of discriminatory 
taxation. If western-style spirits were taxed as soju, they would be less expensive and Korean 
consumers could afford to drink them with meals more  often.’  Korea's argument is that western-style 
spirits are indeed more expensive, but th e rest of this statement does not follow. 
6.258.  Korea points out that using the Dodwell data pr ovided by the EC, the pre-tax price differences 
between these beverages is great.  These price differe nces would thus be maintained if tax rates were 
harmonised, and they are too great for it to follo w that consumers would suddenly find imported 
alcoholic beverages an affordable alternative to diluted soju for meal-use, even disregarding the 
matter of taste. According to Ko rea, even the European Communities cannot think that its evidence 
shows that the addition of a few hundred won to the price of a bottle of diluted soju will have any 
substantial effect on demand for, for example, whisky.   
6.259.  Korea also states that another unfounded allegati on appeared in the EC oral statement, where 
it stated that: 
"Tax and tariff changes were followed by  a substantial reduction of prices and a 
considerable increase in the sales of whis ky. This increase took place at the expense 
of soju. Whereas the market share of soju  fell from 96 per cent in 1992 to 94 per cent 
in 1996, during the same period, whisky in creased by a similar percentage from 1.5 
per cent to 3 per cent. Soju's declini ng market share in an expending market 
evidences that soju and whisky are in direct competition".260 
6.260.  Korea states that it is probably true that if the price of whisky falls, the volume of whisky 
purchased will increase. According to Korea, that the quantity of whis ky purchased is responsive to 
the price of whisky, does not, however, further the EC  and US case.   According to Korea, they need 
to show that this increase was at the expense of so ju – that the demand for soju is responsive to the 
price of whisky.   
6.261.  Korea argues that if whisky sales increase at a greater percentage rate than soju sales, the 
share of whisky in the hypo thetical 'soju-whisky market' will rise, and that of soju will fall.  In Korea's 
view, that is entirely consistent with sales of soju  rising at the same rate both before and after the 
increase in the share of whisky. The increase in whisky market share and the fall in soju market share 
says nothing about whether whisky grew at the expense of soju.  
6.262.  According to Korea, the point can be underlined by taking two goods that most people will 
accept to be unrelated – say whisky and floor polish – and aggregating them into an artificial market. 
                                                      
259 As appears from Korea's answer to question 5 of the second set of questions from the Panel, the 
weighted average price of standard diluted soju (excluding premium soju) is 306.58 won, while the weighted 
average price of premium diluted soju alone is 539.70 won.  
260 See EC oral statement, p. 6.  WT/DS75/R 
 WT/DS84/R 
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 In that ‘market’, the share of whisky might rise: whisky sales might grow at a higher percentage rate than sales of floor polish. But this does not prove or  even suggest that whisky sales have grown at the 
expense of floor polish sales. Indeed, since the two products are, ex hypothesi , unrelated, it is clear 
that they have not. 
6.263.  In Korea's view, this ‘proof’ that  whisky has grown at the expense of floor polish is in no way 
different from the ‘proof’ offered by the European  Communities and the United States that whisky has 
grown at the expense of soju in the ‘whisky-soju market’. Whisky's gain of market share in the 
‘whisky-soju market’ shows that sales of whisky have  grown at a faster percentage rate than soju: it 
shows no more and no less. 
6.264.  According to Korea, the arguments of the Eu ropean Communities and the United States that 
market evolution in Korea supports their claim that whisky and soju are substitutes deserve no weight.  
In Korea's view, sales in whisky have certainly in creased in Korea as its price fell, which is to be 
expected.  Korea argues that in itself that fact  has no bearing on the case.  What the European 
Communities and the United States need to show is that the increase in sales of whisky was at the 
expense of sales of soju, which in Korea's view, they have not done. 
6.265.  Korea argues that the complainants display an interesting approach to the alcoholic strength 
of products.  According to Korea, the complainan ts argue that a difference in alcoholic strength 
should not be taken into account in certain instances (such as, it should not affect the determination of 
whether products  meet the strict ‘like’ product cr iteria).   In Korea's view, the complainants only 
analyze price in this way in a last-ditch attempt to deal with evidence that is very damaging to their 
case.   Korea further argues that the EC cannot bring itself to compare alcohol-adjusted prices of an 
average standard soju price -- inst ead, it compares an atypical bottle of standard whisky to a bottle of 
premium soju, and still comes out with a 2 to 3 times price difference. 
6.266.  Korea argues that the EC is focusing on excepti ons in describing the Korean market. When it 
comes to the price of premium soju in this case, they take the most expensive premium soju brand 
(Kimsatgat) as representative.  The sales volume of such high-priced premium soju is minimal.   
Korea further argues that he Eu ropean Communities takes inexpens ive whisky as an example, which 
is atypical as well. 
6.267.  Korea also argues that the calculations of th e European Communities are misleading.  When 
taking the price per degree of alcohol based on we ighted averages, so as to obtain a representative 
price, whisky is still 7.96 times the price of standa rd soju per degree of alcohol. Looking at premium 
soju alone, whisky is 4.71 times the price of premium soju per degree of alcohol.
261  Again, these are 
pre-tax prices. 
6.268.  Korea asserts that contrary to its contention in Japan – Taxes on Alcoholic Beverages II , that 
pre-tax prices were within a relatively short range , the European Communities now claims that there 
were actually significant price differences in Japan,  and submits figures that are supposed to show 
this.  According to Korea, the Eu ropean Communities even goes so far as to suggest that the Japan - 
Taxes on Alcoholic Beverages consciously disregarded substantial price differences.262 
6.269.  Korea observes that prices of western-style liquors and the Japanese shochus, once the tax is 
removed, appear to be rather close, with a number of overlaps.263  Furthermore, Korea notes that 
Japan chose not to dispute the EC's contentions ab out prices and price competition. However, rather 
                                                      
261  Calculations based on data from the National Tax Administration. 
262  EC written rebuttal, at para. 130. 
263 See Annex 2 to EC written rebuttal.  WT/DS75/R 
WT/DS84/R Page 120 
 
 than speculating about the evidence, and the argumen ts presented to the panel in Japan - Taxes on 
Alcoholic Beverages, Korea submits it is safer to recall the explicit finding by that panel: 
(T)he Community argued that the retail prices of shochu and of the other distilled spirits and 
liqueurs are within a relatively short range once the liquor taxes and the ad valorem taxes are 
deducted.  This, in the Community's view, confirms  that all of them are, at least potentially, 
competitive in terms of price .
264 
6.270.  Korea also notes that the Panel re peated the Community’s argument: 
[t]hat, but for the discriminatory taxes imposed pursuant to the Liquor Tax Law, many 
western-style liquors would be less expensive than shochu in real terms .265 
6.271.  According to Korea, one can only conclude th at the European Communities was describing 
the facts in one way before the Jap anese liquor taxes Panel, and is now  changing its story before this 
Panel.  In Korea's view, these two versions simply do not match.  Korea asks how the European Communities was able to say that pre-tax, prices of many western-style liquors would be less expensive than Japanese shochu, and now say that pre-tax prices of western style liquors in Japan 
were actually significantly higher than shochu?  
6.272.  Korea further argues that neither the Panel nor  the Appellate Body in their legal findings 
reflected on any significant price differences in Japan – Taxes on Alcoholic Beverages II . According 
to Korea, it is clear from the evidence presented to th is panel that in Korea, after the removal of the 
liquor taxes, none of the western-style liquors w ould become cheaper than Korean soju. On the 
contrary, very substantial price differences would remain. 
6.273.  Korea maintains that, together with the other di stinguishing factors such as end use (whisky is 
not a meal drink, etc.) these price differences dem onstrate that there is no directly competitive or 
substitutable relationship between the western-st yle drinks in dispute and standard soju. 
(c) End use 
6.274.  Korea states that it has also shown in its subm ission that the end uses for diluted soju differ 
greatly from those of the imported liquors at issue in this case.  In particular, Korea states that it has 
pointed out that the overwhelming use of diluted so ju is as an accompaniment to meals -- a use for 
which the imported liquors are considered  unsuitable and too expensive.   
6.275.  According to Korea, the complainants have not  been able to provide an answer to this 
argument.  While the  European Communities allege dly acknowledges that standard soju is ‘often 
consumed with meals’, it argues that there are exceptions, such as sojubangs .  However, meals are 
served as well at sojubangs. In Korea's view, to th e extent that Koreans some times drink soju without 
a meal, these are the exceptions that confirm the rule. 
6.276.  Korea notes that neither of the complainants has been able to demonstrate concretely that any 
of the five western-style liquors in dispute are consumed with meals in Korea.
266 
6.277.  According to Korea, the European Communities closes its eyes to the existing differences in 
end use, simply asserting that, in the case of vodka: ‘Vodka and soju are like products because they 
                                                      
264 Panel Report on  Japan – Taxes on Alcoholic Beverages,  para. 4.82.   
265  Ibid. 
266 According to Korea, the EC has merely asserted that 'other spirits can be and sometimes are drunk 
with meals',  without providing examples and their relative importance (EC oral statement, p. 8).  WT/DS75/R 
 WT/DS84/R 
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 have virtually the same physical characteristics and, therefore, serve for the same end uses.’ 
267  In 
Korea's view, even if the EC assertions about ph ysical characteristics were true, the one does not 
necessarily follow from the other, and the actual behaviour of customers belies the EC assertion.   
6.278.  Korea further argues that accordi ng to the United States, bottled water and tap water must be 
directly substitutable within the meaning of Art. III.2 GATT, despite their large difference in price, 
because they serve similar end uses.  According to Ko rea, if one accepts that, one could start to argue 
that price differences alone need not justify tax differences. That argument might seem to go against 
Korea's case, although it must be recalled that Kore a's case not only relies on price differences, but 
also on differences in physical characteristics (and taste), as well as differences in end use (meal drink 
versus non-meal drinks).  
6.279.  According to Korea, consumers are not silly. If they are consistently willing to pay a much 
higher price for one product, compared to a see mingly similar product, then small differences are 
probably very important to them, and thus for th e market performance of these products.  According 
to Korea, the United States and the European Communities obviously have difficulties accepting that, 
as a difference in market performance woul d block the application of Art. III.2. 
6.280.  Korea further argues that in some developing countries bottled water is safe, and tap water 
may not be safe for tourists. For tourists, that ma kes quite a difference, and they will probably be 
willing to pay a higher price for bottled water. Again,  the US’s argument is flawed by its refusal to 
look at market-specific situations.  Korea asks wh ether Article III:2 GATT would prohibit developing 
countries from charging a higher tax rate on bottled water than on their tap water? 
6.281.  Korea further argues that in developed countries as well, bottled water may in fact target an 
entirely different group of consumers or have diffe rent end uses than tap water. Korea gives the 
example that in Brussels parents are advised not to use tap water to prepare baby formula, as tap water 
contains too many additives and residues. Parent s therefore use much more expensive and purer 
bottled water. Further, according to Korea, in th e United States restaurants commonly serve pitchers 
of tap water with meals. Nevertheless, quite a num ber of customers order bottled water, for reasons 
such as health or taste. According to Korea, de spite their ostensible physical similarities and 
capability for the same end use, these products are not substitutes at all in many countries and 
markets.  Korea asserts that it h as been able to ascertain that tap water and bottled water are taxed 
differently, at least in the EC.268 
6.282.  Korea also notes the US argument that ‘end u se can differ between substitute or competing 
products.  For example, one would not use oranges in  an apple pie . . . but these products do compete 
for consumer spending on fruit purchases.’ 269 Korea notes the alleged US commitment to the idea that 
consumers have a fixed budget for classes of ex penditure, for example, for fruit purchases and 
distilled spirit purchases, and wonders, if this proposi tion is to be central to the US case, whether it is 
going to provide any evidence in support of it. 
6.283.  According to Korea, even if that view of the world could be substantiated, the United States 
in effect concedes, in the quotation above, that  apples belong to two distinct budgetary items – 
consumer spending on fresh fruit and consumer spendi ng on pie fillings.  It also allegedly concedes 
that oranges do not compete in the pie filling segment.  In a country where the principal use for fruit is 
making pies, therefore, substantial changes in the price of apples may have little or no impact on the 
                                                      
267 See EC oral statement, p. 3. 
268 Korea states that in Belgium tap water is subject to a VAT of 6% while bottled water is subject to a 
VAT of 21%. 
269 See US oral statement, para. 8. WT/DS75/R 
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 demand for oranges. In Korea's view, this would be powerful evidence that in that particular country 
apples and oranges are not directly competitive or substitutable.  
6.284.  In the present case, according to Korea, the end use for diluted soju with which imported 
liquors do not compete, is far and away the most im portant use to which diluted soju is put: it is 
typically consumed with meals, and the imported beverages are not.
270  In Korea's view, that major 
difference in end use means that the products at i ssue in this case are neither ‘like’ nor directly 
competitive or substitutable.   
6.285.  Korea adds that, rather than addressing Korea’ s specific arguments about end uses, the United 
States tries to divert the discussion back into ge neralities, saying ‘distilled spirits around the world are 
used for socialisation, relaxation and celebration.’  Th e standard that the US sets for itself is much too 
low.  There are innumerable types of foods and dr inks that could be said to serve these general 
purposes.  However, that does not mean that all of those things are ‘like’ or  directly competitive or 
substitutable. 
6.286.  Korea notes that both complainants attribute the ar gument to Korea that in order to be directly 
competitive or substitutable, products would have to  share 'all' possible economic uses. According to 
Korea, that is not what Korea h as been saying, but it has been refe rring to the most important end use 
of each liquor.  In Korea's view, it has observed that  the most important end use of standard soju is 
different from the most important end use of western-style liquors. 
6.287.  Korea reiterates that standard soju is typically  a ‘meal’ drink, while the western-style liquors 
at issue in this case are not drunk with meals, but  rather in room salons and other high-class bars 
where standard soju is not even on offer. 
6.288.  Korea notes that the European Communities admits that ‘soju is more often consumed with 
every-day meals than western-style spirits’, but it ar gues that this is so ‘simply because western-style 
spirits are more expensive’.271   According to Korea, the Europ ean Communities would like this Panel 
to believe that if taxes were harmonised, Koreans w ould start drinking western-style spirits with their 
meals, in spite of the fact that, whisky, for example, would still be on average 11 times more 
expensive than standard soju.  Korea disagrees, especia lly in light of the fact that regardless of price, 
Koreans do not consider whisky to be appropriate to drink while eating.  
6.289.  Korea argues that, those facts being uncontested, the European Communities has then tried to 
say that Korea has been exaggerating, and alleges th at Korea has claimed that soju is 'always' drunk 
with meals.  Korea denies claiming that, but has stat ed that the bulk of standard soju is drunk with 
meals, which is its most important end use.  Ko rea further alleges that the European Communities 
claims that sojubangs are one of the most typical  places for drinking soju, and supposedly a place 
where meals are not served. In f act, according to Korea, sojubangs are an exceptional outlet and they 
do serve meals.  This contrasts with the end use of western-style liquors which are hardly, if ever, 
drunk with meals.  According to Korea, the Nielse n study which Korea attach ed to its written rebuttal 
bears this out.  
6.290.  According to Korea, the complainants have not provided any evidence to dispel this important 
difference in end use. One point they have made much  of is that some respondents to Nielsen said that 
they drank whisky with their meals. That was a ve ry small percentage indeed, and could also be a 
human error. The complainants are focusing on exceptions  again. The ordinary fact of life is that very 
few, if any, Koreans would buy whisky to drink wi th their meals at home. They receive whisky as a 
gift, and enjoy this on a special occasion that is usually not a meal.  
                                                      
270 According to Korea, this is shown by the Nielsen study.  
271 EC written rebuttal, at para. 115.  WT/DS75/R 
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 6.291.  Korea states that soju is not suited to penetr ate the establishments where western-style liquors 
are sold. The main characteristic of soju is that it is an inexpensive meal drink. Barring exceptions, 
you would not expect to find such a drink in bars . This was borne out by the Nielsen study, which 
Korea submitted.  In Korea's view, the complainan ts have submitted no evidence to contradict this. 
The Hankook study, which they submitted earlier on the distribution patterns of liquors only refers to 
whisky, and ignores soju.
272 
6.292.  Korea further argues that western-style liquors are not, or very rarely, found in Korean 
restaurants, mobile street vendors and Chinese restaurants. These establishments always serve 
standard soju. Western style liquors are found more of ten, though not always, in Japanese restaurants 
(presumably as a before or after meal drink, as cust omers reported that they do not drink whisky with 
Japanese meals). Japanese restaurant s always serve soju. Again, there is a notable difference in 
distribution.273   Korea notes that the EC Hankook Study does not even mention restaurants.  
6.293.  Korea notes the recent visits of US Embassy pers onnel to Korean restaurants.  According to 
Korea, they are nine of the most expensive restaura nts in Seoul. The fact that Embassy officials visit 
these restaurants explains, Korea su spects, why they had whisky in stock. It really says very little 
about the drinking behaviour of the vast mass of the Korean population. 
(d) Places of sale and consumption 
6.294.  One of Korea’s arguments that standard and distilled soju do not compete with imported 
liquors has been that diluted soju and distilled soju are not even available in many of the outlets in 
which imported liquors are consumed, notably, in room  salons and other high class bars.  In order to 
provide the Panel with support for that proposition,  Korea commissioned the Nielsen study.  This 
study surveyed room salons, night clubs and danl anjujums, asking which alcoholic beverages they 
offered. According to Korea, in this survey, 96.7% responded that they sell whisky, while 0% 
responded that they offered diluted soju. 
6.295.  Korea argues that, contrary to what the Eur opean Communities seems to suggest, Korea has 
not argued that whisky has not ‘gained considerable distribution penetration’. Korea’s point is rather 
that diluted soju and the western-sp irits are not available in the same outlets, an important indicator of 
a difference in end use and lack of competition.  According to Korea, its emphasis has been in 
particular on the fact that standard soju does not penetrate the establishments where the western-style 
liquors are available. 
6.296.  Korea also states that it does not find persu asive the US exhibit showing, for example, 
Seagram Extra Dry Gin and Alexander vodka next to  Korean premium soju in a convenience store.274 
According to Korea, the same photograph shows that Gillette shaving foam is also displayed next to 
these alcoholic beverages.  Korea's argument is that convenience stores are pressed for shelf space.  
The fact that two items are displayed next to each  other would hardly be compelling evidence of a 
competitive relationship in any context, but in the context of a small Korean convenience store, is 
truly devoid of meaning.  
(e) Consumer spending "categories" 
6.297.  Korea also claims that instead of the classic more detailed anal ysis outlined above, the United 
States suggests that the Panel only needs to "consider whether the products in question compete for 
consumer spending on a category of goods ."  Korea further claims that the United States asserts that 
                                                      
272 See EC Annex 10. 
273 According to Korea, these are the findings of the AC Nielsen study. 
274 US Exhibit G. WT/DS75/R 
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 "consumers in Korea, like anywhere else, budge t their spending on alcoholic beverages, and 
subsequently spend that budget according to taste, prices and social occasions."  Korea believes that 
the United States is confusing a model of reality with reality.  According to Korea, academic 
researchers may find it interesting to hypothesize that  consumers act as if they first decide how much 
to spend on a category of goods, and then on how  that amount will be divided between the goods 
within the category. That academic researchers ma y find it interesting to hypothesise, however, is 
very far from saying that this is how consumers have  been shown to behave ‘in Korea, as elsewhere’.  
6.298.  According to Korea, the more important point is  that the notion of a category of goods begs 
the central question in this proceeding.  Korea asks how the United States knows what categories are 
relevant for actual consumers – in particular, for Korean consumers?  In Korea's view, it presents no 
evidence to underpin its conjectures.   Korea adds that the United States itself seems unsure of what 
the relevant category is.  Korea notes that some times the United States says that it is ‘alcoholic 
beverages', but at other points it is ‘alcoholic spir its.’  According to Kor ea, `alcoholic beverages’, 
which includes wine and beer, is very different, especially in Korea, from ‘alcoholic spirits’.   
(f) Future competition 
6.299.  Korea also states that the complainants suggest  that the market is developing so that the 
imported beverages and standard soju and di stilled soju might compete in the future.
275  Korea 
considers this assertion to be speculative, at best . If the pre-tax price differences remain the same, 
there is no reason to assume that future consumers will consider them to be direct substitutes.   
6.300.  Korea notes the US argument that, Korea’s population is changing and becoming more 
‘internationally-oriented’ and it may be that in th e future the market for imported beverages will 
grow.  In Korea's view, however, the idea that Koreans may wish to drink more whisky does not mean that they will abandon standard soju as the drink to accompany their meals. The growth, for example, 
of the whisky market could be completely independent of the standard soju market.  
6.301.  Korea claims that this was ob served by the EC Guide on exports  of alcoholic beverages to 
Korea:  
"Soju in particular remains virtually unaffected by imported alcoholic drinks. 
Furthermore, soju is insulated from ec onomic downturns and maintains a loyal 
following of steady consumers".
276 
6.302.  Korea argues that if in the future, the market  does develop such that standard and distilled 
soju and the imported liquors compete, then the complainants are free to resort again to WTO 
proceedings.  However, at the present time, the products are not competing, and that lack of 
competition has not been shown to be tax-related. 
5. Broad or narrow interpretati on of products in dispute 
6.303.  Korea notes the EC argument that the GATT drafte rs aimed to provide stricter rules with 
respect to internal tax measures (Article III:2) than with respect to other internal regulations (Article 
III:4), rather than the opposite which is supposedly argued by Korea.  
6.304.  Korea further notes the EC argument that by in cluding directly competitive or substitutable in 
Article III:2, the drafters intended to create strict er rules for tax discrimination than for internal 
                                                      
275 See for example, the EC oral statement at p. 5 and the US oral statement at para. 19 et. seq. 
276 Korea cites the Sofres report, p. 22.  WT/DS75/R 
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 regulation. If not, they would have limited themselves to ‘like products’ just as in Article III:4.  Korea 
submits that this is as yet undecided.   
6.305.  Korea points out that firstly, in Japan - Taxes on Alcoholic Beverages , the Panel said that the 
coverage of Article III:2 might or might not  be identical to that of Article III:4.
277  In Korea's view, 
therefore, it is not clear, as the European Comm unities claims, that the GATT drafters aimed to 
provide stricter rules with respect to internal tax measures than with respect to other internal 
regulations. 
6.306.  According to Korea, however that may be, it does not alter the fact that Article III:2 treads 
heavily upon national sovereignty.  Korea re fers to the Appellate Body's statement in Japan - Taxes 
on Alcoholic Beverages , that  ’the members of the WTO have made a bargain’.278  In Korea's view, 
that bargain implies limitations on the sovereignty of  the Member in exchange for benefits which they 
expect to derive as a Member of the WTO.  
6.307.  Korea argues that in this context, WTO Memb ers agreed that Article III:2 prohibits tax 
discrimination on ‘like products’ and on directly co mpetitive or substitutable products.  Thus, the 
language of Article III:2 expresses the concessions that the WTO members were r eady to make in this 
regard.  In Korea's view, every concession represents a limitation of the sovereignty of the members. A broad interpretation of the expressed restriction could threaten the carefully negotiated balance 
between the restriction and the benefit which the members expected from this restriction. 
6. "So as to afford protection" 
6.308.  Korea notes the EC statement that Korea has dealt with the ‘so as to afford protection’ matter 
in a ‘perfunctory’ manner.
279  According to Korea, while it is tr ue that Korea does not spend a great 
deal of time on the ‘so as to afford protection’ facet  of this case, this is mainly because Korea is so 
convinced that there are no ‘like’ or directly co mpetitive or substitutable relationships in this case, 
such that the ‘so as’ part of this case will never be reached.   
6.309.  However, Korea has also argues th at taxes in this case are not ‘so as to afford protection’ -- 
that the price differences in this case are too great  for the tax to have afforded any protection to 
domestic production, in particular the production of standard soju.  Korea notes that according to the 
European Communities, it is illogical to men tion these price differences here: if the products 
concerned are found to be directly competitiv e or substitutable 'despite the pre-tax price 
differentials',280 then these price differentials are not really meaningful.  In Korea's view this is not a 
very compelling point, coming from  party which has been arguing that price differences are not 
relevant to a directly competitive or substitutable fi nding, and that it is sufficient for the Panel to look 
at physical characteristics only.  Thus, according to Korea, if this Panel, despite the force of 
precedent, followed the EC view on directly compet itive or substitutable, the absolute differences in 
pre-tax prices would be an entirely separate issue to be addressed in connection with the 'so as to 
afford protection' requirement.   
6.310.  Because the differences in price are so larg e, Korea contends that the additional price 
difference that can be attributed to the tax woul d not have any effect on consumer behaviour, and 
therefore could not afford protection to a domestic industry.  Korea states that apart from its dubious appeal to logic, the European Communities does not show how the liquor taxes can afford protection, 
                                                     
 
277 Panel Report  on Japan - Taxes on Alcoholic Beverages II , supra ., para. 6.20. The Appellate Body 
did not take a position on this issue.  
278 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II , supra ., p. 15. 
279 EC written rebuttal, at para. 1. 
280 EC written rebuttal, at para. 166. WT/DS75/R 
WT/DS84/R Page 126 
 
 to standard soju in particular, given the consider able differences in pre-tax prices with western-style 
liquors. 
6.311.  Korea notes that, in contrast, th e United States has recognised the pertinence of the price 
differences to this third leg of Article III:2.  Wh ile it also contests the relevance of Korea’s price-
based arguments to the determination of ‘like’ or directly competitive or substitutable relationships, it 
argues that ‘differences in prices . . .[are] more appropriately considered in the third element of 
analysis under Article III:2: whether the taxes are applied so as to afford protection to domestic 
production.’
281  However, Korea notes that the US has not addressed the price differences cited by 
Korea in connection with the 'so as to afford protection' requirement. 
6.312.  Accordingly to Korea, it is clear that the comp lainants have not carried their burden of proof 
regarding this third requirement of Article III:2 either .  They would have had to show that, despite the 
much higher pre-tax prices of western-style liquor s, the tax differential had protected domestic 
production of standard soju. 
6.313.  In respect of distilled soju Korea's defence has been different, as the pre-tax prices of distilled 
soju are even higher than or in about the same ra nge as western-style liquors.  However, according to 
Korea, the sales of this traditional, artisanal pr oduct are minimal. The complainants have not shown 
how the continued presence of this product, ta xed at the current rate, would hurt them. 
7. Comments of Korea to the EC Trendscope survey 
6.314.  Korea notes that at the second substantive mee ting of the Panel, the European Communities 
submitted a new consumer survey which Korea had not seen before. 
6.315.  Korea submits that interpretation of this survey is not easy, and that the European 
Communities, by presenting the survey so late in  the proceedings, has deprived Korea of the 
possibility of exploring these problems by questioni ng specific aspects of it before the Panel.  
6.316.  Korea claims that some of the "Key Findings of the Consumer survey"282 strongly support 
points made by Korea by showing, for example, th e considerable degree of specialization of Korean 
outlets for these products.  According to Korea, the Trendscope Survey shows that soju is almost 
never consumed in hotel bars, western restaurants, ca fés, room salons and night clubs, but is the drink 
of choice in Korean restaurants.  The survey also  allegedly backs up Korea's assertions that whisky is 
almost never consumed in Korean, Japanese or Chinese restaurants. 
6.317.  Korea states that the survey also contains results that are inconsistent with Korea's 
understanding of Korean drinking habits, and is puzzl ed that 66% of Trendscope respondents claim to 
drink soju "without a meal" (though only 3% "without food"); and that 86% claim to drink whisky 
"with food" (though only 7% "with a meal"). 
6.318.  Korea also notes that only 34% of those surveyed by Trendscope responded that they drank 
soju with their meal.  According to Korea, th e respondents might have been thinking about meals 
consumed at home, where according to the Nielsen study, 29.3% of the respondents consumed diluted 
soju with their meal. 
6.319.  Korea argues that the Trendscope result is in consistent with Kore a's understanding of the 
market as far as "on-premise" consum ption is concerned.  Korea refers to the Nielsen study, wherein it 
was found that 73% of consumers drank diluted soju with their meals in Korean restaurants.    
                                                      
281 US written rebuttal, at para. 70. 
282 Trendscope survey, Charts entitled "K ey Findings of Consumer Survey".  WT/DS75/R 
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 6.320.  Korea further argues that, to interpret the Tre ndscope results properly, it is necessary to know 
how respondents distinguished between "meal" and "food".  According to Korea, the distinction 
between "food" and "meal" is vague  and dependent on context in Kor ean and English.  Korea recalls 
that in referring to the main end use of soju as meals, it has excluded snacks.   
6.321.  Korea maintains that western-style liquors like whisky are not normally drunk with meals (i.e. 
lunch or dinner) whereas most soju is consumed with meals.  
6.322.  Korea also argues that another ambiguity arises from the Trendscope Survey's use of the term 
"umsik" for "food".  According to Korea, the usual meaning of "umsik" in Korean is "food and drink", 
and as such "umsik" can be interpreted broadly to in clude drinks as well as snacks.  In Korea's view, 
this ambiguity would mean that respondents who, for example, eat peanuts with their whisky may 
well have answered that they drink whisky "with food". 
6.323.  Korea asserts that there is also an ambiguity in the definition of "with meals".  Korea poses 
the question whether "with meal s" was necessarily interpreted by their respondents as eating 
contemporaneously with drinking, or whether it w as interpreted more libera lly to include "before 
dinner" and "after dinner" meals. 
6.324.  Korea points out that there is also an ambigui ty in the sense that it is unclear whether the 
respondents, being faced with questions about food and meals at the same time, would have 
considered the questions as mutually exclusive.  In Korea's view, some respondents might have 
thought that the questions about "food" were intende d not to include "meals", while others might have 
assumed that because meals are food,  then soju which is usually consumed with meals is as of 
necessity consumed with food too. 
6.325.  Korea submits that since the complainants have submitted this survey too late, it did not have 
the opportunity to pursue the ambiguities with questions  through the Panel.  Korea adds that this late 
submission of this survey also means that there is insufficient time to evaluate its evidentiary value, 
and therefore, the panel should disregard it.  
D. EC
 AND  US COMMENTS  ON THE  NIELSEN  STUDY 
6.326.  The complainants responded to this survey , which was commissioned at the instance of 
Korea, by pointing out that there were several cat egories of overlapping end-uses.  They state for 
example, that all Japanese restaurants served soju  and 40% of them served whisky; a further 6.7% 
served brandy or cognac.  According to the compla inants, of the responding Western-style restaurants 
and cafés, 90% served whisky and a lesser number se rved other types of western-style beverages, and 
21.7% served soju. 
6.327.  The complainants also note that while only 1.7% of the individual respondents drank whisky 
at home with meals, only 29.3% of all respondents consumed any alcoholic beverages at home with 
meals.  In the complainants view, the proper co mparison was that between the 1.7% and the 29.3%, 
thus leaving 5.8% of all respondents who consumed  alcoholic beverages at home as drinkers of 
whisky with their meals. 
6.328.  The complainants have also questioned some of the findings of the Nielsen study, arguing that 
these results are actually indications of overlapping end-uses.  The complainants note that there were 
almost no western-style beverages in Korea until th e last five years following changes in the duty 
rates on imported distilled beverages. 
6.329.  The complainants argue that alcoholic beverag es, like many foods and beverages, are habit 
based products.  In their view, people tend to purchase what they are used to and change their tastes WT/DS75/R 
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 only over a period of time.  They must become familiar with the taste of new products and will only make minor substitutions for the familiar product at  first and more significant changes will tend to 
occur over a period of time until a fairly stable rate is achieved. 
6.330.  According to the complainants, the trends shown in the Nielsen study, as well as the 
substitutability shown in the EC market survey (the  Dodwell study), show unmistakable evidence of 
the beginnings of substitutabilit y and common end-use by imports. 
6.331.  The United States claims that the Nielsen study al so contradicts Korea’s emphasis that soju is 
only drunk straight in alleged contrast to Wester n spirits.  According to the United States, survey 
respondents reported that in addition to being drunk straight, standard  soju is consumed mixed with 
cola, cider, juice or some other manner. The resu lts confirm that even if standard soju were 
predominantly consumed straight by surv ey respondents, it was not consumed only straight.  
Moreover, survey respondents were asked how th ey “normally” like to drink standard soju and 
whisky, and they were limited to a single response,  suggesting that the reporting of multiple styles of 
consumption were avoided by the design of the question. 
6.332.  The United States further notes that the results of  the Nielsen study also run counter to the 
supposedly rigid styles of whiskey consumption Ko rea paints in its submissions and first oral 
statement.   For example, one-third of the survey res pondents reported preferring consuming whisky 
straight and a smaller percentage indicated, simila r to standard soju, a preference for whisky mixed 
with cola, cider, and juice.   According to the United States, with a third of respondents preferring 
their whisky straight, just as Korea claims standard soju is largely consumed, it is clear that whisky 
and soju consumption styles overlap significantly. 
6.333.  The United States further claims that the Niel sen study also directly undermines Korea’s  
assertion that soju is “never drunk mixed.”  Ko rea says this assertion was  based on “common 
knowledge,”
283 but apparently such common knowledge may not be a reliable source of information.  
Korea has insisted that the burden is for the compla ining parties to show its factual assertions to be 
untrue.  In our view, the Nielsen study’s direct c ontradiction of Korea’s so-called common knowledge 
places doubt on all similar unsubstantiated assertions by  Korea concerning consumption in its market. 
6.334.  The United States asserts that, in response to th e Korean Nielsen study, the U.S. Embassy in 
Korea identified nine large traditional Korean restau rants in Seoul that serve traditional Korean food 
based on the common knowledge among Embassy staff.   U.S. embassy employ ees then asked whether 
the establishments served whiskey an d whether they served soju.  It turned out that every single one 
of these nine restaurants serves both soju and whisky.284  The United States does not claim to have 
taken a representative market survey, but such a surv ey is not necessary for the point at hand.  We are 
simply saying that Korea’s depiction of stratifie d end uses in different restaurants in Korea is 
contradicted by a simple tour of its capital city.  These observations based on simple anecdotal evidence stand in stark contrast to the Nielsen finding that no surveyed Korean style restaurants 
served whisky and soju, whether in Seoul or elsewhere .  This tends to confirm that the Nielsen study 
selectively sampled the restaurants known to limit th e variety of spirits, representing an additional 
bias in the sampling.  Moreover, the Trendscope su rvey, which the EC has described in detail earlier, 
further contradicts the Nielsen results by also show ing that whisky is consumed at venues such as 
Korean restaurants where soju is the main item.  Additionally, the Trendscope study shows that soju, 
similar to whisky, is most often enjoyed without meals. 
6.335.  According to the United States, even if the Pa nel were to accept these contradictions and 
biases, the Nielsen survey, highlighted by the EC, su rvey in fact lends credible support to the U.S. 
                                                     
 
283 Korean response to a U.S. Question.  
284 US Exhibit S.  WT/DS75/R 
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 position in this case by indicating significant overl aps in usage between soju and Western spirits.  
Again, given the recent removal of barriers to entr y, it is not expected that Western spirits will be 
consumed in every venue and in  equal proportions to the traditional Korean spirit of soju.  
Nevertheless, the survey indicates whisky is consumed  with meals, whisky is served in three out of 
six types of restaurants surveyed (four out of seven if you include hotel bars), and whisky and soju are 
both consumed straight, or mixed with cola, cider or juice.