WORLD TRADE WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
4October 1996
ORGANIZATION(96-3951)
Appellate Body
Japan -Taxes onAlcoholic Beverages
AB-1996-2
Report oftheAppellate BodyWT/DS8/AB/R
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WORLD TRADE ORGANIZATION
APPELLATE BODY
Japan -Taxes onAlcoholic Beverages
Japan, Appellant/Appellee
United States, Appellant/Appellee
Canada, Appellee
European Communities, AppelleeAB-1996-2
Present:
Lacarte-Muró, Presiding Member
Bacchus, Member
El-Naggar, Member
A. Introduction
Japan andtheUnited States appeal from certain issues oflawandlegalinterpretations inthe
Panel Report, Japan -Taxes onAlcoholic Beverages1(the"Panel Report"). ThatPanel (the"Panel")
wasestablished toconsider complaints bytheEuropean Communities, Canada andtheUnited States
against Japan relating totheJapanese Liquor TaxLaw(Shuzeiho), LawNo.6of1953 asamended
(the"Liquor TaxLaw").2
ThePanel Report wascirculated totheMembers oftheWorld Trade Organization (the"WTO")
on11July1996. Itcontains thefollowing conclusions:
(i) Shochu andvodka arelikeproducts andJapan, bytaxing the
latter inexcess oftheformer, isinviolation ofitsobligation
under Article III:2, firstsentence, oftheGeneral Agreement
onTariffs andTrade 1994.
1WT/DS8/R, WT/DS10/R, WT/DS11/R.
2Norway originally reserved itsright asathird party tothedispute butsubsequently informed thePanel thatitwas
withdrawing itsrequest toparticipate asathird party.WT/DS8/AB/R
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(ii) Shochu, whisky, brandy, rum,gin,genever, andliqueurs are
"directly competitive orsubstitutable products" andJapan, by
nottaxing themsimilarly, isinviolation ofitsobligation under
Article III:2, second sentence, oftheGeneral Agreement on
Tariffs andTrade 1994.3
ThePanel made thefollowing recommendations:
7.2 ThePanelrecommendsthattheDisputeSettlementBodyrequest
Japan tobring theLiquor TaxLawintoconformity withitsobligations
under theGeneral Agreement onTariffs andTrade 1994.4
On8August 1996, Japan notified theDispute Settlement Body5oftheWTO ofitsdecision
toappeal certain issues oflawcovered inthePanel Report andlegalinterpretations developed bythe
Panel, pursuant toparagraph 4ofArticle 16oftheUnderstanding onRules andProcedures Governing
theSettlement ofDisputes (the"DSU")andfiledaNotice ofAppeal withtheAppellate Body, pursuant
toRule20oftheWorking Procedures forAppellate Review (the"Working Procedures ").6On19August
1996, Japan filedanappellant 'ssubmission.7On23August 1996, theUnited States filedanappellant 's
submission pursuant toRule23(1) oftheWorking Procedures .TheEuropean Communities, Canada
andtheUnited States submitted appellees 'submissions pursuant toRule22oftheWorking Procedures ,
on2September 1996. Thatsameday,Japan submitted anappellee 'ssubmission pursuant toRule23(3)
oftheWorking Procedures .
Theoralhearing contemplated byRule27oftheWorking Procedures washeldon9September
1996. Theparticipants presented theirarguments andanswered questions from theDivision ofthe
Appellate Body hearing theappeal (the"Division"). Theparticipants answered mostofthesequestions
orally atthehearing. They answered some inwriting.8TheDivision gave eachparticipant an
opportunity torespond tothewritten post-hearing memoranda oftheother participants.9
3Panel Report, para. 7.1.
4Panel Report, para. 7.2.
5WT/DS8/9, WT/DS10/9, WT/DS11/6.
6WT/AB/WP/1.
7Pursuant toRule 21(1) oftheWorking Procedures .
8Pursuant toRule 28(1) oftheWorking Procedures .
9Pursuant toRule 28(2) oftheWorking Procedures .WT/DS8/AB/R
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B. Arguments ofParticipants
1. Japan
Japan appeals fromthePanel'sfindings andconclusions, aswellasfrom certain ofthelegal
interpretations developed bythePanel. Japan argues thatthePanel erred initsinterpretation of
ArticleIII:2,firstandsecondsentencesoftheGeneralAgreementonTariffsandTrade1994(the"GATT
1994"),whichisanintegralpartoftheMarrakeshAgreementEstablishingtheWorldTradeOrganization
(the"WTO Agreement ").10According toJapan, withrespect toboththefirstandsecond sentences
ofArticle III:2, thePanel erred in:(1)disregarding theneedtodetermine whether theLiquor Tax
Lawhastheaimofaffording protection todomestic production; (2)ignoring whether thereis"linkage"
between theorigin ofproducts andthetaxtreatment theyincur and,inthisrespect, notcomparing
thetaxtreatment ofdomestic products asawhole andforeign products asawhole; and(3)notgiving
proper weight tothetax/price ratioasayardstick tocompare thetaxburdens.
Withrespect tothefirstsentence ofArticle III:2, Japan argues thatthePanel erred byvirtually
ignoring Article III:1, particularly thephrase "soastoafford protection todomestic production", as
partofthecontext ofArticle III:2. Japan maintains alsothatthetitleofArticle IIIforms partofthe
context ofArticle III:2, andthattheobject andpurpose oftheGATT 1994 andtheWTO Agreement
asawhole must alsobetaken intoaccount ininterpreting Article III:2. Japan argues thatthe
interpretation ofArticle III:2, firstsentence, inthelightoftheseconsiderations, requires anexamination
ofboththeaimandtheeffect ofthemeasure inquestion. Japan alsoalleges thatthePanel erred in
placing excessive emphasis ontariffclassification infinding thatshochu andvodka are"likeproducts"
within themeaning ofArticle III:2, firstsentence, arguing thattherelevant tariff bindings indicate
thatthese products arenot"like".
Withrespect tothesecond sentence ofArticle III:2, Japan asserts thatthePanel erred byfailing
tointerpret correctly theprinciple ofArticle III:1, inparticular, thelanguage "soastoafford protection
todomestic production", erroneously placing excessive emphasis onthephrase "notsimilarly taxed"
intheInterpretative NoteAdArticle III:2. Japan claims further thatthePanel erred byfailing toexamine
theissueofdeminimis differences inthelightoftheprinciple of"soastoafford protection todomestic
10Done atMarrakesh, Morocco, 15April 1994 andentered intoeffect on1January 1995.WT/DS8/AB/R
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production"; thePanel examined theissueofdeminimis differences onlybycomparing taxes interms
oftaxation perkilolitre ofproduct andtaxation perdegree ofalcohol.
Withrespect tothepoints ofappeal raised bytheUnited States initsappellant 'ssubmission,
JapanrespondsthattheargumentsadvancedbytheUnitedStatesarenotbasedonacorrectunderstanding
oftheJapanese liquor taxsystem. Japan argues thattheLiquor TaxLawhasthelegitimate policy
purpose ofensuring neutrality andequity, particularly horizontal equity, andthatithasneither the
aimnortheeffect ofprotecting domestic production. Japan asserts thatitisnotcorrect toconclude
thatalldistilled liquors are"likeproducts" under Article III:2, firstsentence, ortoconclude thatthe
Liquor TaxLawisinconsistent withArticle III:2because itimposes ataxonimported distilled liquors
inexcess ofthetaxonlikedomestic products.
2. United States
TheUnited States supports thePanel'soverall conclusions, butappeals nonetheless. TheUnited
States alleges several errors inthefindings ofthePanel andthelegalinterpretations developed bythe
Panel inreaching itsconclusions inthePanel Report. TheUnited States maintains thatthePanel erred
initsinterpretation ofArticle III:2, firstandsecond sentences, principally asaresult ofanerroneous
understanding oftherelationship between Article III:2andArticle III:1. TheUnited States contends
thatthePanel disregarded Article III:1, which theUnited States seesasanintegral partofthecontext
thatmustbeconsidered ininterpreting Article III:2, andArticle IIIgenerally. TheUnited States asserts
thatArticle III:1setsouttheobject andpurpose ofArticle IIIandmust therefore beconsidered in
anyinterpretation ofthetextofArticle III:2. TheUnited States argues thatthePanel didnotlook
beyond thetextofArticle III:2ininterpreting Article III:2andthereby fellintoerror.
More specifically, withrespect tothefirstsentence ofArticle III:2, theUnited States submits
thatthePanel erred infinding that"likeness" canbedetermined purely onthebasis ofphysical
characteristics, consumer usesandtariffclassification without considering alsothecontext andpurpose
ofArticle III,assetoutinArticle III:1, andwithout considering, inparticular, whether regulatory
distinctionsaremade,inthelanguageofArticleIII:1,"soastoaffordprotectiontodomesticproduction".
TheUnited States concludes thatthePanel erred initsinterpretation ofArticle III:2, firstsentence
in:failing tointerpret Article III:2, firstsentence, inthelightofArticle III:1, consistently withtheWT/DS8/AB/R
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analysis inUnited States -Measures Affecting Alcoholic andMaltBeverages ("MaltBeverages ");11
notfinding thatalldistilled spirits constitute "like products" under Article III:2, firstsentence; and
drawing aconnection between national treatment obligations andtariff bindings.
Withrespect tothesecond sentence ofArticle III:2andtheAdArticle thereto, theUnited States
argues thatthePanel erred withrespect totheAdArticle tothesecond sentence initsinterpretation
oftheterm"directly competitive orsubstitutable products" bynotconsidering whether ataxdistinction
isapplied "inamanner contrary totheprinciples setforth inparagraph 1of[Article III]", thatis,
"soastoafford protection todomestic production". TheUnited States alsoclaims thatthePanel erred
byusing cross-price elasticity asthe"decisive criterion" forwhether products are"directly competitive
orsubstitutable".
TheUnited States contends aswellthatthePanel erred innotaddressing thefullscope ofthe
products subject tothedispute andthatthere isinconsistency between thePanel'sconclusions in
paragraph 7.1(ii) ofthePanel Report andinparagraphs 6.32-6.33 ofthePanel Report. TheUnited
States further submits thatthePanel erred inincorrectly assessing therelationship between Article III:2
andArticle III:4bystating thattheproduct coverage ofthetwoprovisions isnotidentical.
Finally, theUnited States claims thatthePanel erred inincorrectly characterizing adopted panel
reports as"subsequent practice" within themeaning ofArticle 31(3)(b) oftheVienna Convention on
theLawofTreaties (the"Vienna Convention ").12According totheUnited States, adopted panel reports
serve onlytoclarify, forthepurposes oftheparticular dispute, theapplication oftherights and
obligations oftheparties tothatdispute totheprecise setofcircumstances atthattime. Thedecision
toadopt apanel report constitutes a"decision" within themeaning ofparagraph 1(b)(iv) ofthelanguage
incorporating theGATT 1994 intotheWTO Agreement ,however, theadopted panel report assuch
doesnotconstitute a"decision" inthissense.
Withrespect totheclaims oferror raised inJapan'sappellant 'ssubmission, theUnited States
responds that:thenational treatment provisions inArticle IIIofGATT 1994canapply toorigin-neutral
measures;Japan'staxationundertheLiquorTaxLawdoeshavetheaimandeffectofaffordingprotection
11Panel Report adopted on19June 1992, BISD 39S/206.
1223May 1969, 1155 U.N.T.S. 331; 8International Legal Materials 679.WT/DS8/AB/R
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todomestic production; andthetax/price ratios citedbyJapan arenottheappropriate basisforevaluating
theconsistency oftaxation under theLiquor TaxLawwithArticle III:2.
3. European Communities
TheEuropean Communities support thePanel'sconclusions, andlargely agree withthelegal
interpretations ofArticle III:2, firstandsecond sentences, employed bythePanel. With respect to
Article III:2, firstsentence, theEuropean Communities submit thatthePanel'sreasons foradopting
theinterpretation inthePanel Report, andthusforrejecting aspecific testof"aims andeffects", are
sound and"inaccordance withcustomary rules ofinterpretation ofpublic international law", as
contemplated byArticle 3.2oftheDSU.13TheEuropean Communities contend thatthePanel made
itclear thattheessential criterion fora"like product" determination issimilarity ofphysical
characteristics andthattariffnomenclatures mayberelevant foradetermination of"likeness" because
theyconstitute anobjective classification ofproducts according totheirphysical characteristics. The
European Communities maintain thatthePanel'sdecision toidentify onlyvodka andshochu as"like
products" forpurposes ofArticle III:2cannot beregarded asarbitrary orinsufficiently motivated.
Although notentirely satisfied withthePanel'sconclusions ontherange ofproducts found tobe"like"
under Article III:2, firstsentence, theEuropean Communities claim thatthose conclusions primarily
involve theassessment offactsand,therefore, arenotreviewable bytheAppellate Body, which is
limited totheconsideration ofissues oflawunder Article 17.6oftheDSU.14
Withrespect toArticle III:2, second sentence, theEuropean Communities argue thatthePanel
didnotrulethatcross-price elasticity isthedecisive criterion foradetermination thattwoproducts
aredirectly competitive orsubstitutable, butrather ruled thatsuchelasticity isonlyoneofthecriteria
tobeconsidered. TheEuropean Communities viewthePanel'sfindings ontheissue ofthetax/price
ratios asfactual; however, iftheAppellate Body nevertheless considers itnecessary toruleonthis
13Article 3.2oftheDSU states inpertinent part:
...The Members recognize that[thedispute settlement system] serves topreserve the
rights andobligations ofMembers under thecovered agreements, andtoclarify the
existing provisions ofthose agreements inaccordance with customary rules of
interpretation ofpublic international law.
14Article 17.6 oftheDSU states:
Anappeal shall belimited toissues oflawcovered inthepanel report andlegal
interpretations developed bythepanel.WT/DS8/AB/R
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issue, theEuropean Communities argue thattax/price ratios arenotthemost appropriate yardstick
forcomparing taxburdens imposed byasystem ofspecific taxes. TheEuropean Communities submit
further thatthePanel wascorrect inignoring thelinkage between differences intaxation andtheorigin
ofproducts. TheEuropean Communities assert thatJapan'sargument thattheLiquor TaxLawisnot
applied "soastoafford protection todomestic production" ofshochu because shochu isalsoproduced
inother countries and,therefore, isnotan"inherently domestic product" rests ontwowrong
propositions: first,that"domestic production" ofshochu isnot"protected" ifthesame taxtreatment
isaccorded toforeign shochu; and,second, thatthemerefactthatshochu isproduced inthirdcountries
issufficient toconclude thatforeign shochu maybenefit fromthelower taxasmuch asdomestic shochu
and,consequently, thatprotection isnotafforded onlytodomestic production. TheEuropean
Communities further contend thattheUnited States isincorrect toattribute tothePanel thestatement
thattheproduct coverage ofArticle III:2andArticle III:4isnotequivalent.
Withrespect tothestatus ofadopted panel reports, theEuropean Communities conclude that
thePanel'scharacterization ofthem as"subsequent practice inaspecific case" isintrinsically
contradictory, since theessence ofsubsequent practice isthatitconsists ofalarge number oflegally
relevant events andpronouncements. TheEuropean Communities 'viewisthatoneadopted panel report
"would merely constitute partofawallofthehouse thatconstitutes subsequent practice". TheEuropean
Communities, therefore, asktheAppellate Body tomodify thePanel'slegalterminology onthisissue.
TheEuropean Communities further consider thatthedecision toadopt apanel report constitutes a
"decision" within themeaning ofparagraph 1(b)(iv) ofthelanguage ofAnnex 1Aincorporating the
GATT 1994 intotheWTO Agreement ,however anadopted panel report isnotitself a"decision" in
thissense.
4. Canada
Canada confined itssubmissions andarguments onappeal toArticle III:2, second sentence.
Canada supports thePanel'slegal interpretations ofArticle III:2, second sentence, aswellasthe
conclusion ofthePanel thattheLiquor TaxLawisinconsistent withArticle III:2, second sentence.
Canada claims thatthePanel properly found thatthephrase "soastoafford protection" inArticle III:1
doesnotrequire aconsideration ofboththeaimandeffect ofameasure todetermine whether that
measure affords protection todomestic production. Canada argues further that:first,thePanel Report
didnotcreate apersetestinArticle III:2, second sentence, anddidnotequate thereference to"soWT/DS8/AB/R
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astoafford protection todomestic production" withadetermination thatdirectly competitive or
substitutable products are"notsimilarly taxed"; second, thePanel hadsufficient evidence before it
toconcludethatdifferentialtaxtreatmentundertheLiquorTaxLawfavoursdomesticshochuproduction;
third, thePanel Report considered indetail theissue ofthetax/price ratios andassigned them their
proper weight inassessing thetaxburden ontheproducts indispute; and,finally, thePanel interpreted
thephrase "directly competitive orsubstitutable" properly anddidnotidentify "cross-price elasticity"
asthedecisive criterion forassessment ofwhether products aredirectly competitive orsubstitutable.
Withregard tothestatus ofadopted panel reports, Canada argues thatdecisions toadopt panel
reports under GATT 1947 constitute "decisions" under Article 1(b)(iv) oftheGATT 1994.
C. Issues Raised intheAppeal
Theappellants, Japan andtheUnited States, haveraised thefollowing issues inthisappeal:
1. Japan
(a) whether thePanel erred infailing tointerpret Article III:2, firstandsecond
sentences, inthelightofArticle III:1;
(b) whether thePanel erred inrejecting an"aim-and-effect" testinestablishing
whether theLiquor TaxLawisapplied "soastoafford protection todomestic
production";
(c) whether thePanel erred infailing toexamine theeffect ofaffording protection
todomestic production fromtheperspective ofthelinkage between theorigin
ofproducts andtheirtreatment under theLiquor TaxLaw;
(d) whether thePanel failed togiveproper weight totax/price ratios asayardstick
forcomparing taxburdens under Article III:2, firstandsecond sentences;WT/DS8/AB/R
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(e) whether thePanel erred ininterpreting andapplying Article III:2, second
sentence, byequating thelanguage "notsimilarly taxed" inAdArticle III:2,
second sentence, with"soastoafford protection" inArticle III:1; and
(f) whether thePanel erred inplacing excessive emphasis ontariff classification
asacriterion fordetermining "like products".
2. United States
(a) whether thePanel erred infailing tointerpret Article III:2, firstandsecond
sentences, inthelightofArticle III:1;
(b) whether thePanel erred infailing tofindthatalldistilled spirits are"like
products";
(c) whether thePanel erred indrawing aconnection between national treatment
obligations andtariff bindings;
(d) whether thePanel erred ininterpreting andapplying Article III:2, second
sentence, byequating thelanguage "notsimilarly taxed" inAdArticle III:2,
second sentence, with"soastoafford protection" inArticle III:1;
(e) whether thePanel erred initsconclusions on"directly competitive or
substitutable products" byexamining cross-price elasticity as"thedecisive
criterion";
(f) whether thePanel erred infailing tomaintain consistency between the
conclusions inparagraph 7.1(ii) ofthePanel Report on"directly competitive
orsubstitutable products" andtheconclusions inparagraphs 6.32-6.33 ofthe
Panel Report, andwhether thePanel erred infailing toaddress thefullscope
ofproducts subject ofthisdispute;WT/DS8/AB/R
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(g) whether thePanel erred infinding thatthecoverage ofArticle III:2andArticle
III:4arenotequivalent; and
(h) whether thePanel erred initscharacterization ofpanel reports adopted bythe
GATT CONTRACTING PARTIES andtheWTO Dispute Settlement Body
as"subsequent practice inaspecific casebyvirtue ofthedecision toadopt
them".
D. Treaty Interpretation
Article 3.2oftheDSU directs theAppellate Body toclarify theprovisions ofGATT 1994
andtheother "covered agreements" oftheWTO Agreement "inaccordance withcustomary rules of
interpretation ofpublic international law". Following thismandate, inUnited States -Standards for
ReformulatedandConventionalGasoline,15westressedtheneedtoachievesuchclarificationbyreference
tothefundamental ruleoftreaty interpretation setoutinArticle 31(1) oftheVienna Convention .We
stressed there thatthisgeneral ruleofinterpretation "hasattained thestatus ofaruleofcustomary
orgeneral international law".16There canbenodoubt thatArticle 32oftheVienna Convention ,dealing
withtheroleofsupplementary means ofinterpretation, hasalsoattained thesame status.17
Article 31,asawhole, andArticle 32areeachhighly pertinent tothepresent appeal. They
provide asfollows:
ARTICLE 31
General ruleofinterpretation
1. Atreaty shallbeinterpreted ingoodfaithinaccordance with
theordinary meaning tobegiven totheterms ofthetreaty
intheircontext andinthelightofitsobject andpurpose.
15Adopted 20May 1996, WT/DS2/9.
16Ibid., atp.17.
17Seee.g.:Jiménez deAréchaga, "International LawinthePastThird ofaCentury" (1978-I) 159Recueil desCours
p.1at42;Territorial Dispute (Libyan Arab Jamahiriya/Chad) ,Judgment ,(1994), I.C.J. Reports, p.6at20;Maritime
Delimitation andTerritorial Questions between Qatar andBahrain, Jurisdiction andAdmissibility ,Judgment ,(1995),
I.C.J.Reports, p.6at18;Interpretation oftheConvention of1919 Concerning Employment ofWomen during theNight
(1932), P.C.I.J., Series A/B, No.50,p.365at380; cf.theSerbian andBrazilian Loans Cases (1929), P.C.I.J., Series
A,Nos. 20-21, p.5at30;Constitution oftheMaritime Safety Committee oftheIMCO (1960), I.C.J. Reports, p.150at
161; AirTransport Services Agreement Arbitration (United States ofAmerica v.France )(1963), International LawReports,
38,p.182at235-43.WT/DS8/AB/R
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2. Thecontext forthepurpose oftheinterpretation ofatreaty
shallcomprise, inaddition tothetext,including itspreamble
andannexes:
(a) anyagreement relating tothetreaty which was
madebetweenallthepartiesinconnexionwith
theconclusion ofthetreaty;
(b) anyinstrument which wasmade byoneor
moreparties inconnexion withtheconclusion
ofthetreaty andaccepted bytheother parties
asaninstrument related tothetreaty.
3. There shallbetaken intoaccount together withthecontext:
(a) anysubsequent agreement between theparties
regarding theinterpretation ofthetreaty or
theapplication ofitsprovisions;
(b) anysubsequent practice intheapplication of
thetreaty which establishes theagreement of
theparties regarding itsinterpretation;
(c) anyrelevant rules ofinternational law
applicable intherelations between theparties.
4. Aspecial meaning shallbegiven toatermifitisestablished
thattheparties sointended.
ARTICLE 32
Supplementary means ofinterpretation
Recourse maybehadtosupplementary means ofinterpretation,
including thepreparatory work ofthetreaty andthecircumstances of
itsconclusion, inorder toconfirm themeaning resulting from the
application ofarticle 31,ortodetermine themeaning when the
interpretation according toarticle 31:
(a) leaves themeaning ambiguous orobscure; or
(b) leads toaresult which ismanifestly absurd
orunreasonable.
Article 31oftheVienna Convention provides thatthewords ofthetreaty formthefoundation
fortheinterpretive process: "interpretation must bebased above allupon thetextofthetreaty".18
18Territorial Dispute (Libyan ArabJamahiriya/Chad) ,Judgment ,(1994) I.C.J. Reports, p.6at20;Maritime Delimitation
andTerritorial Questions between Qatar andBahrain, Jurisdiction andAdmissibility ,Judgment ,(1995) I.C.J.Reports, p.
6at18.WT/DS8/AB/R
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Theprovisions ofthetreaty aretobegiven theirordinary meaning intheircontext.19Theobject and
purpose ofthetreaty arealsotobetaken intoaccount indetermining themeaning ofitsprovisions.20
Afundamental tenetoftreaty interpretation flowing fromthegeneral ruleofinterpretation setoutin
Article 31istheprinciple ofeffectiveness (utresmagis valeat quam pereat ).21InUnited States -
Standards forReformulated andConventional Gasoline ,wenoted that"[o]ne ofthecorollaries ofthe
general ruleofinterpretation ’intheVienna Convention isthatinterpretation mustgivemeaning and
effect toalltheterms ofthetreaty. Aninterpreter isnotfreetoadopt areading thatwould result in
reducing whole clauses orparagraphs ofatreaty toredundancy orinutility".22
E. Status ofAdopted Panel Reports
Inthiscase, thePanel concluded that,
...panel reports adopted bytheGATT CONTRACTING PARTIES
andtheWTO Dispute Settlement Body constitute subsequent practice
inaspecific case byvirtue ofthedecision toadopt them.
Article 1(b)(iv) ofGATT 1994provides institutional recognition that
adopted panel reports constitute subsequent practice. Suchreports are
anintegral partofGATT 1994, since theyconstitute "other decisions
oftheCONTRACTING PARTIES toGATT 1947".23
Article 31(3)(b) oftheVienna Convention states that"anysubsequent practice intheapplication
ofthetreaty which establishes theagreement oftheparties regarding itsinterpretation" istobe"taken
intoaccount together withthecontext" ininterpreting theterms ofthetreaty. Generally, ininternational
19See,e.g., Competence oftheGeneral Assembly fortheAdmission ofaState totheUnited Nations (Second Admissions
Case)(1950), I.C.J. Reports, p.4at8,inwhich theInternational Court ofJustice stated: "The Court considers itnecessary
tosaythatthefirstdutyofatribunal which iscalled upon tointerpret andapply theprovisions ofatreaty, istoendeavour
togiveeffect tothem intheir natural andordinary meaning andinthecontext inwhich theyoccur".
20Thatis,thetreaty 's"object andpurpose" istobereferred toindetermining themeaning ofthe"terms ofthetreaty"
andnotasanindependent basis forinterpretation: Harris, Cases andMaterials onInternational Law(4thed.,1991) p.770;
Jiménez deAréchaga, "International LawinthePastThird ofaCentury" (1978-I) 159Recueil desCours p.1at44;Sinclair,
TheVienna Convention andtheLawofTreaties (2nded,1984), p.130. Seee.g.Oppenheims 'International Law(9thed.,
Jennings andWatts, eds., 1992) Vol.I,p.1273; Competence oftheILOtoRegulate thePersonal Work oftheEmployer
(1926), P.C.I.J., Series B,No.13,p.6at18;International Status ofSouth West Africa (1962), I.C.J. Reports, p.128
at336; ReCompetence ofConciliation Commission (1955), 22International LawReports, p.867at871.
21Seealso(1966) Yearbook oftheInternational LawCommission, Vol. II,p.219: "When atreaty isopen totwo
interpretations oneofwhich does andtheother doesnotenable thetreaty tohave appropriate effects, good faithandthe
objects andpurposes ofthetreaty demand thattheformer interpretation should beadopted."
22United States -Standards forReformulated andConventional Gasoline ,WT/DS2/9, adopted 20May 1996, p.23.
23Panel Report, para. 6.10.WT/DS8/AB/R
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law,theessence ofsubsequent practice ininterpreting atreaty hasbeenrecognized asa"concordant,
commonandconsistent"sequenceofactsorpronouncementswhichissufficienttoestablishadiscernable
pattern implying theagreement oftheparties regarding itsinterpretation.24Anisolated actisgenerally
notsufficient toestablish subsequent practice;25itisasequence ofactsestablishing theagreement
oftheparties thatisrelevant.26
Although GATT 194727panel reports were adopted bydecisions oftheCONTRACTING
PARTIES28,adecision toadopt apanel report didnotunder GATT 1947constitute agreement bythe
CONTRACTING PARTIES onthelegalreasoning inthatpanel report. Thegenerally-accepted view
under GATT 1947 wasthattheconclusions andrecommendations inanadopted panel report bound
theparties tothedispute inthatparticular case, butsubsequent panels didnotfeellegally bound by
thedetails andreasoning ofaprevious panel report.29
Wedonotbelieve thattheCONTRACTING PARTIES, indeciding toadopt apanel report,
intended thattheirdecision would constitute adefinitive interpretation oftherelevant provisions of
GATT 1947. Nordowebelieve thatthisiscontemplated under GATT 1994. There isspecific cause
forthisconclusion intheWTO Agreement .Article IX:2oftheWTO Agreement provides: "The
MinisterialConferenceandtheGeneralCouncilshallhavetheexclusiveauthoritytoadoptinterpretations
ofthisAgreement andoftheMultilateral Trade Agreements". Article IX:2provides further thatsuch
decisions "shall betaken byathree-fourths majority oftheMembers". Thefactthatsuchan"exclusive
authority" ininterpreting thetreaty hasbeenestablished sospecifically intheWTO Agreement isreason
enough toconclude thatsuchauthority doesnotexistbyimplication orbyinadvertence elsewhere.
Historically, thedecisions toadopt panel reports under Article XXIII oftheGATT 1947were
different fromjointaction bytheCONTRACTING PARTIES under Article XXV oftheGATT 1947.
Today, theirnature continues todiffer frominterpretations oftheGATT 1994andtheotherMultilateral
24Sinclair, TheVienna Convention ontheLawofTreaties (2nded.,1984), p.137; Yasseen, "L'interprétation destraités
d'après laConvention deVienne surleDroit desTraités" (1976-III) 151Recueil desCours p.1at48.
25Sinclair, supra .,footnote 24,p.137.
26(1966) Yearbook oftheInternational LawCommission, Vol.II,p.222; Sinclair, supra .,footnote 24,p.138.
27ByGATT 1947, werefer throughout totheGeneral Agreement onTariffs andTrade, dated 30October 1947, annexed
totheFinal ActAdopted attheConclusion oftheSecond Session ofthePreparatory Committee oftheUnited Nations
Conference onTrade andEmployment, assubsequently rectified, amended ormodified.
28ByCONTRACTING PARTIES, werefer throughout totheCONTRACTING PARTIES ofGATT 1947.
29European Economic Community -Restrictions onImports ofDessert Apples ,BISD 36S/93, para. 12.1.WT/DS8/AB/R
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Trade Agreements under theWTO Agreement bytheWTO Ministerial Conference ortheGeneral
Council. Thisisclear from areading ofArticle 3.9oftheDSU,which states:
Theprovisions ofthisUnderstanding arewithout prejudice totherights
ofMembers toseekauthoritative interpretation ofprovisions ofa
coveredagreementthroughdecision-makingundertheWTOAgreement
oracovered agreement which isaPlurilateral Trade Agreement.
Article XVI:1 oftheWTO Agreement andparagraph 1(b)(iv) ofthelanguage ofAnnex 1A
incorporating theGATT 1994 intotheWTO Agreement bring thelegalhistory andexperience under
theGATT 1947 intothenewrealm oftheWTO inawaythatensures continuity andconsistency in
asmooth transition fromtheGATT 1947system. Thisaffirms theimportance totheMembers ofthe
WTO oftheexperience acquired bytheCONTRACTING PARTIES totheGATT 1947 --and
acknowledges thecontinuing relevance ofthatexperience tothenewtrading system served bytheWTO.
Adopted panel reports areanimportant partoftheGATT acquis .They areoften considered by
subsequent panels. They create legitimate expectations among WTO Members, and,therefore, should
betaken intoaccount where theyarerelevant toanydispute. However, theyarenotbinding, except
withrespect toresolving theparticular dispute between theparties tothatdispute.30Inshort, their
character andtheirlegalstatus havenotbeenchanged bythecoming intoforce oftheWTO Agreement .
Forthese reasons, wedonotagree withthePanel'sconclusion inparagraph 6.10ofthePanel
Report that"panel reports adopted bytheGATT CONTRACTING PARTIES andtheWTO Dispute
Settlement Body constitute subsequent practice inaspecific case" asthephrase "subsequent practice"
isusedinArticle 31oftheVienna Convention .Further, wedonotagree withthePanel'sconclusion
inthesame paragraph ofthePanel Report thatadopted panel reports inthemselves constitute "other
decisions oftheCONTRACTING PARTIES toGATT 1947" forthepurposes ofparagraph 1(b)(iv)
ofthelanguage ofAnnex 1Aincorporating theGATT 1994 intotheWTO Agreement .
However, weagree withthePanel'sconclusion inthatsame paragraph ofthePanel Report
thatunadopted panel reports "have nolegalstatus intheGATT orWTO system since theyhavenot
30Itisworth noting thattheStatute oftheInternational Court ofJustice hasanexplicit provision, Article 59,tothesame
effect. Thishasnotinhibited thedevelopment bythatCourt (anditspredecessor) ofabody ofcaselawinwhich considerable
reliance onthevalue ofprevious decisions isreadily discernible.WT/DS8/AB/R
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beenendorsed through decisions bytheCONTRACTING PARTIES toGATT orWTO Members".31
Likewise, weagree that"apanel could nevertheless finduseful guidance inthereasoning ofanunadopted
panel report thatitconsidered toberelevant".32
F. Interpretation ofArticle III
TheWTO Agreement isatreaty --theinternational equivalent ofacontract. Itisself-evident
thatinanexercise oftheirsovereignty, andinpursuit oftheirownrespective national interests, the
Members oftheWTO havemade abargain. Inexchange forthebenefits theyexpect toderive as
Members oftheWTO, theyhaveagreed toexercise theirsovereignty according tothecommitments
theyhavemade intheWTO Agreement .
OneofthosecommitmentsisArticleIIIoftheGATT1994,whichisentitled"NationalTreatment
onInternal Taxation andRegulation". Forthepurpose ofthisappeal, therelevant parts ofArticle
IIIreadasfollows:
Article III
National Treatment onInternal Taxation andRegulation
1.Thecontracting parties recognize thatinternal taxesandother internal
charges, andlaws, regulations andrequirements affecting theinternal sale,
offering forsale,purchase, transportation, distribution oruseofproducts, and
internal quantitative regulations requiring themixture, processing oruseof
products inspecified amounts orproportions, should notbeapplied toimported
ordomestic products soastoafford protection todomestic production.*
2.Theproducts oftheterritory ofanycontracting party imported into
theterritory ofanyother contracting party shallnotbesubject, directly or
indirectly, tointernal taxes orother internal charges ofanykindinexcess of
those applied, directly orindirectly, tolikedomestic products. Moreover, no
contracting party shallotherwise apply internal taxes orother internal charges
toimported ordomestic products inamanner contrary totheprinciples set
forth inparagraph 1.*
31Panel Report, para. 6.10.
32Ibid.WT/DS8/AB/R
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AdArticle III
Paragraph 2
Ataxconforming totherequirements ofthefirstsentence ofparagraph 2
wouldbeconsideredtobeinconsistentwiththeprovisionsofthesecondsentence
onlyincases where competition wasinvolved between, ontheonehand, the
taxed product and,ontheother hand, adirectly competitive orsubstitutable
product which wasnotsimilarly taxed.
Thebroad andfundamental purpose ofArticle IIIistoavoid protectionism intheapplication
ofinternal taxandregulatory measures. More specifically, thepurpose ofArticle III"istoensure
thatinternal measures notbeapplied toimported ordomestic products soastoafford protection to
domestic production ’".33Toward thisend,Article IIIobliges Members oftheWTO toprovide equality
ofcompetitive conditions forimported products inrelation todomestic products.34"[T]he intention
ofthedrafters oftheAgreement wasclearly totreattheimported products inthesame wayasthe
likedomestic products oncetheyhadbeencleared through customs. Otherwise indirect protection
could begiven".35Moreover, itisirrelevant that"thetrade effects" ofthetaxdifferential between
imported anddomestic products, asreflected inthevolumes ofimports, areinsignificant orevennon-
existent; Article IIIprotects expectations notofanyparticular trade volume butrather oftheequal
competitive relationship between imported anddomestic products.36Members oftheWTO arefree
topursue theirowndomestic goals through internal taxation orregulation solongastheydonotdo
soinawaythatviolates Article IIIoranyoftheother commitments theyhavemade intheWTO
Agreement.
ThebroadpurposeofArticleIIIofavoidingprotectionismmustberememberedwhenconsidering
therelationship between Article IIIandotherprovisions oftheWTOAgreement .Although theprotection
ofnegotiated tariff concessions iscertainly onepurpose ofArticle III,37thestatement inParagraph
6.13ofthePanel Report that"oneofthemainpurposes ofArticle IIIistoguarantee thatWTO Members
33United States -Section 337oftheTariff Actof1930, BISD 36S/345, para. 5.10.
34United States -Taxes onPetroleum andCertain Imported Substances ,BISD 34S/136, para. 5.1.9; Japan -Customs
Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages ,BISD 34S/83, para. 5.5(b).
35Italian Discrimination Against Imported Agricultural Machinery ,BISD 7S/60, para. 11.
36United States -Taxes onPetroleum andCertain Imported Substances ,BISD 34S/136, para. 5.1.9.
37Japan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages ,BISD 34S/83,
para. 5.5(b); Canada -Import, Distribution andSaleofCertain Alcoholic Drinks byProvincial Marketing Agencies ,BISD
39S/27, para. 5.30.WT/DS8/AB/R
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willnotundermine through internal measures their commitments under Article II"should notbe
overemphasized. Thesheltering scope ofArticle IIIisnotlimited toproducts thatarethesubject of
tariffconcessions under Article II.TheArticle IIInational treatment obligation isageneral prohibition
ontheuseofinternal taxesandother internal regulatory measures soastoafford protection todomestic
production. Thisobligation clearly extends alsotoproducts notbound under Article II.38Thisis
confirmed bythenegotiating history ofArticle III.39
G. Article III:1
Theterms ofArticle IIImust begiven theirordinary meaning --intheircontext andinthe
lightoftheoverall object andpurpose oftheWTO Agreement .Thus, thewords actually usedinthe
Article provide thebasisforaninterpretation thatmustgivemeaning andeffect toallitsterms. The
proper interpretation oftheArticle is,firstofall,atextual interpretation. Consequently, thePanel
38Brazilian Internal Taxes ,BISD II/181, para. 4;United States -Taxes onPetroleum andCertain Imported Substances ,
BISD 34S/136, para. 5.1.9; EEC -Regulation onImports ofParts andComponents ,BISD 37S/132, para. 5.4.
39AttheSecond Session ofthePreparatory Committee oftheUnited Nations Conference onTrade andEmployment,
heldin1947, delegates intheTariff Agreement Committee addressed theissue ofwhether toinclude thenational treatment
clause from thedraft Charter foranInternational Trade Organization ("ITO Charter") intheGATT 1947. Onedelegate
noted:
ThisArticle intheCharter hadtwopurposes, asIunderstand it.Thefirstpurpose
wastoprotect theitems intheSchedule oranyother Schedule concluded asaresult
ofanysubsequent negotiations andagreements -thatis,toensure thatacountry
offering atariff concession could notnullify thattariff concession byimposing an
internal taxonthecommodity, which hadanequivalent effect. Ifthatwere thesole
purpose andcontent ofthisArticle, there could really benoobjection toitsinclusion
intheGeneral Agreement. ButtheArticle intheCharter hadanadditional purpose.
Thatpurpose wastoprevent theuseofinternal taxes asasystem ofprotection. It
waspartofaseries ofArticles designed toconcentrate national protective measures
intotheforms permitted under theCharter, i.e.subsidies andtariffs, andsince we
havetaken overthisArticle from theCharter, weare,byincluding theArticle, doing
twothings: sofarasthecountries become parties totheAgreement, weare,first
ofall,ensuring thatthetariff concessions theygrant oneanother cannot benullified
bytheimposition ofcorresponding internal taxes; butwearealsoensuring thatthose
countries which become parties totheAgreement undertake nottouseinternal taxes
asasystem ofprotection.
Thisview isreinforced bythefollowing statement ofanother delegate:
...[Article III]isnecessary toprotect notonlyscheduled items intheAgreement,
but,indeed, allitems forallourexports andtheexports ofanycountry. Ifthatis
notdone, thenevery itemwhich doesnotappear intheSchedule would have tobe
reconsidered andpossibly tariff negotiations re-opened ifArticle IIIwere changed
topermit anyaction onthese non-scheduled items.
SeeEPCT/TAC/PV.10, pp.3and33.WT/DS8/AB/R
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iscorrect inseeing adistinction between Article III:1, which "contains general principles", and
Article III:2, which "provides forspecific obligations regarding internal taxes andinternal charges".40
Article III:1articulates ageneral principle thatinternal measures should notbeapplied soastoafford
protection todomestic production. Thisgeneral principle informs therestofArticle III.Thepurpose
ofArticle III:1istoestablish thisgeneral principle asaguide tounderstanding andinterpreting the
specific obligations contained inArticle III:2andintheotherparagraphs ofArticle III,while respecting,
andnotdiminishing inanyway, themeaning ofthewords actually usedinthetextsofthose other
paragraphs. Inshort, Article III:1constitutes partofthecontext ofArticle III:2, inthesame waythat
itconstitutes partofthecontext ofeachoftheother paragraphs inArticle III.Anyother reading of
Article IIIwould havetheeffect ofrendering thewords ofArticle III:1meaningless, thereby violating
thefundamental principle ofeffectiveness intreaty interpretation. Consistent withthisprinciple of
effectiveness, andwiththetextual differences inthetwosentences, webelieve thatArticle III:1informs
thefirstsentence andthesecond sentence ofArticle III:2indifferent ways.
H. Article III:2
1. FirstSentence
Article III:1informs Article III:2, firstsentence, byestablishing thatifimported products are
taxed inexcess oflikedomestic products, thenthattaxmeasure isinconsistent withArticle III.Article
III:2, firstsentence doesnotreferspecifically toArticle III:1. There isnospecific invocation inthis
firstsentence ofthegeneral principle inArticle III:1thatadmonishes Members oftheWTO notto
apply measures "soastoafford protection". Thisomission must havesome meaning. Webelieve
themeaning issimply thatthepresence ofaprotective application neednotbeestablished separately
fromthespecific requirements thatareincluded inthefirstsentence inorder toshow thatataxmeasure
isinconsistent withthegeneral principle setoutinthefirstsentence. However, thisdoesnotmean
thatthegeneral principle ofArticle III:1doesnotapply tothissentence. Tothecontrary, webelieve
thefirstsentence ofArticle III:2is,ineffect, anapplication ofthisgeneral principle. Theordinary
meaning ofthewords ofArticle III:2, firstsentence leads inevitably tothisconclusion. Read intheir
context andinthelightoftheoverall object andpurpose oftheWTO Agreement ,thewords ofthe
firstsentence require anexamination oftheconformity ofaninternal taxmeasure withArticle IIIby
determining, first,whether thetaxed imported anddomestic products are"like" and,second, whether
40Panel Report, para. 6.12.WT/DS8/AB/R
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thetaxesapplied totheimported products are"inexcess of"those applied tothelikedomestic products.
Iftheimported anddomestic products are"like products", andifthetaxes applied totheimported
products are"inexcess of"those applied tothelikedomestic products, thenthemeasure isinconsistent
withArticle III:2, firstsentence.41
Thisapproach toanexamination ofArticle III:2, firstsentence, isconsistent withpastpractice
under theGATT 1947.42Moreover, itisconsistent withtheobject andpurpose ofArticle III:2, which
thepanel inthepredecessor tothiscasedealing withanearlier version oftheLiquor TaxLaw, Japan -
Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages ("1987
Japan -Alcohol "),rightly stated as"promoting non-discriminatory competition among imported and
likedomestic products [which] could notbeachieved ifArticle III:2wereconstrued inamanner allowing
discriminatoryandprotectiveinternaltaxationofimportedproductsinexcessoflikedomesticproducts".43
(a) "Like Products"
Because thesecond sentence ofArticle III:2provides foraseparate anddistinctive consideration
oftheprotective aspect ofameasure inexamining itsapplication toabroader category ofproducts
thatarenot"like products" ascontemplated bythefirstsentence, weagree withthePanel thatthe
firstsentence ofArticle III:2mustbeconstrued narrowly soasnottocondemn measures thatitsstrict
41Inaccordance withArticle 3.8oftheDSU,suchaviolation isprima faciepresumed tonullify orimpair benefits under
Article XXIII oftheGATT 1994. Article 3.8reads asfollows:
Incases where there isaninfringement oftheobligations assumed under acovered agreement, theaction
isconsidered prima facie toconstitute acaseofnullification orimpairment. Thismeans thatthere is
normally apresumption thatabreach oftherules hasanadverse impact onother Members parties to
thatcovered agreement, andinsuch cases, itshall beuptotheMember against whom thecomplaint
hasbeen brought torebut thecharge.
42SeeBrazilianInternalTaxes,BISDII/181, para.14;Japan-CustomsDuties,TaxesandLabellingPracticesonImported
Wines andAlcoholic Beverages ,BISD 34S/83, para. 5.5(d); United States -Taxes onPetroleum andCertain Imported
Substances,BISD34S/136, para.5.1.1; UnitedStates-MeasuresAffectingtheImportation,InternalSaleandUseofTobacco,
DS44/R, adopted on4October 1994.
43Japan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages ,BISD 34S/83,
para5.5(c).WT/DS8/AB/R
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terms arenotmeant tocondemn. Consequently, weagree withthePanel alsothatthedefinition of
"like products" inArticle III:2, firstsentence, should beconstrued narrowly.44
Hownarrowly isamatter thatshould bedetermined separately foreachtaxmeasure ineach
case. Weagree withthepractice under theGATT 1947ofdetermining whether imported anddomestic
products are"like" onacase-by-case basis. TheReport oftheWorking Party onBorder Tax
Adjustments ,adopted bytheCONTRACTING PARTIES in1970, setoutthebasic approach for
interpreting "like orsimilar products" generally inthevarious provisions oftheGATT 1947:
...theinterpretation ofthetermshould beexamined onacase-by-case basis. This
would allow afairassessment ineachcaseofthedifferent elements thatconstitute a
"similar" product. Some criteria weresuggested fordetermining, onacase-by-case
basis, whether aproduct is"similar": theproduct 'send-uses inagiven market;
consumers 'tastes andhabits, which change from country tocountry; theproduct 's
properties, nature andquality.45
Thisapproach wasfollowed inalmost alladopted panel reports afterBorder TaxAdjustments .46
Thisapproach should behelpful inidentifying onacase-by-case basis therange of"like products"
thatfallwithin thenarrow limits ofArticle III:2, firstsentence intheGATT 1994. Yetthisapproach
willbemosthelpful ifdecision makers keepeverinmind hownarrow therange of"like products"
inArticle III:2, firstsentence ismeant tobeasopposed totherange of"like" products contemplated
insome other provisions oftheGATT 1994 andother Multilateral Trade Agreements oftheWTO
Agreement .Inapplying thecriteria citedinBorder TaxAdjustments tothefactsofanyparticular case,
andinconsidering other criteria thatmayalsoberelevant incertain cases, panels canonlyapply their
bestjudgement indetermining whether infactproducts are"like". Thiswillalways involve an
44Wenotetheargument onappeal thatthePanel suggested inparagraph 6.20ofthePanel Report thattheproduct coverage
ofArticle III:2isnotidentical tothecoverage ofArticle III:4. ThatisnotwhatthePanel said. ThePanel saidthefollowing:
Ifthecoverage ofArticle III:2 isidentical tothatofArticle III:4, adifferent
interpretation oftheterm"like product" would becalled forinthetwoparagraphs.
Otherwise, iftheterm"like product" were tobeinterpreted inanidentical wayin
bothinstances, thescope ofthetwoparagraphs would bedifferent. (emphasis added)
Thiswasmerely ahypothetical statement.
45Report oftheWorking Party onBorder TaxAdjustments ,BISD 18S/97, para. 18.
46TheAustralian Subsidy onAmmonium Sulphate ,BISD II/188; EEC-Measures onAnimal FeedProteins ,BISD 25S/49;
Spain -Tariff Treatment ofUnroasted Coffee ,BISD 28S/102; Japan -Customs Duties, Taxes andLabelling Practices on
Imported Wines andAlcoholic Beverages ,BISD 34S/83; United States -Taxes onPetroleum andCertain Imported Substances ,
BISD 34S/136. AlsoseeUnited States -Standards forReformulated andConventional Gasoline ,WT/DS2/9, adopted on
20May 1996.WT/DS8/AB/R
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unavoidable element ofindividual, discretionary judgement. Wedonotagree withthePanel's
observation inparagraph 6.22ofthePanel Report thatdistinguishing between "like products" and
"directly competitive orsubstitutable products" under Article III:2is"anarbitrary decision". Rather,
wethink itisadiscretionary decision thatmustbemade inconsidering thevarious characteristics of
products inindividual cases.
Nooneapproach toexercising judgement willbeappropriate forallcases. Thecriteria in
Border TaxAdjustments should beexamined, butthere canbenooneprecise andabsolute definition
ofwhatis"like". Theconcept of"likeness" isarelative onethatevokes theimage ofanaccordion.
Theaccordion of"likeness" stretches andsqueezes indifferent places asdifferent provisions ofthe
WTO Agreement areapplied. Thewidth oftheaccordion inanyoneofthose places mustbedetermined
bytheparticular provision inwhich theterm"like" isencountered aswellasbythecontext andthe
circumstances thatprevail inanygiven casetowhich thatprovision mayapply. Webelieve that,in
Article III:2, firstsentence oftheGATT 1994, theaccordion of"likeness" ismeant tobenarrowly
squeezed.
ThePanel determined inthiscasethatshochu andvodka are"likeproducts" forthepurposes
ofArticle III:2, firstsentence. Wenotethatthedetermination ofwhether vodka isa"likeproduct"
toshochu under Article III:2, firstsentence, ora"directly competitive orsubstitutable product" to
shochu under Article III:2, second sentence, doesnotmaterially affect theoutcome ofthiscase.
Auniformtariffclassificationofproductscanberelevantindeterminingwhatare"likeproducts".
Ifsufficientlydetailed,tariffclassificationcanbeahelpfulsignofproductsimilarity.Tariffclassification
hasbeenusedasacriterion fordetermining "likeproducts" inseveral previous adopted panel reports.47
Forexample, inthe1987Japan -Alcohol Panel Report, thepanel examined certain wines andalcoholic
47EEC-Measures onAnimal Feed Proteins ,BISD 25S/49; Japan -Customs Duties, Taxes andLabelling Practices on
ImportedWinesandAlcoholicBeverages,BISD34S/83;UnitedStates-StandardsforReformulatedandConventionalGasoline,
WT/DS2/9, adopted on20May 1996.WT/DS8/AB/R
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beverages ona"product-by-product basis" byapplying thecriteria listed intheWorking Party Report
onBorder TaxAdjustments ,
...aswellasothers recognized inprevious GATT practice (seeBISD
25S/49, 63),suchastheCustoms Cooperation Council Nomenclature
(CCCN) fortheclassification ofgoods incustoms tariffs which has
beenaccepted byJapan.48
Uniform classification intariff nomenclatures based ontheHarmonized System (the"HS")
wasrecognized inGATT 1947practice asproviding auseful basisforconfirming "likeness" inproducts.
However, there isamajor difference between tariff classification nomenclature andtariff bindings or
concessions made byMembers oftheWTO under Article IIoftheGATT 1994. There arerisksin
using tariffbindings thataretoobroad asameasure ofproduct "likeness". Many oftheleast-developed
country Members oftheWTO submitted schedules ofconcessions andcommitments asannexes to
theGATT 1994 forthefirsttimeasrequired byArticle XIoftheWTO Agreement .Many ofthese
least-developed countries, aswellasotherdeveloping countries, havebindings intheirschedules which
include broad ranges ofproducts thatcutacross several different HStariff headings. Forexample,
many ofthese countries haveverybroad uniform bindings onnon-agricultural products.49Thisdoes
notnecessarily indicate similarity oftheproducts covered byabinding. Rather, itrepresents theresults
oftrade concessions negotiated among Members oftheWTO.
Itistruethattherearenumerous tariffbindings which areinfactextremely precise withregard
toproduct description andwhich, therefore, canprovide significant guidance astotheidentification
of"like products". Clearly enough, these determinations needtobemade onacase-by-case basis.
However, tariffbindings thatinclude awiderange ofproducts arenotareliable criterion fordetermining
orconfirming product "likeness" under Article III:2.50
48Japan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages ,BISD 34S/83,
para. 5.6.
49Forexample, Jamaica hasbound tariffs onthemajority ofnon-agricultural products at50%. Trinidad andTobago
havebound tariffs onthemajority ofproducts falling within HSChapters 25-97 at50%. Peruhasbound allnon-agricultural
products at30%, andCosta Rica, ElSalvador, Guatemala, Morocco, Paraguay, Uruguay andVenezuela havebroad uniform
bindings onnon-agricultural products, withafewlisted exceptions.
50Webelieve, therefore, thatstatements relating toanyrelationship between tariff bindings and"likeness" mustbemade
cautiously. Forexample, thePanel stated inparagraph 6.21ofthePanel Report that"...withrespect totwoproducts subject
tothesame tariff binding andtherefore tothesame maximum border tax,there isnojustification, outside ofthose mentioned
inGATT rules, totaxthem inadifferentiated waythrough internal taxation". Thisisincorrect.WT/DS8/AB/R
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With these modifications tothelegal reasoning inthePanel Report, weaffirm thelegal
conclusions andthefindings ofthePanel withrespect to"like products" inallother respects.
(b) "InExcess Of"
Theonlyremaining issueunder Article III:2, firstsentence, iswhether thetaxes onimported
products are"inexcess of"those onlikedomestic products. Ifso,thentheMember thathasimposed
thetaxisnotincompliance withArticle III.Even thesmallest amount of"excess" istoomuch. "The
prohibition ofdiscriminatory taxes inArticle III:2, firstsentence, isnotconditional onatradeeffects
test’norisitqualified byademinimis standard."51Weagree withthePanel'slegalreasoning and
withitsconclusions onthisaspect oftheinterpretation andapplication ofArticle III:2, firstsentence.
2. Second Sentence
Article III:1informs Article III:2, second sentence, through specific reference. Article III:2,
second sentence, contains ageneral prohibition against "internal taxesorotherinternal charges" applied
to"imported ordomestic products inamanner contrary totheprinciples setforth inparagraph 1".
Asmentioned before, Article III:1states thatinternal taxes andother internal charges "should notbe
applied toimported ordomestic products soastoafford protection todomestic production". Again,
AdArticle III:2states asfollows:
Ataxconforming totherequirements ofthefirstsentence ofparagraph
2would beconsidered tobeinconsistent withtheprovisions ofthe
secondsentenceonlyincaseswherecompetitionwasinvolvedbetween,
ontheonehand, thetaxed product and,ontheother hand, adirectly
competitive orsubstitutable product which wasnotsimilarly taxed.
51United States -Measures Affecting Alcoholic andMaltBeverages ,BISD 39S/206, para5.6;seealsoBrazilian Internal
Taxes ,BISD II/181, para. 16;United States -Taxes onPetroleum andCertain Imported Substances ,BISD 34S/136, para.
5.1.9; Japan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages ,BISD 34S/83,
para. 5.8.WT/DS8/AB/R
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Article III:2, second sentence, andtheaccompanying AdArticle haveequivalent legalstatus
inthatbotharetreaty language which wasnegotiated andagreed atthesame time.52TheAdArticle
doesnotreplace ormodify thelanguage contained inArticle III:2, second sentence, but,infact,clarifies
itsmeaning. Accordingly, thelanguage ofthesecond sentence andtheAdArticle mustbereadtogether
inorder togivethem theirproper meaning.
Unlike thatofArticle III:2, firstsentence, thelanguage ofArticle III:2, second sentence,
specifically invokes Article III:1. Thesignificance ofthisdistinction liesinthefactthatwhereas
Article III:1actsimplicitly inaddressing thetwoissues thatmustbeconsidered inapplying thefirst
sentence, itactsexplicitly asanentirely separate issue thatmust beaddressed along withtwoother
issues thatareraised inapplying thesecond sentence. Giving fullmeaning tothetextandtoitscontext,
three separate issues mustbeaddressed todetermine whether aninternal taxmeasure isinconsistent
withArticle III:2, second sentence. These three issues arewhether:
(1) theimported products andthedomestic products are"directly competitive or
substitutable products" which areincompetition witheachother;
(2) thedirectly competitive orsubstitutable imported anddomestic products are"not
similarly taxed";and
(3) thedissimilar taxation ofthedirectly competitive orsubstitutable imported domestic
products is"applied ...soastoafford protection todomestic production ".
Again, thesearethreeseparate issues. Eachmustbeestablished separately bythecomplainant
forapanel tofindthatataxmeasure imposed byaMember oftheWTO isinconsistent withArticle
III:2, second sentence.
52Thenegotiating history ofArticle III:2 confirms thatthesecond sentence andtheAdArticle were added during the
Havana Conference, along withother provisions andinterpretative notes concerning Article 18ofthedraft ITOCharter.
When introducing these amendments todelegates, therelevant Sub-Committee reported that:"The newform oftheArticle
makes clearer thandidtheGeneva texttheintention thatinternal taxes ongoods should notbeusedasameans ofprotection.
Thedetails havebeenrelegated tointerpretative notes sothatitwould beeasier forMembers toascertain theprecise scope
oftheirobligations under theArticle." E/CONF.2/C.3/59, page8.Article 18ofthedraftITOCharter subsequently became
Article IIIoftheGATT pursuant totheProtocol Modifying PartIIandArticle XXVI, which entered intoforce on14December
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(a) "Directly Competitive orSubstitutable Products "
Ifimported anddomestic products arenot"likeproducts" forthenarrow purposes ofArticle
III:2, firstsentence, thentheyarenotsubject tothestrictures ofthatsentence andthere isno
inconsistencywiththerequirementsofthatsentence.However,dependingontheirnature,anddepending
onthecompetitiveconditionsintherelevantmarket,thosesameproductsmaywellbeamongthebroader
category of"directly competitive orsubstitutable products" thatfallwithin thedomain ofArticle III:2,
second sentence. Howmuch broader thatcategory of"directly competitive orsubstitutable products"
maybeinanygiven caseisamatter forthepanel todetermine based onalltherelevant factsinthat
case. Aswith"likeproducts" under thefirstsentence, thedetermination oftheappropriate range of
"directlycompetitiveorsubstitutableproducts"underthesecondsentencemustbemadeonacase-by-case
basis.
Inthiscase, thePanel emphasized theneed tolooknotonlyatsuchmatters asphysical
characteristics, common end-uses, andtariffclassifications, butalsoatthe"market place".53Thisseems
appropriate. TheGATT 1994 isacommercial agreement, andtheWTO isconcerned, afterall,with
markets. Itdoesnotseem inappropriate tolookatcompetition intherelevant markets asoneamong
anumber ofmeans ofidentifying thebroader category ofproducts thatmight bedescribed as"directly
competitive orsubstitutable".
Nordoesitseeminappropriate toexamine elasticity ofsubstitution asonemeans ofexamining
those relevant markets. ThePanel didnotsaythatcross-price elasticity ofdemand is"thedecisive
criterion"54fordetermining whether products are"directly competitive orsubstitutable". ThePanel
stated thefollowing:
InthePanel’sview, thedecisive criterion inorder todetermine whether
twoproducts aredirectly competitive orsubstitutable iswhether they
have common end-uses, inter alia,asshown byelasticity of
substitution.55
Weagree. And, wefindthePanel'slegal analysis ofwhether theproducts are"directly
competitive orsubstitutable products" inparagraphs 6.28-6.32 ofthePanel Report tobecorrect.
53Panel Report, para. 6.22.
54United States Appellant 'sSubmission, dated 23August 1996, para. 98,p.63. (emphasis added)
55Panel Report, para6.22.WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
Page26
WenotethatthePanel'sconclusions on"like products" andon"directly competitive or
substitutable products" contained inparagraphs 7.1(i) and(ii),respectively, ofthePanel Report fail
toaddress thefullrange ofalcoholic beverages included inthePanel'sTerms ofReference.56More
specifically, thePanel'sconclusions inparagraph 7.1(ii) on"directly competitive orsubstitutable
products" relate onlyto"shochu, whisky, brandy, rum,gin,genever, andliqueurs," which isnarrower
thantherange ofproducts referred totheDispute Settlement Body byoneofthecomplainants, the
United States, which included initsrequest fortheestablishment ofapanel "allother distilled spirits
andliqueursfallingwithinHSheading2208".Weconsiderthisfailuretoincorporateintoitsconclusions
alltheproducts referred tointheTerms ofReference, consistent withthematters referred totheDSB
inWT/DS8/5, WT/DS10/5 andWT/DS11/2, tobeanerror oflawbythePanel.
(b) "NotSimilarly Taxed"
Togiveduemeaning tothedistinctions inthewording ofArticle III:2, firstsentence, and
Article III:2, second sentence, thephrase "notsimilarly taxed" intheAdArticle tothesecond sentence
mustnotbeconstrued soastomean thesame thing asthephrase "inexcess of"inthefirstsentence.
Onitsface,thephrase "inexcess of"inthefirstsentence means anyamount oftaxonimported products
"inexcess of"thetaxondomestic "likeproducts". Thephrase "notsimilarly taxed" intheAdArticle
tothesecond sentence must therefore mean something else. Itrequires adifferent standard, justas
"directly competitive orsubstitutable products" requires adifferent standard ascompared to"like
products" forthese same interpretive purposes.
Reinforcing thisconclusion istheneedtogiveduemeaning tothedistinction between "like
products" inthefirstsentence and"directly competitive orsubstitutable products" intheAdArticle
tothesecond sentence. If"inexcess of"inthefirstsentence and"notsimilarly taxed" intheAdArticle
tothesecond sentence were construed tomean oneandthesame thing, then"like products" inthe
firstsentence and"directly competitive orsubstitutable products" intheAdArticle tothesecond sentence
would alsomean oneandthesame thing. Thiswould eviscerate thedistinctive meaning thatmust
berespected inthewords ofthetext.
56ThePanel'sTerms ofReference citethematters referred totheDispute Settlement Body bytheEuropean Communities,
Canada andtheUnited States inWT/DS8/5, WT/DS10/5 andWT/DS11/2, respectively. InWT/DS8/5, theEuropean
Communities referred theDispute Settlement Body toJapan'staxation ofshochu, "spirits", "whisky/brandy" and"liqueurs".
InWT/DS10/5, Canada referred theDispute Settlement Body toJapan'staxation ofshochu andproducts falling "within
HS2208.30 (whiskies '),HS2208.40 (rumandtafia'),HS2208.90 (other'including fruitbrandies, vodka, ouzo, korn,
cream liqueurs andclassic 'liqueurs.)" InWT/DS11/2, theUnited States referred theDispute Settlement Body toJapan's
taxation ofshochu and"allother distilled spirits andliqueurs falling within HSheading 2208".WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
Page27
Tointerpret "inexcess of"and"notsimilarly taxed" identically would denyanydistinction
between thefirstandsecond sentences ofArticle III:2. Thus, inanygiven case, there maybesome
amount oftaxation onimported products thatmaywellbe"inexcess of"thetaxondomestic "like
products" butmaynotbesomuch astocompel aconclusion that"directly competitive orsubstitutable"
imported anddomestic products are"notsimilarly taxed" forthepurposes oftheAdArticle to
Article III:2, second sentence. Inother words, there maybeanamount ofexcess taxation thatmay
wellbemore ofaburden onimported products thanondomestic "directly competitive orsubstitutable
products"butmayneverthelessnotbeenoughtojustifyaconclusionthatsuchproductsare"notsimilarly
taxed" forthepurposes ofArticle III:2, second sentence. Weagree withthePanel thatthisamount
ofdifferential taxation mustbemore thandeminimis tobedeemed "notsimilarly taxed" inanygiven
case.57And, likethePanel, webelieve thatwhether anyparticular differential amount oftaxation is
deminimis orisnotdeminimis must, heretoo,bedetermined onacase-by-case basis. Thus, tobe
"notsimilarly taxed", thetaxburden onimported products mustbeheavier thanon"directly competitive
orsubstitutable" domestic products, andthatburden mustbemore thandeminimis inanygiven case.
Inthiscase, thePanel applied thecorrect legal reasoning indetermining whether "directly
competitive orsubstitutable" imported anddomestic products were"notsimilarly taxed". However,
thePanel erred inblurring thedistinction between thatissueandtheentirely separate issueofwhether
thetaxmeasure inquestion wasapplied "soastoafford protection". Again, these areseparate issues
thatmustbeaddressed individually. If"directly competitive orsubstitutable products" arenot"not
similarly taxed", thenthere isneither neednorjustification under Article III:2, second sentence, for
inquiring further astowhether thetaxhasbeenapplied "soastoafford protection". Butifsuchproducts
are"notsimilarly taxed", afurther inquiry must necessarily bemade.
(c) "SoAsToAfford Protection"
Thisthird inquiry under Article III:2, second sentence, must determine whether "directly
competitive orsubstitutable products" are"notsimilarly taxed" inawaythataffords protection. This
isnotanissue ofintent. Itisnotnecessary forapanel tosortthrough themany reasons legislators
andregulatorsoftenhaveforwhattheydoandweightherelativesignificanceofthosereasonstoestablish
legislative orregulatory intent. Ifthemeasure isapplied toimported ordomestic products soasto
afford protection todomestic production, thenitdoesnotmatter thatthere maynothavebeenany
57Panel Report, para. 6.33.WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
Page28
desire toengage inprotectionism intheminds ofthelegislators ortheregulators whoimposed the
measure. Itisirrelevant thatprotectionism wasnotanintended objective iftheparticular taxmeasure
inquestion isnevertheless, toechoArticle III:1, "applied toimported ordomestic products soasto
afford protection todomestic production".58Thisisanissueofhowthemeasure inquestion isapplied .
Inthe1987Japan- Alcohol case,thepanel subsumed itsdiscussion oftheissueof"notsimilarly
taxed" within itsexamination oftheseparate issue of"soastoafford protection":
...whereas under thefirstsentence ofArticle III:2thetaxonthe
imported product andthetaxonthelikedomestic product hadtobe
equal ineffect, Article III:1and2,second sentence, prohibited only
theapplication ofinternal taxes toimported ordomestic products in
amanner "soastoafford protection todomestic production". The
Panel wasoftheviewthatalsosmall taxdifferences could influence
thecompetitiverelationshipbetweendirectlycompetingdistilledliquors,
buttheexistence ofprotective taxation could beestablished onlyin
thelightoftheparticular circumstances ofeachcaseandthere could
beademinimis levelbelow which ataxdifference ceased tohavethe
protective effect prohibited byArticle III:2, second sentence.59
Todetect whether thetaxation wasprotective, thepanel inthe1987 caseexamined anumber
offactors thatitconcluded were"sufficient evidence offiscal distortions ofthecompetitive relationship
between imported distilled liquors anddomestic shochu affording protection tothedomestic production
ofshochu". These factors included theconsiderably lower specific taxratesonshochu thanonimported
directly competitive orsubstitutable products; theimposition ofhighadvalorem taxes onimported
alcoholic beverages andtheabsence ofadvalorem taxes onshochu; thefactthatshochu wasalmost
exclusively produced inJapan andthatthelower taxation ofshochu did"afford protection todomestic
production"; andthemutual substitutability ofthese distilled liquors.60Thepanel inthe1987 case
concluded that"theapplication ofconsiderably lower internal taxes byJapan onshochu thanonother
directly competitive orsubstitutable distilled liquors hadtrade-distorting effects affording protection
todomestic production ofshochu contrary toArticle III:1and2,second sentence".61
58Emphasis added.
59Japan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages, BISD 34S/83,
para. 5.11.
60Ibid.
61Ibid.WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
Page29
Asinthatcase, webelieve thatanexamination inanycaseofwhether dissimilar taxation has
beenapplied soastoafford protection requires acomprehensive andobjective analysis ofthestructure
andapplication ofthemeasure inquestion ondomestic ascompared toimported products. Webelieve
itispossible toexamine objectively theunderlying criteria usedinaparticular taxmeasure, itsstructure,
anditsoverall application toascertain whether itisapplied inawaythataffords protection todomestic
products.
Although itistruethattheaimofameasure maynotbeeasily ascertained, nevertheless its
protective application canmostoften bediscerned fromthedesign, thearchitecture, andtherevealing
structure ofameasure. Theverymagnitude ofthedissimilar taxation inaparticular casemaybe
evidence ofsuchaprotective application, asthePanel rightly concluded inthiscase. Most often, there
willbeother factors tobeconsidered aswell. Inconducting thisinquiry, panels should givefull
consideration toalltherelevant factsandalltherelevant circumstances inanygiven case.
Inthisrespect, wenoteandagree withthepanel'sacknowledgment inthe1987Japan -Alcohol
Report:
...thatArticle III:2doesnotprescribe theuseofanyspecific method
orsystem oftaxation. ...there could beobjective reasons proper to
thetaxinquestion which could justify ornecessitate differences in
thesystem oftaxation forimported andfordomestic products. The
Panel found thatitcould alsobecompatible withArticle III:2toallow
twodifferent methods ofcalculation ofprice fortaxpurposes. Since
Article III:2prohibited onlydiscriminatory orprotective taxburdens
onimported products, whatmattered was,intheviewofthePanel,
whether theapplication ofthedifferent taxation methods actually had
adiscriminatory orprotective effect against imported products.62
Wehavereviewed thePanel'sreasoning inthiscaseaswellasitsconclusions ontheissue
of"soastoafford protection" inparagraphs 6.33-6.35ofthePanel Report. Wefindcause forthorough
examination. ThePanel began inparagraph 6.33bydescribing itsapproach asfollows:
...ifdirectly competitive orsubstitutable products arenot"similarly
taxed", andifitwere found thatthetaxfavours domestic products,
thenprotection would beafforded tosuchproducts, andArticle III:2,
second sentence, isviolated.
Thisstatement ofthereasoning required under Article III:2, second sentence iscorrect.
62Japan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages, BISD 34S/83,
para. 5.9(c).WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
Page30
However, thePanel wentontonote:
...forittoconclude thatdissimilar taxation afforded protection, it
would besufficient forittofindthatthedissimilarity intaxation is
notdeminimis ....thePanel tooktheview that"similarly taxed"
istheappropriate benchmark inorder todetermine whether aviolation
ofArticle III:2, second sentence, hasoccurred asopposed to"inexcess
of"thatconstitutes theappropriate benchmark todetermine whether
aviolation ofArticle III:2, firstsentence, hasoccurred.63
Inparagraph 6.34, thePanel added:
(i) Thebenchmark inArticle III:2, second sentence, iswhether
internal taxes operate “soastoafford protection todomestic
production ”,aterm which hasbeen further interpreted inthe
Interpretative NoteadArticle III:2, paragraph 2,tomean dissimilar
taxation ofdomestic andforeign directly competitive orsubstitutable
products.
And, furthermore, initsconclusions, inparagraph 7.1(ii), thePanel concluded that:
(ii) Shochu, whisky, brandy, rum,gin,genever, andliqueurs are
“directlycompetitiveorsubstitutableproducts”andJapan,bynottaxing
them similarly, isinviolation ofitsobligation under Article III:2,
second sentence, oftheGeneral Agreement onTariffs andTrade 1994.
Thus, having stated thecorrect legalapproach toapply withrespect toArticle III:2, second
sentence, thePanel thenequated dissimilar taxation above ademinimis level withtheseparate and
distinct requirement ofdemonstrating thatthetaxmeasure "affords protection todomestic production".
Aspreviously stated, afinding that"directly competitive orsubstitutable products" are"notsimilarly
taxed" isnecessary tofindaviolation ofArticle III:2, second sentence. Yetthisisnotenough. The
dissimilar taxation mustbemore thandeminimis .Itmaybesomuch more thatitwillbeclearfrom
thatverydifferential thatthedissimilar taxation wasapplied "soastoafford protection". Insome
cases, thatmaybeenough toshow aviolation. Inthiscase, thePanel concluded thatitwasenough.
Yetinother cases, there maybeother factors thatwillbejustasrelevant ormore relevant to
demonstrating thatthedissimilar taxation atissue wasapplied "soastoafford protection". Inany
case, thethree issues thatmust beaddressed indetermining whether there issuchaviolation must
beaddressed clearly andseparately ineachcaseandonacase-by-case basis. And, inevery case, a
careful, objective analysis, mustbedoneofeachandallrelevant factsandalltherelevant circumstances
63Panel Report, para6.33.WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
Page31
inorder todetermine "theexistence ofprotective taxation".64Although thePanel blurred itslegal
reasoning inthisrespect, nevertheless weconclude thatitreasoned correctly thatinthiscase,theLiquor
TaxLawisnotincompliance withArticle III:2. AsthePanel did,wenotethat:
...the combination ofcustoms duties andinternal taxation inJapan has
thefollowing impact: ontheonehand, itmakes itdifficult forforeign-
produced shochu topenetrate theJapanese market and,ontheother,
itdoesnotguarantee equality ofcompetitive conditions between shochu
andtherestofwhite’and brown ’spirits. Thus, through a
combination ofhighimport duties anddifferentiated internal taxes,
Japan manages to"isolate" domestically produced shochu fromforeign
competition, beitforeign produced shochu oranyother ofthe
mentioned white andbrown spirits.65
Ourinterpretation ofArticle IIIisfaithful tothe"customary rules ofinterpretation ofpublic
international law".66WTO rules arereliable, comprehensible andenforceable. WTO rules arenot
sorigidorsoinflexible asnottoleave room forreasoned judgements inconfronting theendless and
ever-changing ebbandflowofrealfactsinrealcases intherealworld. Theywillserve themultilateral
trading system bestiftheyareinterpreted withthatinmind. Inthatway,wewillachieve the"security
andpredictability" sought forthemultilateral trading system bytheMembers oftheWTO through
theestablishment ofthedispute settlement system.67
I. Conclusions andRecommendations
Forthereasons setoutinthepreceding sections ofthisreport, theAppellate Body hasreached
thefollowing conclusions:
(a) thePanel erred inlawinitsconclusion that"panel reports adopted bytheGATT
CONTRACTINGPARTIESandtheWTODisputeSettlementBodyconstitutesubsequent
practice inaspecific casebyvirtue ofthedecision toadopt them";
64Japan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages ,BISD 34S/83,
para. 5.11.
65Panel Report, para. 6.35.
66Article 3.2oftheDSU.
67Ibid.WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
Page32
(b) thePanel erred inlawinfailing totakeintoaccount Article III:1ininterpreting
Article III:2, firstandsecond sentences;
(c) thePanel erred inlawinlimiting itsconclusions inparagraph 7.1(ii) on"directly
competitive orsubstitutable products" to"shochu, whisky, brandy, rum,gin,genever,
andliqueurs", which isnotconsistent withthePanel'sTerms ofReference; and
(d) thePanel erred inlawinfailing toexamine "soastoafford protection" inArticle III:1
asaseparate inquiry from"notsimilarly taxed" intheAdArticle toArticle III:2, second
sentence.
Withthemodifications tothePanel'slegalfindings andconclusions setoutinthisreport, the
Appellate Body affirms thePanel'sconclusions thatshochu andvodka arelikeproducts andthatJapan,
bytaxing imported products inexcess oflikedomestic products, isinviolation ofitsobligations under
Article III:2, firstsentence, oftheGeneral Agreement onTariffs andTrade 1994. Moreover, the
Appellate Body concludes thatshochu andother distilled spirits andliqueurs listed inHS2208, except
forvodka, are"directly competitive orsubstitutable products", andthatJapan, intheapplication of
theLiquor TaxLaw, doesnotsimilarly taximported anddirectly competitive orsubstitutable domestic
products andaffords protection todomestic production inviolation ofArticle III:2, second sentence,
oftheGeneral Agreement onTariffs andTrade 1994.
TheAppellate Body recommends thattheDispute Settlement Body request Japan tobring the
Liquor TaxLawintoconformity withitsobligations under theGeneral Agreement onTariffs andTrade
1994.WT/DS8/AB/R
WT/DS10/AB/R
WT/DS11/AB/R
Page33
Signed intheoriginal atGeneva this25thdayofSeptember 1996 by:
________________________
Julio Lacarte-Muró
Presiding Member
__________________ ____________________
James Bacchus SaidEl-Naggar
Member Member