KOREA – TAXES ON ALCOHOLIC BEVERAGES AB-1998-7
Document: Report of the Appellate Body
Date: 18 January 1999
Document codes: WT/DS75/AB/R; WT/DS84/AB/R
Complainant: EU
Respondent: South Korea
Third parties: Canada, Mexico
Dispute stage: Appellate Body
Agreements cited: Art. III:2  GATT 1994

KOREA – TAXES ON ALCOHOLIC BEVERAGES
AB-1998-7
Report of the Appellate Body

APPELLATE BODY
Korea – Taxes on Alcoholic Beverages
Korea, Appellant
European Communities, Appellee
United States, Appellee
Mexico, Third Participant
AB-1998-7
Present:
Matsushita, Presiding Member
Ehlermann, Member
Feliciano, Member
I. Introduction
1. This is an appeal by Korea from certain issues of law and legal interpretation developed in the
Panel Report, Korea – Taxes on Alcoholic Beverages .1 That Panel was established 2 by the Dispute
Settlement Body (the "DSB") to examine the consistency of two Korean tax laws: the Korean Liquor
Tax Law of 1949 and the Korean Education Tax Law of 1982, both as amended (the "measures"),
with Article III:2 of the GATT 1994. The Liquor Tax Law imposes an ad valorem tax on all distilled
spirits. The rate of that tax depends on which of the eleven fiscal categories a particular alcoholic
beverage falls within. The Education Tax Law imposes a surtax on the sale of most distilled spirits,
the rate of the surtax being a percentage of the liquor tax rate applied to the spirit in question. A
detailed description of the operation of these two taxes is to be found at paragraphs 2.1 to 2.23 of the
Panel Report.
2. The Panel considered claims made by the European Communities and the United States that
the contested measures are inconsistent with Article III:2 of the GATT 1994 because they accord
preferential tax treatment to soju, a traditional Korean alcoholic beverage, as compared with certain
imported "western-style" alcoholic beverages. The Panel Report was circulated to the Members of the
 (the "WTO") on 17 September 1998. The Panel "reached the conclusion

1, , 17 September 1998.
2The Panel was established 16 October 1997 with standard terms of reference (see WT/DS75/7,
WT/DS84/5, 10 December 1997) that were based on requests for the establishment of a panel made by the
European Communities (WT/DS75/6, 15 September 1997) and the United States (WT/DS84/4, 15 September
1997).

that soju (diluted and distilled), whiskies, brandies, cognac, rum, gin, tequila, liqueurs and admixtures
are directly competitive or substitutable products." 3 The Panel also concluded that "Korea has taxed
the imported products in a dissimilar manner and the tax differential is more than de minimis" and
that "the dissimilar taxation is applied in a manner so as to afford protection to domestic production."4
The Panel made the following recommendation:
We recommend that the Dispute Settlement Body request Korea to
bring the Liquor Tax Law and the Education Tax Law into conformity
with its obligations under the General Agreement on Tariffs and
Trade 1994.5
3. On 20 October 1998, Korea notified the DSB of its intention to appeal certain issues of law
covered in the Panel Report and legal interpretations developed by the Panel, pursuant to paragraph 4
of Article 16 of the Understanding on Rules and Procedures Governing the Settlement of Disputes
(the "DSU"), and filed a Notice of Appeal with the Appellate Body, pursuant to Rule 20 of the
Working Procedures for Appellate Review (the "Working Procedures"). On 30 October 1998, Korea
filed its appellant's submission.
6 On 16 November 1998, the European Communities and the United
States filed their respective appellees' submissions7 and Mexico filed a third participant's submission.8
The oral hearing, provided for in Rule 27 of the Working Procedures , was held on
24 November 1998. At the oral hearing, the participants and the third participant presented their
arguments and answered questions from the Division of the Appellate Body hearing the appeal.

3Panel Report, para. 11.1.
4Ibid.
5Panel Report, para. 11.2.
6Pursuant to Rule 21(1) of the Working Procedures.
7Pursuant to Rule 22 of the Working Procedures.
8Pursuant to Rule 24 of the Working Procedures.

II. Arguments of the Participants and the Third Participant
A. Korea – Appellant
1. "Directly Competitive or Substitutable Products"
4. Korea contends that the Panel misinterpreted and misapplied the term "directly competitive or
substitutable product", especially the word "directly" which, in Korea's view, is at the heart of the
term at issue. At some level all products are co mpetitive, in that they compete for the consumer's
limited budget, and it is therefore "directly" which gives meaning to the legal text and prevents
Article III:2 from becoming an "unbridled instrument of tax harmonization and deregulation".
(a) Potential Competition
5. Korea claims that the alleged evidence of "potential" competition was essential to the Panel's
finding of a directly competitive or substitutable relationship between the products at issue.
 9
However, Article III:2 does not speak of "potential" competition. Accordingly, it is at least
ambiguous whether "potential" competition is embraced by the second sentence of Article III:2 of the
GATT 1994. Given that ambiguity, Article 19.2 of the DSU and the principles of predictability and
 in dubio mitius should have been respected by the Panel.
6. In Korea's view, the term "directly competitive or substitutable" is not meant to exclude
products that do not compete directly or are not substitutable because of the contested measure itself.
The absence of a competitive relationship on the market concerned should be taken as a powerful
counter-indication that the products involved are not "directly competitive or substitutable". The
Panel, however, has read Article III:2 as covering both products that "are either directly competitive
now or can reasonably be expected to become directly competitive in the near future."
 10 (emphasis
added) In so doing, the Panel relieved the complainants of the need to prove that the lack of actual
competition is caused by the contested measure, and opened the door to speculation about how the
market could evolve in the future, irrespective of the measure in question. Korea warns against
speculation about what consumers might (or might not) do, as opposed to looking at what they
actually do. The Panel repeatedly excused the complainants' failure to produce evidence about actual
competition by saying that preferences in the Korean market might have been frozen by government

9Panel Report, para. 10.97.
10Panel Report, para. 10.48. Korea also refers to paras. 10.40 and 10.73 of the Panel Report.

measures.11 However, Korea points out that, at the time this case was argued, its market had been
open for eight years.
7. Korea contends that the "potential" standard is impermissibly broad and speculative, and the
wording and the purpose of Article III:2 do not permit this interpretation. There is nothing wrong
with requiring complainants to wait until, if ever , their case becomes "ripe" and products actually
compete directly. What if a Member has been forced to change its tax law because products might
compete and then, in fact, they do not? Should that Member return to the panel to request permission
to restore its tax system?
(b) Expectations, the "Trade Effects" Test and the "Nature" of
Competition
8. Korea notes the considerable emphasis the Panel placed on "expectations" of an "equal
competitive relationship" between imported and domestic products.
12 However, Korea argues that
these "expectations" exist only for those products which are "like" or "directly competitive or
substitutable". If products are not currently directly competitive or substitutable, there can be no
relevant expectations with respect to them.
9. The Panel erroneously considered that to "focus on the quantitative extent of competition
instead of the nature of it, could result in a type of trade effects test being written into Article III
cases."
 13 This is a misunderstanding of the "trade effects" test. While past cases held that a lack of
"trade effects" is not a defence to an Article III:2 violation, in those cases the products involved had
 already been shown to be "like" or "directly competitive or substitutable".
10. Korea observes that the Panel referred to th e "nature" of competition many times in its
findings, making statements such as: "the question is not of the degree of competitive overlap, but its
nature."
 14 By examining the nature of competition, the Panel added a vague and subjective criterion
which is not present in Article III:2, and dispensed with the complainants' obligation to show direct
competitiveness or substitutability and also with the need to look at actual markets.

12Panel Report, para. 10.48.
13Panel Report, para. 10.42.
14Panel Report, para. 10.44. Korea also refers to Panel Report, paras. 10.42, 10.44 and 10.66 in this
respect.

(c) Evidence From Other Markets
11. The Panel stated that it could "look at other markets and make a judgement as to whether the
same patterns could prevail in the case at hand." 15 In Korea's view, this amounts to little more than
guesswork and constitutes an impermissible broadening of the scope of Article III:2. The Panel also
disregarded the fact that consumer responsiveness to different products "may vary from country to
country".
16 Moreover, there was no basis for the Panel to assume that the Korean and Japanese
markets were, or were becoming, the same. Korea further contends that, even if evidence from other
markets were relevant, the Panel should not have limited itself to looking at only one other country's
market. To ensure a balanced view, evidence from more than one other market ought to have been
reviewed.
12. Korea submits that all of the above misinterpretations of Article III:2 constitute a violation of
provisions of the DSU and general principles of law, namely, the principle that neither panels nor the
Appellate Body can add to or diminish the rights and obligations provided in the covered agreements
(Article 19.2 of the DSU), the principle of predictability, and the principle of in dubio mitius.
(d) Grouping of the Products
13. Korea stresses the importance of the methodology used to compare domestic and imported
products under Article III:2. It considers that the Panel committed a major legal error in wrongly
defining the comparison it had to undertake. The Panel grouped together products that are not
physically identical; are produced in different ways by different manufacturers using different raw
materials; taste differently; are used differently; are marketed and sold differently at considerably
different prices and are subject to different tax rates in Korea. The Panel also failed to carry out a
separate analysis for diluted and distilled soju.
17 Korea urges that the Panel erred in conducting its
analysis on the basis of an agglomeration of the characteristics of two such different products. To
extend conclusions that are primarily based on diluted soju to distilled soju is unacceptable logic.
Further, by treating diluted soju and distilled soju together, the Panel overlooked the relevance of the
considerable price differential between diluted soju and whisky.

15Panel Report, para. 10.46.
16Panel Report, Japan – Taxes on Alcoholic Beverages ("Japan – Alcoholic Beverages "), WT/DS8/R,
WT/DS10/R, WT/DS11/R, adopted 1 November 1996, para. 6.28.
17Panel Report, para. 10.54.

14. Korea points out that the Panel decided to treat all the imported distilled spirits as one group.18
In Korea's view, the Panel's decision to group all these beverages together was, in effect, a decision
(or at least a presumption) that they are directly competitive or substitutable everywhere, without
considering whether that was true in the Korean market. By grouping all the imported beverages
together, the Panel made it impossible to appreciate the differences between the imported products.
The Panel could not, for example, conclude that in Korea diluted soju was directly competitive or
substitutable for vodka, but not whisky.
15. Korea acknowledges that when the Panel considered the product characteristics, it examined
the products in the group one by one. But the Panel dismissed as insignificant, differences between
the products regarding such characteristics as colour, taste and price. In so doing, the Panel
"trivialized" actual consumer perceptions which are at the heart of the "directly competitive or
substitutable" standard. The erroneous approach adopted by the Panel makes it impossible to
determine what the outcome of the case would have been if the Panel had not erred at the outset.
2. "So As to Afford Protection"
16. According to Korea, the Panel erred in findin g that the Korean taxes had a protective effect
mainly on the basis of an analysis of the structure of the law itself. The Panel ignored Korea's
explanation for the structure of the law.
19 The Panel also made too much of the fact that there is
virtually no imported soju, overlooking the fact that there has simply been a lack of interest abroad in
the manufacture of these typically Korean products. More importantly, the Panel did not follow the
Appellate Body's ruling in Japan – Alcoholic Beverages , to the effect that, even though the tax
differential may, in some cases, show that the tax is applied "so as to afford protection", "in other
cases, there may be other factors that will be just as relevant or more relevant to demonstrating that
the dissimilar taxation was applied 'so as to afford protection'."
 20 (emphasis added)
17. Korea reiterates the argument it made before the Panel that, in view of the large, intrinsic pre-
tax price-differences between diluted soju and the imported products at issue, the tax differential
cannot be said to have the effect of "afford[ing] protection" to diluted soju. Where the price-
difference between two products is so significant, the additional difference created by the variation in

18Panel Report, para. 10.60.
19Korea's explanation of the structure of its tax regime is set out at paras. 5.172 to 5.181 of the Panel
Report. In its arguments before the Appellate Body, Korea placed particular emphasis on the arguments
summarized at para. 5.176 of the Panel Report.
20Adopted 1 November 1996, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, p. 30.

tax can have no protective effect. Korea also maintains that demand for distilled soju is specific and
static, and that it would not be affected a great deal by altering the price, especially not to the degree
at issue in this case. Korea, therefore, claims that the tax differential does not "afford protection" to
distilled soju, contrary to the conclusion reached by the Panel.
3. Application of Article III:2 of the GATT 1994
18. Korea submits that the Panel erred in several ways when assessing the evidence. While Korea
recognizes that appellate review is limited to questions of law, it considers that, in reviewing a panel's
interpretation and application of Article III:2, second sentence, the Appellate Body cannot avoid
considering the factual underpinnings of the panel's assessment. In this case, the Panel drew
conclusions which the evidence before it did not support. Errors of this type were decisive in the
adjudication of the dispute in favour of the complainants, and thus constitute reversible legal errors.
19. The Panel also erred in applying different standards of proof to the evidence. The Panel was
far more exacting when looking at evidence subm itted by Korea than when considering evidence
brought by the complainants. The Panel, in effect, applied a "double standard of proof
 ".21 The Panel
also misapplied the requirements on the burden of proof which follow from the Appellate Body
Report in United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India
("United States – Shirts & Blouses").22
20. Despite evidence to the contrary provided by Korea, the Panel relied upon the notion that
consumer preferences in the Korean market might have been frozen by the measures at issue. By so
doing, the Panel unfairly put Korea in the position of having to prove a negative -- that the lack of
competition was not due to the contested measures -- rather than requiring the complainants to prove
positively that consumer preferences in Korea had been frozen.

22Adopted 23 May 1997, WT/DS33/AB/R, WT/DS33/R, p. 14.

(a) Product Characteristics
21. Korea notes that the Panel found that "[a]ll the products … have the essential feature of being
distilled alcoholic beverages." 23 In essence, the Panel considered this sufficient to raise a
presumption that all distilled alcoholic beverages are "directly competitive or substitutable". Korea
disagrees that such a generic statement could give rise to a presumption of this type. The Panel erred
in dismissing the importance of flavour in a case concerning beverages. The flavour of products is
one of the consumer's primary considerations wh en choosing a beverage and distinctions between
flavours are, therefore, not "minor"
 24 from the consumer's perspective.
22. The Panel's focus on the fact that all the alcoholic beverages at issue are produced by
distillation means that certain industrial products (e .g., paint thinner) or medicinal products (e.g.,
rubbing alcohol) would also be in a directly co mpetitive or substitutable relationship with the
beverages in question. Similarity in raw materials and the methods of production are, therefore,
meaningless in defining a directly competitive or substitutable relationship between products.
23. That the Panel applied a "double standard of proof" is shown by its rejection, on the one hand,
of Korea's example of bottled and tap water, which Korea believes demonstrated that close physical
similarity is not always probative evidence of a directly competitive or substitutable relationship. On
the other hand, the Panel relied on the United States' example of branded and generic aspirin to show
that physical similarity was highly significant. Moreover, the Panel dismissed Korea's bottled and tap
water example, in part, because it refered to "different products in different countries" .
25 Yet, in
another part of its Report, the Panel said that evidence from "other countries" was relevant.26
(b) End-Uses
24. Before the Panel, Korea showed that, in Korea, the overwhelming end-use of diluted soju is
consumption during meals whereas western-style drinks are hardly ever consumed with meals. The
Panel, however, found that this distinction did not suffice to prevent the products from being
considered as directly competitive or substitutable.
27 Korea believes the Panel erred, both as to the
application of Article III:2 and as to requirements of the burden of proof, in accepting that all the
beverages at issue were drunk for the same purposes, inter alia , socialization and relaxation. In

23Panel Report, para. 10.67.
24Ibid.
25Panel Report, para. 9.23.
26Panel Report, para. 10.45.
27Panel Report, para. 10.76.

reaching this finding, the Panel drew upon three sources: (a) trends and anecdotal evidence;
(b) marketing strategies; and, (c) the presence of admixtures.
25. The Panel placed emphasis on "trends and changes in consumption patterns" 28 which it said
were demonstrated in the Nielsen Study and the Dodwell Study. However, neither of these studies
nor the Trendscope Study contains evidence of trends. They show, instead, a "snapshot" of the
market at a particular moment in time; they do not show changes over time. The Panel erred in
considering that these studies contained evidence of trends, and the Panel's statements amount to
mischaracterization of the evidence presented. Moreover, the Panel erred in speculating that those
trends were "likely to continue",
29 without pointing to any supporting evidence.
26. Korea argues that the Nielsen Study was used "selectively" by the Panel. For example, even
if it showed some overlap in beverages available in Japanese and western-style restaurants, it also
showed that in the large majority of outlets th ere was no overlap. Thus, the overlap shown in the
Nielsen Study is very limited and, in light of contrary evidence, cannot be considered as conclusive
proof of the similarity of end-uses between the drinks at issue. In other words, the overall
consumption pattern sufficiently rebuts any presumption of common end-uses raised by the minor
overlap indicated by the Nielsen Study. The same is true of the figures given in the Nielsen Study for
home-consumption of alcoholic beverages with meals. Even if 5.8 per cent of respondents stated that
they drink whisky with their meals, that still leaves 94.2 per cent who do not. This evidence supports
Korea's argument regarding the "meal" end-use of particular alcoholic beverages. Instead, it was
turned around to become evidence of "overlap" in end-use. The speculation engaged in by the Panel
was made worse by the Panel's consideration of trends on the Japanese market.
27. The Panel's treatment of Korean companies' marketing strategies discloses again a "double
standard of proof
 ". Where the Panel considered that marketing strategies supported a finding that the
products were "like" or "directly competitive or substitutable", they became important evidence 30,
whereas the Panel dismissed evidence from marketing strategies that it considered did not support
such a finding.
31
28. The Panel also erred when assessing the evidence submitted concerning admixtures. Korea
argued that diluted soju and distilled soju are consumed "straight" in Korea (unlike some of the

28Panel Report, para. 10.48.
29Panel Report, para. 10.76.
30Panel Report, para. 10.79.
31Panel Report, paras. 10.65 and 10.66.

imported beverages at issue in this case), a fact borne out in its market study.32 That soju cocktails are
different from diluted soju and distilled soju is refl ected in Korea's tax law. Korea maintains that the
presence of diluted soju in admixtures cannot support a finding of similarity with other drinks which
are drunk in a mixed form, just as the existence of Bailey's 33 is not proof that whisky is often drunk
mixed. Like Bailey's and whisky, diluted soju, distilled soju and admixtures are different drinks and
are treated as such under the Liquor Tax Law. The Panel wrongfully rejected Korea's point which
rebutted the evidence on admixtures.
(c) Channels of Distribution
29. While recognizing that channels of distribution are revealing for a market structure, the Panel
wrongly dismissed Korea's distinctions regarding on-premise consumption, and thereby erred in its
assessment of the evidence.
30. The essence of Korea's argument was that most of the volume of diluted soju and of western-
style drinks was sold and consumed in different types of outlets. This was borne out by the Nielsen
Study which clearly shows that, except in the case of Japanese restaurants and café/western-style
restaurants, there was no overlap for on-premise consumption. Before the Panel, the United States
responded to this by noting that that their embassy personnel knew of nine "traditional Korean-style
restaurants" in Seoul serving both whisky and soju. Korea argues that the Panel should not have
dismissed Korea's evidence about differences in places of consumption on the basis of evidence
concerning nine restaurants, provided by the United States' embassy personnel.
31. The Panel also applied "double standards" to the evidence Korea and the complainants
supplied on this issue. While Korea presented a market survey covering 320 restaurants that showed
that there are different channels of distribution for the drinks in dispute, the Panel accepted the
anecdotal evidence produced by the United States about only nine Korean restaurants.

32See in particular Panel Report, paras. 5.268 and 5.273.
33Panel Report, para. 7.11. Bailey's Irish Cream is an alcoholic beverage which is a mixture of whisky
and cream.

(d) Prices
32. Korea considers that the large, undisputed price differences between diluted soju and the
imported beverages are key elements of evidence, and that the larger the price difference between two
products, the less influence a change in the price of one will have on the demand for the other. In the
present case, there is no price overlap between diluted soju, including its premium version, and any of
the western-style drinks.
33. Korea believes that the only evidence on consumer responsiveness to changes in prices which
was submitted by the complainants was the Dodwell Study. But Korea raised "fundamental
objections" about the Dodwell Study before the Panel, and the Study is so flawed that it should have
been rejected. The Panel erred in failing to reco gnize the weaknesses in the Study. Korea notes that
the Panel considered the Dodwell Study "helpful evidence"
 34 sufficient to raise a presumption of a
directly competitive or substitutable relationship, and rejected the "hard evidence" Korea had
submitted in rebuttal. The Panel, therefore, wrongly allocated the burden of proof and also applied a
"double standard" since it was lenient with the complainants' evidence, but strict with Korea's rebuttal
evidence.
34. Korea contends that the evidence of the large price differences between diluted soju and most
of the imported beverages is sufficient to rebut the complainants' claims about the existence of a
directly competitive or substitutable relationship between the imported and domestic beverages.
However, the Panel essentially disregarded the evidence and did not address Korea's argument that
the absolute price differences were so great that behavioural changes were unlikely.
35. When stating that premium diluted soju was a "fast growing category"
35, the Panel neglected
Korea's evidence. Korea had emphasized during the second meeting with the Panel that premium soju
production was declining, apparently as a result of Korean consumers' unwillingness to pay more for
an up-market version of diluted soju.
36. According to the Panel, cognac is a directly competitive or substitutable product for standard
diluted soju even though, before any tax is applied, the products differ in price by a factor of 20.
36
Admittedly, for some of the western-style beverages, the price differential from soju is smaller, and
even negative (e.g. distilled soju as compared to standard whisky). However, the Panel did not

34Panel Report, para. 10.92.
35Panel Report, para. 10.94.
36This factor is based on the prices of the Dodwell Study. However, the Panel mentions an even higher
price difference: a factor of 24 (Panel Report, footnote 408).

distinguish between types of product and concluded broadly that "the price differences [were] not so
large as to refute the other evidence". 37 Korea believes that in the case of consumer products, to say
that an actual price difference of a factor of 10 or 20 is insufficient to refute hypothetical evidence on
competition, such as the Dodwell Study, flies in the face of common sense and shows that the Panel
wrongly applied Article III:2.
(e) Treatment of Tequila
37. Korea observes that, although virtually no evidence on tequila was submitted by either the
complainants or the third party, the Panel found th at Korea had violated Article III:2 with respect to
this beverage. The United States identified tequila as one of the products covered by the measures at
issue, and tequila was included in the Dodwell Study presented by the European Communities.
Mexico also made certain descriptive comments concerning the physical characteristics, tariff
classification and patterns of consumption of tequila and mescal. The Panel included tequila in its
examination because evidence was presented with respect to it
 38, although it excluded mescal which
"was mentioned without positive evidence" being provided. 39 The only additional elements
concerning tequila were statements made by the complainants that tequila is drunk with spicy food in
Mexico, that tequila is becoming popular in Japan
40 and that tequila was included in the Dodwell
Study. Korea considers the evidence on tequila to be insufficient to give rise to a presumption of a
directly competitive or substitutable relationship with soju.
38. The Panel made no attempt to analyze what th e Dodwell Study actually said. The Dodwell
Study shows that consumers responded inconsistently to a possible price change for tequila. In fact, it
even appears from the Dodwell Study that demand for tequila may not change if its price were
lowered. The Panel, nonetheless, concluded that there was evidence that consumers were sensitive to
relative price changes of soju and tequila.

37Panel Report, para. 10.94.
38Panel Report, para. 10.58.
39Ibid.
40Panel Report, paras. 5.72 and 6.182.

4. Article 11 of the DSU
39. Korea submits that, contrary to Article 11 of the DSU, the Panel failed to apply the standard
of review appropriate to an Article III:2 dispute. Korea maintains that, in this case, the Panel simply
did not have sufficient evidence to enable it to conduct an "objective assessment" and, instead, relied
on speculation. The Panel also failed to accord due deference to Korea's description of its own
market. Korea believes that, when faced with conflicting descriptions of a foreign market, a panel
should be very careful in making assertions about what this market is like and should certainly not
engage in speculation about its possible future development. Where there was disagreement between
the parties about the Korean market, the Panel shou ld have accepted Korea's description, unless the
complainants brought compelling evidence to the contrary.
40. Despite its "strong misgivings" about the Panel Report, Korea states that it does not assert that
the Panel acted in bad faith. However, Korea believes that the matters it has raised under Article 11
of the DSU are, nonetheless, serious enough to merit reversal of the Panel's conclusions.
5. Article 12.7 of the DSU
41. Finally, Korea claims that the Panel failed to fulfil its obligation under Article 12.7 of the
DSU. Korea considers much of the Panel's reasoning to be obscure, making it very difficult to
determine the evidence the Panel relied upon in reaching its conclusions and the weight it gave to
different evidence and arguments. In addition, the Panel Report is also "unacceptably vague". The
Panel relies upon open-ended concepts, such as "potential" competition in the "near term", "potential"
end-uses and the "nature" of competition, to support its conclusions which can be stretched to cover
any outcome. Furthermore, certain evidence, such as the Sofres Study, was simply ignored without
the Panel giving reasons therefor. The inadequate reasoning, in Korea's view, also prevented the
Panel from making an objective assessment under Article 11 of the DSU.

B. European Communities - Appellee
1. "Directly Competitive or Substitutable Products"
42. The European Communities submits that Korea's appeal is grounded on the erroneous premise
that the term "directly competitive or substitutable" must be interpreted "strictly". That proposition
finds no support in the GATT, in its drafting histor y or in previous panel reports. As noted by the
Panel, the drafting history of Article III:2 suggests that the drafters had in mind a rather broad notion
of "directly competitive or substitutable" products, that could include apples and oranges.
41
Furthermore, the Korean argument that Article III:2, second sentence, must be interpreted "strictly" is
equally applicable to virtually any GATT provision.
(a) Potential Competition
43. The European Communities believes that the Pa nel's finding that there is "present direct
competition" between the imported beverages and soju 42 would be sufficient to conclude that those
products are "directly competitive or substitutable". The additional finding of "a strong potentially
direct competitive relationship" provides further support for that conclusion but is not indispensable.
44. In any event, the Panel's analysis of the eviden ce of "potential" competition is consistent with
the wording of Article III:2, its object and purpose, as well as previous Appellate Body and panel
reports. Korea relies on the fact that neither Article III:2 nor the Ad Article mention "potential"
competition. But nor do they mention "actual" co mpetition. In the European Communities' view,
potential competition is "competition", both in the ordinary economic sense and within the meaning
of the Ad Article. The use in the Ad Article of the words "competitive" (rather than "competing")
and "substitutable" (instead of "substitute") is a further indication that the drafters envisaged the
application of Article III:2 in the case of both "actual" and "potential" competition. The French and
Spanish texts also support this view.
45. To the European Communities, the relevance of potential competition flows directly from the
fact that Article III does not protect export volumes but expectations of an equal competitive
relationship. The prohibition against protective taxation applies even if there are no imports of
"directly competitive and substitutable" products. Korea's insistence on the existence of actual
competition is, therefore, inconsistent with the proper interpretation of Article III:2. Korea's "but for"

41See Panel Report, para. 10.38.
42Panel Report, para. 10.98.

test is an admission that potential competition is re levant in some circumstances, but that test is too
restrictive and finds no support in Article III:2, second sentence.
(b) Evidence From Other Markets
46. A determination of whether two products are "directly competitive or substitutable" must be
made on a case-by-case basis and in respect of the market of the Member applying the contested tax
measures. Nevertheless, other markets may provide a strong indication of the nature of the
competitive relationship between the products in the market at issue. This may be particularly true in
cases where there is either very little or no actual competition on the market at issue. In the present
case, the Panel made very limited use of evidence drawn from third country markets. The Panel
looked at evidence from the Japanese market to corroborate findings made concerning the Korean
market. Although the Panel could have looked at other markets in addition to the Japanese market,
that was not necessary.
47. The European Communities contends that Korea' s interpretation of Article III:2 diminishes
the rights of Members. Furthermore, the principle in dubio mitius is a supplementary method of
interpretation that applies only where there is a genuine ambiguity. That is not the case here. Finally,
the Panel's interpretation promotes "predictability".
(c) Grouping of the Products
48. The European Communities views the Panel's decision on how to group the products as a
methodological one made for analytical purposes only. It does not involve any interpretation of
Article III:2 and does not, therefore, raise any "question of law" which could form the subject of an
appeal, unless the Panel failed to make an "objective assessment" of the facts.
49. Contrary to Korea's assertions, the Panel did not find that distilled soju and diluted soju were
directly substitutable and competitive products. The Panel held that if diluted soju were found to
be directly competitive or substitutable with imported spirits, it would follow necessarily that distilled
soju, which is more similar to imported spirits, would also be directly competitive or substitutable
with those spirits.
43 Korea has not challenged the premise underlying the Panel's reasoning.

43Panel Report, para. 10.54.

50. The European Communities contends that, in d eciding to consider together all imported
beverages, the Panel did not anticipate the outcome of the case nor did it find that the imported
products were directly competitive or substitutable inter se. Korea has not shown that applying a
different analytical approach would have led to a different result. There is no significant difference
between Korea's strict product-by-product approach and the Panel's method. In practice, the Panel
switched to a product-by-product approach whenever there were differences between the imported
spirits in respect of a particular criterion.
2. "So As To Afford Protection"
51. According to the European Communities, the Panel's finding that Korea's measures are
applied "so as to afford protection to domestic production", is based on three factors: the sheer
magnitude of the tax differential, the lack of rationality of the product categorization, and the fact that
there were virtually no imports.
44 There is no indication in the Panel Report that the Panel considered
the second of these three factors to be particularly important.
52. Korea has not explained why it was necessary to add a series of exceptions to the definition of
soju which resulted in the most important categories of imported spirits being placed in a much higher
tax bracket than soju. The reasons why there are no imports of soju are irrelevant. What matters is
that, in practice, imports of soju are and always have been negligible.
53. The European Communities considers the Korean argument that the measures do not
appreciably change the competitive opportunities of the imported products to be factually wrong. In
any event, comparing pre-tax price-differences is not sufficient to take account of all possible price
distortions caused by the measures.
45 Furthermore, prices may be affected by extraneous factors, such
as fluctuations in exchange rates.46
54. The European Communities argues that the "so as to afford protection" requirement is
concerned exclusively with whether the contested measures protect domestic production and not with
 how much protection is afforded. If two products are directly competitive or substitutable, then any
tax differential which is more than de minimis may affect the competitive relationship between the

44Panel Report, paras. 10.101 and 10.102.
46Ibid.

products and, as a result, "protect" the less taxed product. The only remaining issue is whether
protecting the less taxed product favours "domestic production".
3. Application of Article III:2 of the GATT 1994
55. The European Communities asserts that Korea's claims under this heading do not raise any
"question of law", but only factual issues which, in principle, are not subject to appellate review.
These claims can only be considered by the Appe llate Body under Article 11 of the DSU. However,
an appellant invoking this ground of appeal must show that the Panel abused its discretion in a manner
which attains a "certain level of gravity".
47 The European Communities contends that the Panel did
not make the errors Korea alleges. However, even if Korea could demonstrate that the Panel
committed those errors, they would not come close to constituting "egregious errors that call into
question the good faith of the Panel".
48
(a) Product Characteristics
56. According to the European Communities, Korea's argument that flavour is one of the
consumer's primary considerations when choosing a beverage is flawed. If two products are nearly
identical, the consumer's choice between them will necessarily turn on very minor differences. For
instance, the only reason for choosing a green necktie instead of a red necktie is the colour. Yet,
colour remains a relatively minor feature of neckties and differences in colour do not prevent neckties
from being "directly competitive and substitutable".
57. Korea also considers that the Panel erred in relying on the "commonality of raw materials"
and the similarity of manufacturing processes as a decisive criterion. In the European Communities'
view, Korea improperly characterizes the Panel's reasoning. The Panel stated in unequivocal terms
that "commonality of raw materials" is a relevant factor, but not a dispositive one. Nor did the Panel
consider that the similarity of manufacturing processes is, in and of itself, decisive.
58. The European Communities does not accept that Korea's tap and bottled water example is
comparable with that of generic and branded as pirin. Generic aspirin and branded aspirin are

47European Communities' appellee's submission, para. 68, citing Appellate Body Reports in European
Communities – Measures Affecting the Importation of Certain Poultry Products (" European Communities –
Poultry"), WT/DS69/AB/R, adopted 23 July 1998 and EC Measures Concerning Meat and Meat Products
(Hormones) ("European Communities – Hormones "), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February
1998.
48European Communities – Hormones, supra, footnote 47.

identical or nearly identical products, even if they are marketed differently. Tap water and bottled
water have the same appearance, but it may be highly questionable whether they have close physical
characteristics.
(b) End-Uses
59. The European Communities argues that the Nielsen Study refutes Korea's assertions on
consumption patterns of soju and western-style spir its. It showed that some consumers drank whisky
with their meals and that soju is not always drunk with meals. The Trendscope survey confirmed that
western-style spirits are sometimes consumed with meals. The Panel did not base its conclusion that
soju and western-style spirits have similar end-uses on the Nielsen Study's finding that 6 per cent of
consumers drank whisky with their meals. Rather, the Panel rejected the relevance of the narrow
distinction between consumption with meals and w ithout meals, and also between consumption with
"snacks" or with "meals".
49
60. The European Communities disagrees with Korea th at there is a contradiction in the Panel's
treatment of marketing strategies. Although the Panel stated that marketing strategies can be used to
create primarily perceptual distinctions between products, it also stated that marketing strategies can
be useful tools for analysis if they highlight fundamental product distinctions or similarities.
 50 The
Panel thereafter relied on marketing strategies that highlight underlying product similarities.51
61. The European Communities recalls that the complainants adduced evidence before the Panel
that certain pre-mixed drinks contained soju, thereby refuting Korea's claim that soju is always drunk
straight. Whether pre-mixes are considered as soju or as liqueurs for tax purposes is altogether
irrelevant. Pre-mixed "gin and tonic", "whisky and cola" or "piña colada" would not be classified as
whisky, gin or rum. Yet, their very existence constitutes irrefutable evidence that some consumers like
to drink those spirits mixed with non-alcoholic beverages.

49Panel Report, para. 10.76.
50Panel Report, para. 10.65.
51Panel Report, para. 10.79.

(c) Channels of Distribution
62. The Panel relied on the "anecdotal" evidence provided by the United States embassy staff to
show that Korea was drawing distinctions which were too fine. The Panel's reasoning, in the
European Communities' view, was that the only relevant distinction was between off-premise
consumption (i.e. consumption at home or at fr iends' places) and on-premise consumption (i.e.
consumption at public places such as restaurants and bars).
52 Korea does not challenge the Panel's
finding that both soju and western-style spirits are currently sold in a similar manner for off-premise
consumption. Nor has Korea disputed that off-premise consumption represents a substantial share of
total consumption. Further, if western-style spirits were taxed similarly to soju, more people would
drink them in inexpensive public places than at present.
(d) Prices
63. The European Communities notes that Korea does not challenge the Panel's view that
consumer responsiveness to changes in relative prices is, in principle, more relevant than a
comparison of absolute prices when assessing whether products are directly competitive or
substitutable. Korea argues that premium soju "only represents 5 per cent of the market". To put
things in perspective, the European Communities recalls that the total sales volume of premium
diluted soju exceeds the combined sales volume of all imported spirits.
64. Korea also claims that the Panel "wilfully neglected"
 53 Korea's evidence when it observed
that premium diluted soju was a "fast growing category" 54 of product. The Panel, however,
responded to Korea's arguments during the interim review, stating that, although sales had slowed,
that was true for all higher priced products and was a consequence of the financial crisis. In any
event, Korea did not submit evidence to show that sales of premium diluted soju had decreased.
65. Korea's arguments concerning the Dodwell Study seek, purely and simply, a de novo
examination by the Appellate Body of facts already determined by the Panel. Korea's critique of the
Dodwell Study's methodology was refuted point-by-point by the European Communities in its
submissions to the Panel, and the European Communities does not consider it necessary to repeat
those arguments on appeal.

52Panel Report, para. 10.86.
54Panel Report, para. 10.94.

66. The European Communities underlines that the authors of the Sofres Report, who also
prepared the Dodwell Study, assumed that all spir its were part of the same market. Although
overlooked by Korea, this Report also states that imported beverages are increasingly preferred by
Koreans. The passages Korea relies on have been quoted out of context.
(e) Treatment of Tequila
67. The Panel's finding that tequila and soju are "directly competitive or substitutable" products
was based on the similarity of their physical characteristics and end-uses.
55 In addition, the Panel
relied upon the Dodwell study.
4. Article 11 of the DSU
68. In respect of Korea's assertion that the Panel failed to accord due deference to Korea's
description of the Korean market, the European Co mmunities states that the "deferential" standard of
review advocated by Korea finds no support in either the DSU or the GATT 1994. As stated by the
Appellate Body
56, the appropriate standard of review for the application of the GATT 1994 and of all
other covered agreements (with the sole exception of the Agreement on the Implementation of
Article VI of GATT 1994) is contained in Article 11 of the DSU. A different standard of review would
alter a "finely drawn balance".57
5. Article 12.7 of the DSU
69. This ground of appeal does not raise any issue that has not been addressed already.

55Panel Report, para. 10.58.

C. United States - Appellee
1. "Directly Competitive or Substitutable Products"
70. The United States observes that many of Korea's complaints in this case relate to questions of
fact. Each allegation must be examined to determine whether it concerns a legal question that may be
the subject of appellate review.
(a) Potential Competition
71. According to the United States, the Panel followed the Appellate Body's guidance in
Japan - Alcoholic Beverages that the breadth of the category of "directly competitive or substitutable"
products "is a matter for the panel to determine based on all the relevant facts", and that product
comparisons "involve an unavoidable element of individual, discretionary judgment."
 58
72. The United States considers that the concepts of "potential" and "actual" competition are
redundancies. Competition may be shown by many means, including through a demonstration that
current substitution is occurring or through the inherent degree of substitutability evidenced by the
products' similar physical characteristics and basic end-uses.
73. Contrary to Korea's claims, the United States observes that the Panel did not rely exclusively,
or even mostly, on evidence of potential competition. The Panel's reference to "significant potential
competition"
 59 does not detract from the fact that it concluded that there was evidence of "present
direct competition".60
74. In any event, the Panel was correct to consider evidence of potential competition in
concluding that the imported products and the domestic products were "directly competitive or
substitutable". Korea's argument to the contrary finds no support in the ordinary meaning of the
relevant GATT 1994 provisions, taken in their context and read in light of their object and purpose,
nor is it consistent with past panel and Appellate Body reports.

58Appellate Body Report, Japan – Alcoholic Beverages, supra, footnote 20, pp. 25 and 21.
59Panel Report, para. 10.97.
60Panel Report, para 10.98. The United States also refers to Panel Report, paras. 10.71 – 10.73, 10.79,
10.82, 10.83, 10.86 and 10.95, all of which refer to aspects of current competition between the products.

75. According to the United States, the purpose of the provisions at issue is to prohibit protective
taxation. The word "substitutable" clearly shows that Article III:2, second sentence, applies in the
case of "potential substitution" (i.e. where products are able to be substituted). The French and
Spanish texts of the provision support this readin g. Likewise, the ordinary economic sense of the
word "competition" is not limited to actual instances of observed substitution. The phrase
"competition was involved"
61 must be read as referring to situations where competition -- both current
and potential -- is present.
76. Article III:2 protects "expectations" and Members' "potentialities" as exporters. The Panel
was, therefore, correct to reject Korea's argument for a quantification of current substitution. A
complete absence of imports is not a defence in the case of a violation of Article III and a particular
degree of current market penetration of imports should not, therefore, be required.
77. The Panel was also correct, the United States believes, to consider that evidence from other
markets could be "relevant, albeit of less relative evidentiary weight" than evidence from the market
actually at issue.
62 Indeed, evidence from another market may be highly probative, whereas evidence
from the market at issue may be unreliable beca use of protection. Although the Panel could have
considered more than one other market, it may have felt it most relevant and useful to consider the
Japanese market, given its history of restrictions and the structure of its tax laws which appear similar
to those of the Korean market. The United States also notes that the Panel's decision to consider other
markets is consistent with broader GATT practice.
63
78. The United States views Korea's arguments concerning Article 19.2 of the DSU, the principle
of in dubio mitius and the so-called principle of "predictability" as aids to the interpretation of
Article III rather than as independent claims. In any event, the United States argues that it is Korea's
interpretation which would violate Article 19.2 of the DSU and the principle of predictability.
Furthermore, the principle in dubio mitius only applies in case of ambiguity, and there is none here.
(b) Grouping of the Products
79. The United States contends that the Panel properly examined extensive evidence concerning
the categorization of products, including physical characteristics, end-uses, channels of distribution

61Ad Article III:2, second sentence.
62Panel Report, para. 10.78.
63The United States refers, in particular, to Panel on Poultry , GATT Doc. L/2088, unadopted report
issued 21 November 1963, para. 10, and Japan - Restrictions on Imports of Certain Agricultural Products ,
BISD 35S/163, adopted 22 March 1988, para. 5.1.3.7.

and points of sale, and prices. The Panel's determinations with regard to the "grouping" of products
was an analytical methodology that was not used to "prejudge the substantive discussion". Moreover,
the Panel also analyzed the competitive relationship between individual categories of imported and
domestic products. Thus, the use of the "analytical tool" had no practical repercussions on the
outcome of the case.
80. Korea's objections to the Panel's decision to "combine" diluted and distilled soju for the
purposes of the comparison with imported spirits amount to a disagreement with the Panel's finding
that the two types of soju are similar. Pursuant to Article 17.6 of the DSU, such issues cannot,
however, form the subject of an appeal.
2. "So As To Afford Protection"
81. The Panel analyzed the protectionist character of the measures in a manner consistent with the
guidance given by the Appellate Body in Japan – Alcoholic Beverages. The three factors relied upon
by the Panel were: the size of the tax differentials, the structure of the Liquor Tax Law and its
application. The United States observes that Korea's explanation of the structure of the tax provides
no objective reason to tax the domestic and imported products at issue so differently, given the very
minor physical differences between them. The fact that detailed product definitions, corresponding to
the western beverages, were introduced over time s hows a specific intent to apply different fiscal
treatment to soju and imports as the imports entered the Korean market. The fact that there was no
imported soju shows only that the design of the law can be safely equated with protection of domestic
production.
82. To the United States, Korea's argument that the large price differences between diluted soju
and the imported products prevented the tax measures from affording protection is specious. First, the
magnitude of the tax differentials itself can be sufficient to conclude that there is a protective effect.
Second, the Panel had already made a factual finding that, despite the large price differentials, the
products were directly competitive or substitutable. Third, since the tax differentials exceeded de
minimis levels, there is no factual or legal basis to argue that the measures are incapable of affording
protection.
3. Application of Article III:2 of the GATT 1994
83. According to the United States, Korea's request to have the Appellate Body review the
"misapplication of the facts" and Korea's arguments under various articles of the DSU and

international law principles amount, in essence, to an attempt to relitigate the facts. To the extent that
Korea has raised any legal claims, for instance, specific violations of Article 11 and 12.7 of the DSU,
these are without basis and would, if accepted, undermine Article 17.6 of the DSU.
84. Korea alleges that the Panel refused to recogn ize that the complainants did not satisfy the
burden of proof requirements. According to the United States, these arguments amount to an
objection to the Panel's weighing of the evidence.
4. Article 11 of the DSU
85. In short, to establish that the Panel has failed to discharge its duties under Article 11 of
the DSU, Korea must show that the Panel committed an error so egregious that it calls into question
the "good faith" of the Panel. This is a high standard and appropriately so. As Korea concedes, its
allegations concerning the facts do not call into question the Panel's good faith. Therefore, none of
Korea's allegations meet the requisite standard for a violation of Article 11 of the DSU.
86. Nevertheless, Korea asks the Appellate Body to look beyond instances of bad faith. In
particular, Korea asks the Appellate Body to lower the present standard by introducing new criteria
for the term "objective assessment". The Appellate Body should reject these proposals as they would
require it to undertake a de novo factual review, thereby contradicting Article 17.6 of the DSU.
87. Korea's criticisms of the Dodwell Study and the Sofres Report basically find fault with the
credibility and weight given to a piece of evidence, which the Appellate Body has confirmed is "part
and parcel of the fact finding process".
64 Although the Panel does not explicitly mention the Sofres
Report in its findings, the Panel is clearly aware of that Report. It is mentioned in the Panel Report
and is quoted extensively in Korea's oral arguments.
65
88. Korea's allegations concerning the application of a "double standard" of proof relate largely to
the Panel's appreciation of the evidence before it. Korea's argument that the Panel did not have
enough evidence to enable it to conduct an objective assessment is, essentially, an objection to the
sufficiency of the evidence before the Panel. This is, again, a criticism of the weight and credibility of
the facts.

65See, for example, Panel Report, paras. 6.121 and 6.125.

89. While the United States agrees that a country's description of its own market and culture
should be respected, there is no basis in the DSU for Korea's claim that, in the event of a disagreement
about the Korean market, the Panel should accept Korea's descriptions unless the complainants submit
compelling evidence to the contrary. Moreover, this is a standard never before contemplated in any
panel or Appellate Body report.
5. Article 12.7 of the DSU
90. The term "basic rationale" is not defined in the DSU. Under Article 31(1) of the Vienna
Convention on the Law of Treaties 66, the text of a provision is to be given its "ordinary meaning".
Dictionary definitions emphasize the minimal nature of the explanation required by Article 12.7 of
the DSU.
67
91. Given the ordinary meaning of these terms, the United States sees no basis for Korea's
allegation that the Panel failed to provide a sufficient explanation of its findings. A panel need not
give a detailed and exhaustive statement of its reasons for every factual determination it makes. It
need only provide the fundamental reasoning behind each factual and legal finding or
recommendation, thereby making it possible for the Appellate Body to exercise its review and
ensuring that Members understand the manner in which the panel applied the provision in question.
The Panel has more than satisfied this threshol d, examining each legal element in great detail and
listing the factual elements it considered important.

66Done at Vienna, 23 May 1969, 1155 U.N.T.S. 331; (1969), 8 International Legal Materials, 679.
67Webster's Dictionary defines the word "basic" as "of, relating to, or forming the base or essence;
fundamental; constituting or serving as the basis or starting-point", and "rationale" as "an explanation of
controlling principles of opinion, belief, practice, or phenomena; an underlying reason; basis". The Concise
Oxford Dictionary defines "basic" as "forming or serving as a base; fundamental; simplest or lowest in level,"
and "rationale" as "the fundamental reason or logical basis of anything; a reasoned exposition; a statement of
reason".

D. Arguments of the Third Participant – Mexico
1. "Directly Competitive or Substitutable Products"
(a) Potential Competition
92. Mexico contends that Korea overlooks that the Panel made an express ruling concerning
"direct competition" 68 and applied all of the criteria established by the panel, and endorsed by the
Appellate Body, in Japan – Alcoholic Beverages . These criteria are: physical characteristics,
common end-uses, tariff classifications and the market-place.
93. Mexico also considers that Korea's assertions regarding the "potential competition" criterion
are contradictory. Korea sometimes accepts, through the "but for" test, that potential competition may
be a necessary element in analysis under Article III:2, while at other times it objects to that criterion.
94. In Mexico's view, Korea places considerable emphasis on the irrelevancy and danger of
speculating on the possible future evolution of a market. It is difficult to believe that Korea really
thinks that the complainants and the third party in this dispute have any interest in such speculation or
that they would invest considerable resources merely to obtain a hypothetical, advisory opinion.
Mexico seeks only to be able to export tequila to Korea without having to face a discriminatory tax
regime.
(b) Evidence From Other Markets
95. According to Mexico, the Panel analyzed ev idence from the Japanese market because the
Korean market "still has substantial tax differentials"
69, and, in those circumstances, the Japanese
market was relevant. The Panel did not evade its obligation to examine the Korean market since that
market was also analyzed.

68Panel Report, paras 10.95, 10.97 and 10.98.
69Panel Report, para. 10.45.

(c) Grouping of the Products
96. Mexico is of the view that Korea has misunderstood the Panel's intention in proceeding
primarily with an examination of the relationshi p between diluted soju and the imported beverages.
The Panel simply based its examination on diluted soju and, when it detected a relevant difference
between the two types of soju, highlighted that difference.
97. The Panel did not improperly group the imported beverages nor did it ignore differences
between them. The Panel based its comparison on the characteristics common to all of them and, in
any event, also noted relevant distinctions between the beverages where appropriate.
2. "So As to Afford Protection"
98. Mexico contends that Korea's arguments under this heading are wrong because the Panel
mentioned not only the difference in tax burden between the domestic beverages and the imported
beverages, but also noted that the structure of the Liquor Tax Law itself was discriminatory.
3. Application of Article III:2 of the GATT 1994
99. Mexico considers that, since this is a dispute concerning alleged failure to comply with
obligations in the GATT 1994, Korea's measures are presumed to nullify or impair benefits accruing
under that Agreement and, consequently, under Article 3.8 of the DSU, the burden of refuting the
allegations is incumbent upon Korea and not on the appellees or the third party. Contrary to Korea's
assertions, the complaining parties and Mexico submitted several pieces of evidence, including:
evidence on the physical similarities of the spirits; evidence on the tariff classification of tequila and
soju; and evidence from the market-place, in the form of the Dodwell Study, which also covered the
relationship between tequila and soju.
100. Mexico agrees with the Panel's rejection of Korea's arguments that the appropriate end-use to
be considered in this case was consumption of the beverages with or without meals. As regards
admixtures, Mexico considers that the existence of soju cocktails is evidence that soju is not only
drunk straight, but is also drunk mixed.
101. Korea argues that it has greater authority than the Panel to analyze its own market. In
Mexico's view, this claim is not only difficult to defend, but is also contradictory. If the Koreans have

a special authority not possessed by others, why did Korea entrust analysis of the Korean market to
non-Korean companies, such as A.C. Nielsen?
III. Issues Raised In This Appeal
102. This appeal raises the following issues:
(a) whether the Panel erred in its interpretation and application of the term "directly
competitive or substitutable product" which appears in the Ad Article to Article III:2,
second sentence, of the GATT 1994;
(b) whether the Panel erred in its interpretation and application of the term "so as to
afford protection", which is incorporated into Article III:2, second sentence, by
specific reference to the "principles set forth in paragraph 1" of Article III of the
GATT 1994;
(c) whether the Panel erred in its application of the rules on the allocation of the burden
of proof;
(d) whether the Panel failed to make an objective assessment of the matter as required by
Article 11 of the DSU; and
(e) whether the Panel failed to set out the basic rationale behind its findings and
recommendations as required by Article 12.7 of the DSU.

IV. Interpretation and Application of Article III:2, second sentence, of the GATT 1994
103. The first issue that we have to address is whet her the Panel erred in interpreting Article III:2,
second sentence, of the GATT 1994.
104. Article III:2 provides:
The products of the territory of any contracting party imported into
the territory of any other contracting party shall not be subject,
directly or indirectly, to internal taxes or other internal charges of any
kind in excess of those applied, directly or indirectly, to like domestic
products. Moreover, no contracting party shall otherwise apply
internal taxes or other internal charges to imported or domestic
products in a manner contrary to the principles set forth in
paragraph 1.
 70
105. The meaning of the second sentence of Article III:2 is clarified by paragraph 2 of
Ad Article III, which reads:
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.
106. Article III:1 provides:
The contracting parties recognize that internal taxes and other internal
charges, and laws, regulations and requirements affecting the internal
sale, offering for sale, purchase, transportation, distribution or use of
products, and internal quantitative regulations requiring the mixture,
processing or use of products in specified amounts or proportions,
should not be applied to imported or domestic products so as to afford
protection to domestic production.
107. In our Report in Japan - Alcoholic Beverages , we stated that three separate issues must be
addressed when assessing the consistency of an internal tax measure with Article III:2, second
sentence, of the GATT 1994. These three issues are whether:

70The provisions of Article III:2, second sentence, of the GATT 1 994 include paragraph 2 of
Ad Article III and, by specific incorporation, the term "so as to afford protection" which appears in paragraph 1
of Article III.

(1) the imported products and the domestic products are "directly
competitive or substitutable products " which are in
competition with each other;
(2) the directly competitive or substitutable imported and
domestic products are "not similarly taxed"; and
(3) the dissimilar taxation of the directly competitive or
substitutable imported and domestic products is " applied …
so as to afford protection to domestic production".71
A. " Directly Competitive or Substitutable Products"
108. The Panel concluded its examination of the first issue arising under Article III:2, second
sentence, as follows:
We are of the view that there is sufficient unrebutted evidence in this
case to show present direct competition between the products.
Furthermore, we are of the view that the complainants also have
shown a strong potentially direct competitive relationship. Thus, on
balance, we find that the evidence concerning physical characteristics,
end-uses, channels of distribution and pricing, leads us to conclude
that the imported and domestic products are directly competitive or
substitutable.
 72
109. According to the Panel, the "key question" with respect to the first issue arising under
Article III:2, second sentence, "is whether the products are directly competitive or substitutable." 73
(emphasis in the original) The Panel stated that "an assessment of whether there is a direct
competitive relationship between two products or groups of products requires evidence that
consumers consider or could consider the two produc ts or groups of products as alternative ways of
satisfying a particular need or taste." 74 The determination of whether domestic and imported products
are directly competitive or substitutable "requires evidence of the direct competitive relationship
between the products, including, in this case, comp arisons of their physical characteristics, end-uses,
channels of distribution and prices." 75 The Panel reasoned, furthermore, that the "focus should not be
exclusively on the quantitative extent of the competitive overlap, but on the methodological basis on

71Appellate Body Report, Japan – Alcoholic Beverages, supra, footnote 20, p. 24.
72The "products" referred to by the Panel are diluted soju, distilled soju, whiskies, brandies, cognac,
rum, gin, vodka, tequila, liqueurs and admixtures. Panel Report, para. 10.98.
73Panel Report, para. 10.39.
74Panel Report, para. 10.40.
75Panel Report, para. 10.43.

which a panel should assess the competitive relationship." 76 "[Q]uantitative analyses, while helpful,
should not be considered necessary." 77 Similarly, "quantitative studies of cross-price elasticity are
relevant, but not exclusive or even decisive in nature." 78 A determination of the precise extent of the
competitive overlap can be complicated by the fact that protectionist government policies can distort
the competitive relationship between products, causing the quantitative extent of the competitive
relationship to be understated. 79 The Panel cautioned that "a focus on the quantitative extent of
competition instead of the nature of it, could result in a type of trade effects test being written into
Article III cases." 80
110. The Panel noted that assessment of competition has a temporal dimension. 81 It considered
that panels should look at "evidence of trends and changes in consumption patterns and make an
assessment as to whether such trends and patterns lead to the conclusion that the products in question
are either directly competitive now or can reasonably be expected to become directly competitive in
the near future."
 82 The Panel stated:
… We will not attempt to speculate on what could happen in the
distant future, but we will consider evidence pertaining to what could
reasonably be expected to occur in the near term based on the
evidence presented. How much weight to be accorded such evidence
must be decided on a case-by-case basis in light of the market
structure and other factors including the quality of the evidence and
the extent of the inference required. … Obviously, evidence as to
what would happen now is more probative in nature than what would
happen in the future, but most evidence cannot be so conveniently
parsed. If one is dealing with products that are experience based
consumer items, then trends are particularly important and it would be
unrealistic and, indeed, analytically unhelpful to attempt to separate
every piece of evidence and disregard that which discusses
implications for market structure in the near future.
83

76Panel Report, para. 10.39.
77Panel Report, para. 10.42.
78Panel Report, para. 10.44.
79Panel Report, para. 10.42.
80Ibid.
81Panel Report, para. 10.47.
82Panel Report, para. 10.48.
83Panel Report, para. 10.50.

111. According to Korea, the Panel misinterpreted the term "directly competitive or substitutable
product" by, inter alia , "relying on 'potential' competition, comparing the Korean market to the
Japanese market and undertaking the wrong product comparisons." 84
1. Potential Competition
112. Korea argues that the Panel took an unacceptably broad and speculative approach to the role
of potential competition, which is not permitted by the wording, context and object and purpose of
Article III:2, second sentence.
85 Korea agrees that this provision is not intended to exclude products
that are not directly competitive or substitutable because of the contested measure itself. However,
the Panel's overly broad approach has opened the door to speculation about how the market could
evolve in the future, irrespective of the tax measure in question.
86
113. Contrary to Korea's assertions, the Panel has not relied on potential competition in order to
overcome the absence today of a "directly competitive or substitutable" relationship between the
domestic and imported products on the basis that such a relationship might develop in the future. The
Panel concluded that "there is sufficient unrebutted evidence in this case to show present direct
competition between the products".
87 (emphasis added) This legal finding is not a speculative one
concerning the future, but is based firmly in the present. The reference to "a strong potentially direct
competitive relationship" does no more than buttress the Panel's finding of "present direct
competition".
88
114. The term "directly competitive or substitutable" describes a particular type of relationship
between two products, one imported and the other domes tic. It is evident from the wording of the
term that the essence of that relationship is that the products are in competition. This much is clear
both from the word "competitive" which means "characterized by competition" 89, and from the word
"substitutable" which means "able to be substituted". 90 The context of the competitive relationship is

85Korea's appellant's submission, paras. 26 and 31.
87Panel Report, para. 10.98. Likewise, the Panel also stated that "the evidence overall supports a
finding that the imported and domestic products at issue are directly competitive or substitutable" (para. 10.95).
(emphasis added)
88Panel Report, para. 10.98.
89Lesley Brown (ed.), The New Shorter Oxford English Dictionary , Vol. I, p. 459 (Clarendon
Press, 1993).
90Lesley Brown (ed.), op. cit., Vol. II, p. 3125.

necessarily the marketplace since this is the forum where consumers choose between different
products. Competition in the market place is a dynamic, evolving process. Accordingly, the wording
of the term "directly competitive or substitutable" implies that the competitive relationship between
products is not to be analyzed exclusively by reference to current consumer preferences. In our
view, the word "substitutable" indicates that the requisite relationship may exist between products
that are not, at a given moment, considered by consumers to be substitutes but which are, nonetheless,
capable of being substituted for one another.
115. Thus, according to the ordinary meaning of the term, products are competitive or substitutable
when they are interchangeable
91 or if they offer, as the Panel noted, "alternative ways of satisfying a
particular need or taste". 92 Particularly in a market where there are regulatory barriers to trade or to
competition, there may well be latent demand.
116. The words "competitive or substitutable" are qualified in the Ad Article by the term
"directly". In the context of Article III:2, second sentence, the word "directly" suggests a degree of
proximity in the competitive relationship between the domestic and the imported products. The word
"directly" does not, however, prevent a panel from considering both latent and extant demand.
117. Our reading of the ordinary meaning of the te rm "directly competitive or substitutable" is
supported by its context as well as its object and purpose. As part of the context, we note that the
Ad Article provides that the second sentence of Article III:2 is applicable "only in cases where
competition was involved". (emphasis added) According to Korea, the use of the past indicative
"was" prevents a panel taking account of "potential" competition. However, in our view, the use of
the word "was" does not have any necessary significance in defining the temporal scope of the
analysis to be carried out. The Ad Article describes the circumstances in which a hypothetical tax
"would be considered to be inconsistent with the provisions of the second sentence". (emphasis added)
The first part of the clause is cast in the conditional mood ("would") and the use of the past indicative
simply follows from the use of the word "would". It does not place any limitations on the temporal
dimension of the word "competition".
118. The first sentence of Article III:2 also forms part of the context of the term. "Like" products
are a subset of directly competitive or substitutable products: all like products are, by definition,
directly competitive or substitutable products, whereas not all "directly competitive or substitutable"

91Appellate Body Report, Canada – Certain Measures Concerning Periodicals (" Canada –
Periodicals"), WT/DS31/AB/R, adopted 30 July 1997.
92Panel Report, para. 10.40.

products are "like". 93 The notion of like products must be construed narrowly 94 but the category of
directly competitive or substitutable products is broader. 95 While perfectly substitutable products fall
within Article III:2, first sentence, imperfectly substitutable products can be assessed under
Article III:2, second sentence.
96
119. The context of Article III:2, second sentence, also includes Article III:1 of the GATT 1994.
As we stated in our Report in Japan - Alcoholic Beverages, Article III:1 informs Article III:2 through
specific reference.97 Article III:1 sets forth the principle "that internal taxes … should not be applied
to imported or domestic products so as to afford protection to domestic production." It is in the light
of this principle, which embodies the object and purpose of the whole of Article III, that the term
"directly competitive and substitutable" must be read. As we said in Japan – Alcoholic Beverages:
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 conditions for imported
products in relation to domestic products. … Moreover, it is
irrelevant that the "trade effects" of the tax differential between
imported and domestic products, as reflected in the volumes of
imports, are insignificant or even non-existent; Article III protects
expectations not of any particular trade volume but rather of the equal
competitive relationship between imported and domestic products.
 98
(emphasis added).
120. In view of the objectives of avoiding protectionism, requiring equality of competitive
conditions and protecting expectations of equal competitive relationships, we decline to take a static
view of the term "directly competitive or substitutable." The object and purpose of Article III

93Panel Report, Japan - Alcoholic Beverages, supra, footnote 16, para. 6.22, approved by the Appellate
Body at p. 23 of its Report.
94Appellate Body Report, Japan - Alcoholic Beverages , supra, footnote 20, p. 20, and Canada -
Periodicals, supra, footnote 91, p. 21.
95Appellate Body Report, Japan - Alcoholic Beverages, supra, footnote 20, p. 25.
96Canada - Periodicals, supra, footnote 91, p. 28.
97Appellate Body Report, Japan - Alcoholic Beverages, supra, footnote 20, p. 23.
98Ibid, p. 16, with references to earlier Panel Reports.

confirms that the scope of the term "directly competitive or substitutable" cannot be limited to
situations where consumers already regard products as alternatives. If reliance could be placed only
on current instances of substitution, the object and purpose of Article III:2 could be defeated by the
protective taxation that the provision aims to prohibit. Past panels have, in fact, acknowledged that
consumer behaviour might be influenced, in particular, by protectionist internal taxation. Citing the
panel in Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic
Beverages ("1987 Japan – Alcohol")
99, the panel in Japan – Alcoholic Beverages observed that "a tax
system that discriminates against imports has the consequence of creating and even freezing
preferences for domestic goods."
100 The panel in Japan – Alcoholic Beverages also stated that
"consumer surveys in a country with … a [protect ive] tax system would likely understate the degree
of potential competitiveness between substitutable products". 101 (emphasis added) Accordingly, in
some cases, it may be highly relevant to examine latent demand.
121. We observe that studies of cross-price elasticity, which in our Report in Japan – Alcoholic
Beverages were regarded as one means of examining a market 102, involve an assessment of latent
demand. Such studies attempt to predict the change in demand that would result from a change in the
price of a product following, inter alia, from a change in the relative tax burdens on domestic and
imported products.
122. Korea itself recognizes that potential demand may be taken into account in determining
whether products are "directly competitive or substitutable". Before the Panel, Korea acknowledged
that this term is not intended to exclude products that are not directly competitive or substitutable
because of ("but for") the contested measure itself. At the oral hearing before us, Korea accepted that
this "but for" test would permit account to be taken "not only [of] the direct price increasing effect of
a tax differential but also [of] other elements that could show an impairment of competitive
opportunities because of the tax differential, that distribution costs had been higher, etc."
 103
123. We note, however, that actual consumer demand may be influenced by measures other than
internal taxation. Thus, demand may be influenced by, inter alia , earlier protectionist taxation,

99Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages ,
adopted 10 November 1987, BISD 34S/83. The panel in Japan – Alcoholic Beverages, supra, footnote 16, cited
100Panel Report, Japan – Alcoholic Beverages , supra, footnote 16, para. 6.28. This passage was
expressly approved by the Appellate Body in its Report in this case (p. 25).
101Ibid.
102Appellate Body Report, Japan – Alcoholic Beverages, supra, footnote 20, p. 25.
103Response by Korea to questions at the oral hearing.

previous import prohibitions or quantitative restrictions. Latent demand can be a particular problem
in the case of "experience goods", such as food and beverages, which consumers tend to purchase
because they are familiar with them and with which consumers experiment only reluctantly.
104
124. We, therefore, conclude that the term "directly competitive or substitutable" does not prevent
a panel from taking account of evidence of latent consumer demand as one of a range of factors to be
considered when assessing the competitive relationship between imported and domestic products
under Article III:2, second sentence, of the GATT 1994. In this case, the Panel committed no error of
law in buttressing its finding of "present direct competition" by referring to a "strong potentially direct
competitive relationship".
105
2. Expectations
125. In the course of its reasoning on potential competition, the Panel referred to the "settled law
that competitive expectations and opportunities are protected" 106 and noted our statement in
Japan - Alcoholic Beverages that "Article III protects expectations not of any particular trade volume
but rather of the equal competitive relationship between imported and domestic products".107
126. Korea takes the view that "expectations" exist only for products which are already "like" or
"directly competitive or substitutable" and that it was improper for the Panel to consider that there
could be expectations regarding products that are not currently "directly competitive or substitutable",
but which might become so in the near future.
108
127. As we have said, the object and purpose of Article III is the maintenance of equality of
competitive conditions for imported and domestic products.109 It is, therefore, not only legitimate, but
even necessary, to take account of this purpose in interpreting the term "directly competitive or
substitutable product".110

104Panel Report, paras. 10.44, 10.50 and 10.73.
105Panel Report, para. 10.98.
106Panel Report, para. 10.48.
107Supra, footnote 20, p. 16, with references to earlier panel reports.
108Korea's appellant's submission, para. 33, citing, in part, the Panel Report, para. 10.48.
109Supra, para. 119.
110Moreover, as we noted earlier, the Panel concluded that there was evidence of " present direct
competition" between the imported and domestic products. (Panel Report, para. 10.98, emphasis added)

3. "Trade Effects" Test
128. The Panel expressed concern that "a focus on the quantitative extent of competition instead of
the nature of it, could result in a type of trade effects test being written into Article III cases." 111
129. Korea complains that this is a misunderstanding of the "trade effects" test. 112 In our view,
when the Panel referred to a "type of trade effects test", it was simply expressing its scepticism about
the consequences of placing undue emphasis on quantitative analyses of the competitive relationship
between products. This is clear from the sentence immediately following the sentence containing the
reference to a "type of trade effects test":
That is, if a certain degree of competition must be shown, it is similar
to showing that a certain amount of damage was done to that
competitive relationship by the tax policies in question.
113 (emphasis
in the original)
130. Thus, the Panel stated that if a particular degree of competition had to be shown in
quantitative terms, that would be similar to requiring proof that a tax measure has a particular impact
on trade. It considered such an approach akin to a "type of trade effects test".
131. We do not consider the Panel's reasoning on this point to be flawed. 114

111Panel Report, para. 10.42.
112Supra, para. 9.
113Panel Report, para. 10.42.
114We note, moreover, that the Panel cites correctly the "trade effects" test in para. 10.42 of the Report,
the very paragraph in which it refers to a "type of trade effects test".

4. Nature of Competition
132. The Panel makes numerous references to the "nature of competition".115 Korea considers that,
through the use of the term "nature of competition", the Panel has inserted a "vague and subjective
element" which is not found in Article III:2, second sentence.
116 Korea argues that this reference to
the "nature of competition", therefore, amounts to another failure properly to interpret the term
"directly competitive or substitutable".
133. We believe that the Panel uses the term " nature of competition" as a synonym for quality of
competition, as opposed to quantity of competition. The Panel considered that in analyzing whether
products are "directly competitive or substitutable", the focus should be on the nature of competition
and not on its quantity:
… the question is not of the degree of competitive overlap, but its
nature. Is there a competitive relationship and is it direct ? …
 117
(emphasis added)
134. In taking issue with the use of the term "nat ure of competition", Korea, in effect, objects to
the Panel's sceptical attitude to quantification of the competitive relationship between imported and
domestic products. For the reasons set above, we share the Panel's reluctance to rely unduly on
quantitative analyses of the competitive relationship.
118 In our view, an approach that focused solely
on the quantitative overlap of competition would, in essence, make cross-price elasticity the decisive
criterion in determining whether products are "directly competitive or substitutable". We do not,
therefore, consider that the Panel's use of the term "nature of competition" is questionable.
5. Evidence from the Japanese Market
135. The Panel considered that, in assessing whether products are directly competitive or
substitutable, it was appropriate to look at "the nature of competition in other countries".119 It stated:

115See Panel Report, paras. 10.42, 10.45, 10.66, 10.76, 10.78 and 10.92.
116Korea's appellant's submission, paras. 37 and 38.
117Panel Report, para. 10.44.
118Supra, para. 120.
119Panel Report, para. 10.45.

[A]s we are looking at the nature of competition in a market that
previously was relatively closed and still has substantial tax
differentials, such evidence of competitive relationships in other
markets is relevant. … We do not need, in this case, to give
substantial weight to conditions in markets outside Korea, but such
factors are relevant… . To completely ignore such evidence from
other markets would require complete reliance on current market
information which may be unreliable, due to its tendency to understate
the competitive relationship, because of the very actions being
challenged. Indeed, the result could be that the most restrictive and
discriminatory government policies would be safe from challenge
under Article III due to the lack of domestic market data.
120
136. According to Korea, the Panel's approach cons titutes an impermissible broadening of the
scope of Article III:2, second sentence. Moreover, Korea believes that if evidence from other markets
were to be admitted, more than one other market ought to be reviewed. In this case, as there was
"considerable evidence available as to what is taking place within the Korean market"
 121, Korea
considers that there was no reason to rely on evidence drawn from another market when making
conclusions about the Korean market.
137. It is, of course, true that the "directly competitive or substitutable" relationship must be
present in the market at issue 122, in this case, the Korean market. It is also true that consumer
responsiveness to products may vary from country to country. 123 This does not, however, preclude
consideration of consumer behaviour in a country other than the one at issue. It seems to us that
evidence from other markets may be pertinent to the examination of the market at issue, particularly
when demand on that market has been influenced by regulatory barriers to trade or to competition.
Clearly, not every other market will be relevant to the market at issue. But if another market displays
characteristics similar to the market at issue, then evidence of consumer demand in that other market
may have some relevance to the market at issue. This, however, can only be determined on a case-by-
case basis, taking account of all relevant facts.
138. In the present case, the Panel did not err in referring to the Japanese market in its reasoning.

120Panel Report, paras. 10.45 and 10.46.
121Panel Report, para. 10.46.
122Appellate Body Report, Japan – Alcoholic Beverages , supra, footnote 20, p. 25, and Canada -
Periodicals, supra, footnote 91, p. 25.
123Panel Report, Japan – Alcoholic Beverages , supra, footnote 16, para. 6.28, with reference to
Working Party Report on "Border Tax Adjustments", L/3464, adopted 2 December 1970, BISD 18S/97, p. 102,
para. 18, approved by the Appellate Body Report, Japan – Alcoholic Beverages, supra, footnote 20, p. 25.

6. Grouping of the Products
139. Before embarking on its assessment of whether the imported and domestic products at issue
are directly competitive or substitutable, the Panel considered how it would carry out that assessment.
It stated:
… With respect to the domestic product, soju, there are two primary
categories identified. There is distilled soju and diluted soju.
…
… If we find that diluted soju is directly competitive with and
substitutable for the imported products, it will follow that this is also
the case for distilled soju because distilled soju is intermediary
between the imported products and diluted soju. Indeed, distilled soju
is, on the one hand, more similar to the imported products than diluted
soju and is, on the other hand, more similar to diluted soju than are the
imported products.
 124
With respect to the imported products, the Panel said:
… We … do not accept the Korean argument that we are required to
make an item by item comparison between each imported product and
both types of soju. Relying on product categories is appropriate in
many cases. … The question becomes where to draw the boundaries
between categories, rather than whether it is appropriate to utilize
categories for analytical purposes. … [W]e find that, on balance, all
of the imported products specifically identified by the complainants
have sufficient common characteristics, end-uses and channels of
distribution and prices to be considered together.
* (emphasis added)125
*This decision does not prejudge the substantive discussion; rather we are merely
identifying an analytical tool. It is possible that during the course of a dispute,
evidence will show that an analytical approach should be revised. … (emphasis
added)
140. Korea argues that the Panel erred in failing to examine distilled soju and diluted soju
separately and also in examining all of the imported products together. Korea's argument is based, in
large part, on allegedly significant differences between the products that the Panel grouped together.
Korea is concerned that by considering the products together, the Panel overlooked important

124Panel Report, paras. 10.51 and 10.54.
125Panel Report, paras 10.59 and 10.60.

differences between them. Korea believes that, in so doing, the Panel was able to conclude that all the
products at issue were directly competitive or substitutable, whereas had the imported products been
examined individually, this result would not have been possible.
141. We consider that Korea's argument raises two distinct questions. The first question is whether
the Panel erred in its "analytical approach". The second is whether, on the facts of this case, the Panel
was entitled to group the products in the manner that it did. Since the second question involves a
review of the way in which the Panel assessed the evidence, we address it in our analysis of
procedural issues.
142. The Panel describes "grouping" as an "analytical tool". It appears to us, however, that
whatever else the Panel may have seen in this "analytical tool", it used this "tool" as a practical device
to minimize repetition when examining the competitive relationship between a large number of
differing products. Some grouping is almost always necessary in cases arising under Article III:2,
second sentence, since generic categories commonly include products with some variation in
composition, quality, function and price, and thus commonly give rise to sub-categories.
126 From a
slightly different perspective, we note that "grouping" of products involves at least a preliminary
characterization by the treaty interpreter that certain products are sufficiently similar as to, for
instance, composition, quality, function and price, to warrant treating them as a group for convenience
in analysis. But, the use of such "analytical tools" does not relieve a panel of its duty to make an
objective assessment of whether the components of a group of imported products are directly
competitive or substitutable with the domestic products. We share Korea's concern that, in certain
circumstances, such "grouping" of products might result in individual product characteristics being
ignored, and that, in turn, might affect the outcome of a case. However, as we will see below, the
Panel avoided that pitfall in this case.
143. Whether, and to what extent, products can be grouped is a matter to be decided on a case-by-
case basis. In this case, the Panel decided to group the imported products at issue on the basis that:
… on balance, all of the imported products specifically identified by
the complainants have sufficient common characteristics, end-uses
and channels of distribution and prices… .
127

126The Panel mentions the product category of "whiskies" which include several subcategories of types
of whisky such as Scotch (premium and standard), Irish, Bourbon, Rye, Canadian, etc., all of which differ.
Panel Report, para. 10.59.
127Panel Report, para. 10.60.

144. As the Panel explained in the footnote attached to this passage 128, the Panel's subsequent
analysis of the physical characteristics, end-uses, channels of distribution and prices of the imported
products confirmed the correctness of its decision to group the products for analytical purposes.
Furthermore, where appropriate, the Panel did take account of individual product characteristics.
129 It,
therefore, seems to us that the Panel's groupi ng of imported products, complemented where
appropriate by individual product examinati on, produced the same outcome that individual
examination of each imported product would have produced. 130 We, therefore, conclude that the
Panel did not err in considering the imported beverages together.
145. With respect to diluted soju and distilled soju, the Panel did not "group" these products as
such. Rather, it concentrated on diluted soju in assessing the competitive relationship between the
domestic and imported beverages. The Panel considered that distilled soju was an "intermediary"
product, with respect to physical characteristics, end-uses and prices, between diluted soju and the
imported products. On that assumption, it reasoned, a fortiori, taking the view that if diluted soju
was shown to be competitive with the imported products, the intermediate product, distilled soju,
would also necessarily be "directly competitive or substitutable" with them.
131 We do not consider the
Panel's reasoning on this point to be objectionable.
B. "So As To Afford Protection"
146. We now address whether the Panel erred in its application of the term "so as to afford
protection", which is incorporated into Article III:2, second sentence, by specific reference to
paragraph 1 of Article III.
147. With regard to this third element of Article III:2, second sentence, the Panel stated:

128Panel Report, footnote 375. See also Panel Report, footnotes 382 and 399.
129See Panel Report, paras. 10.67, 10.71, 10.72, 10.85 and 10.94 and footnotes 385, 386, 387 and 408.
130We note that the panels in 1987 Japan – Alcohol and in Japan – Alcoholic Beverage, followed the
same approach. This approach was implicitly approved in our Report on Japan – Alcoholic Beverages.
131Panel Report, 10.54.

The Appellate Body in the Japan Alcoholic Beverages case stated that
the focus of this portion of the inquiry should be on the objective
factors underlying the tax measure in question including its design,
architecture and the revealing structure. In that case, the Panel and
the Appellate Body found that the very magnitude of the dissimilar
taxation supported a finding that it was applied so as to afford
protection. In the present case, the Korean tax law also has very large
differences in levels of taxation, large enough, in our view, also to
support such a finding.
In addition to the very large levels of tax differentials, we also note
that the structures of the Liquor Tax Law and the Education Tax Law
are consistent with this finding. The structure of the Liquor Tax Law
itself is discriminatory. It is based on a very broad generic definition
which is defined as soju and then there are specific exceptions
corresponding very closely to one or more characteristics of imported
beverages that are used to identify products which receive higher tax
rates. There is virtually no imported soju so the beneficiaries of this
structure are almost exclusively domestic producers.
* Thus, in our
view, the design, architecture and structure of the Korean alcoholic
beverages tax laws (including the Education Tax as it is applied in a
differential manner to imported and domestic products) afford
protection to domestic production. … 132
*The only domestic product which falls into a higher category that corresponds to one
type of imported beverage is distilled soju which represents less than one percent of
Korean production.
148. According to Korea, the Panel committed severa l errors in applying the third element of
Article III:2, second sentence. It ignored Korea's explanations for the structure of the tax. It made
"much" of the virtual absence of imported soju. It did not observe the Appellate Body's guidance in
Japan – Alcoholic Beverages, that, even though the tax differential may prove that a tax is applied "so
as to afford protection", "in other cases, there may be other factors that will be just as relevant or more
relevant to demonstrating that the dissimilar taxation at issue was applied 'so as to afford
protection'."
 133
149. In our Report in Japan – Alcoholic Beverages , we said that examination of whether a tax
regime affords protection to domestic production "is an issue of how the measure in question is
applied", and that such an examination "requires a comprehensive and objective analysis"
 134:

132Panel Report, paras. 10.101 and 10.102.
133Supra, footnote 20, p. 30.
134Supra, footnote 20, p. 28.

… it is possible to examine objectively the underlying criteria used in
a particular tax measure, its structure, and its overall application 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
discerned from the design, the architecture, and the 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 be other factors to be considered as well.135
150. The Panel followed this approach. In finding that the Korean measures afford protection to
domestic production, the Panel relied, first, on the fact that "the Korean tax law … has very large
differences in levels of taxation."
 136 Although it considered that the magnitude of the tax differences
was sufficiently large to support a finding that the contested measures afforded protection to domestic
production, the Panel also considered the structure and design of the measures.
137 In addition, the
Panel found that, in practice, "[t]here is virtually no imported soju so the beneficiaries of this structure
are almost exclusively domestic producers".
138 In other words, the tax operates in such a way that the
lower tax brackets cover almost exclusively domestic production, whereas the higher tax brackets
embrace almost exclusively imported products. In such circumstances, the reasons given by Korea as
to why the tax is structured in a particular way do not call into question the conclusion that the
measures are applied "so as to afford protection to domestic production". Likewise, the reason why
there is very little imported soju in Korea does not change the pattern of application of the contested
measures.
151. Korea claims that the Panel erred in failing to find that the "intrinsic" pre-tax price difference
between diluted soju and the imported alcoholic beverages was so large that "the additional difference
created by the variation in tax can have no [protective] effect".
139 According to Korea, the Panel
"should have inquired whether the tax is capable of affecting reasonable expectations about the

135Supra, footnote 20, p. 29.
136Panel Report, para. 10.101. In para. 10.100, the Panel set out the tax differentials: "the total tax on
diluted soju is 38.5 percent; on distilled soju and liqueurs it is 55 percent; on vodka, gin, rum, tequila and
admixtures it is 104 percent; on whisky, brandy and cognac it is 130 percent".
137Panel Report, para. 10.101.
138Panel Report, para. 10.102. We note that we considered a similar finding by the panel in Japan –
Alcoholic Beverages , supra, footnote 16, p. 31, to be relevant for the establishment of the third element of
Article III:2, second sentence.

competitive relationship between the products." 140 Korea also argued that "the demand for a product
like distilled soju is specific and static and that it would be difficult to affect it a great deal in either
direction by altering the price."
 141
152. In making these arguments, Korea seems to be revisiting the question whether the products
can be treated as directly competitive or substitutable. As regards diluted soju, Korea seems to be
saying, in effect, that the large pre-tax price difference is such that consumers do not treat the products
as substitutable, and that consumers' decisions whether to buy the imported products will not,
therefore, be affected by the higher tax burden imposed on these imports. Similarly, as regards
distilled soju, Korea is arguing that there is no cross-elasticity of demand between distilled soju and
the imported beverages. However, Korea overlooks the fact that the two products have already been
found to be directly competitive or substitutable.
142 Its arguments are, therefore, misplaced at this
stage of the analysis and do not cast doubt on the Panel's finding that the contested measures afford
protection to domestic production.
153. Korea also seems to be insisting that a finding that a measure affords protection must be
supported by proof that the tax difference has some identifiable trade effect. But, as we have said
above, Article III is not concerned with trade volumes.
143 It is, therefore, not incumbent on a
complaining party to prove that tax measures are capable of producing any particular trade effect.
154. We believe, and so hold, that the Panel did not err in its application of the term "so as to
afford protection", which is incorporated into Article III:2, second sentence, by specific reference to
paragraph 1 of Article III.

142The significant price differential between the products was taken into account in determining
whether the products are, in fact, directly competitive or substitutable (Panel Report, para. 10.94).
143Supra, para. 119.

C. Allocation of the Burden of Proof
155. Korea argues that the Panel misapplied the burden of proof and that it applied a "double
standard" when assessing the evidence. We note that although the Panel did not actually articulate the
rules on allocation of the burden of proof, it made specific reference to passages of our Report in
United States – Shirts and Blouses where we enunciated these rules.144
156. It is clear from paragraphs 10.57, 10.58 and 10.82 of the Panel Report that the Panel properly
understood and applied the rules on allocation of the burden of proof. 145 First, the Panel insisted that
it could make findings under Article III:2, second sentence, only with respect to products for which a
 prima facie case had been made out on the basis of evidence presented.
146 Second, it declined to
establish a presumption concerning all alcoholic beverages within HS 2208. 147 Such a presumption
would be inconsistent with the rules on the burden of proof because it would prematurely shift the
burden of proof to the defending party. The Panel, therefore, did not consider alleged violations of
Article III:2, second sentence, concerning pro ducts for which evidence was not presented.
148 Th u s,
the Panel examined tequila because evidence was presented for it, but did not examine mescal and
certain other alcoholic beverages included in HS 2208 for which no evidence was presented. Third,
contrary to Korea's assertions, the Panel did consider the evidence presented by Korea in rebuttal
149,
but concluded that there was "sufficient unrebutted evidence" for it to make findings of
inconsistency.150 (emphasis added)
157. It is, therefore, clear that the Panel did not err in its application of the rules on allocation of
the burden of proof.

144Panel Report, footnote 374.
145In paragraphs 10.57 and 10.58 of its Report, the Panel considered whether it was entitled to make
findings with respect to products, including tequila, mescal and certain other alcoholic beverages, for which
"virtually no evidence" had been provided. In para. 10.82, the Panel assessed whether the complainants had
satisfied the burden of proof with respect to end-uses.
146Panel Report, para. 10.57. See also Panel Report, para. 10.82, where the Panel considered that, with
respect to end-uses, "the complainants submitted adequate evidence … to establish this portion of their case".
147Panel Report, para. 10.57. HS 2208 is the category in Section IV, Chapter 22 of the Harmonised
System of Customs Classification that applies to "Unden atured ethyl alcohol of an alcoholic strength by volume
of less than 80% vol; spirits, liqueurs and other spiritous beverages".
148Panel Report, paras. 10.57 and 10.58.
149See, for example, Panel Report, paras. 10.71, 10.82 and 10.85.
150Panel Report, para. 10.98.

158. We note, finally, that many of Korea's arguments concerning the burden of proof are, in
reality, arguments about whether the Panel made an objective assessment of the matter before it. This
is considered in the next section.
D. Article 11 of the DSU
159. Korea claims that the Panel failed to make an objective assessment of the matter before it and
failed to apply the appropriate standard of review under Article 11 of the DSU. Korea contends that
the Panel did not have sufficient evidence before it to enable it to conduct an objective assessment of
the matter, and that, as regards the evidence that was, in fact, before it, the Panel made a series of
"manifest and/or egregious errors of assessment".
 151
160. In European Communities - Hormones, we stated:
Under Article 17.6 of the DSU, appellate review is limited to appeals
on questions of law covered in a panel report and legal interpretations
developed by the panel. … Determination of the credibility and
weight properly to be ascribed to (that is, the appreciation of) a given
piece of evidence is part and parcel of the fact finding process and is,
in principle, left to the discretion of a panel as the trier of facts. The
consistency or inconsistency of a given fact or set of facts with the
requirements of a given treaty provision is, however, a legal
characterization issue. It is a legal question. Whether or not a panel
has made an objective assessment of the facts before it, as required by
Article 11 of the DSU, is also a legal question which, if properly
raised on appeal, would fall within the scope of appellate review.
152
161. The Panel's examination and weighing of the evid ence submitted fall, in principle, within the
scope of the Panel's discretion as the trier of facts and, accordingly, outside the scope of appellate
review. This is true, for instance, with respect to the Panel's treatment of the Dodwell Study, the
Sofres Report and the Nielsen Study. We cannot second-guess the Panel in appreciating either the
evidentiary value of such studies or the consequences, if any, of alleged defects in those studies.
Similarly, it is not for us to review the relative weight ascribed to evidence on such matters as
marketing studies, methods of production, taste, colour, places of consumption, consumption with
"meals" or with "snacks", and prices.

152Supra, footnote 47, para. 132.

162. A panel's discretion as trier of facts is not, of course, unlimited. That discretion is always
subject to, and is circumscribed by, among other things, the panel's duty to render an objective
assessment of the matter before it. In European Communities - Hormones, we dealt with allegations
that the panel had "disregarded", "distorted" and "m isrepresented" the evidence before it. We held
that these allegations amounted to charges that the panel had violated its duty under Article 11 of the
DSU, allegations which, at the end of the day, we found to be unsubstantiated:
... Clearly, not every error in the appreciation of the evidence
(although it may give rise to a question of law) may be characterized
as a failure to make an objective assessment of the facts. ... The duty
to make an objective assessment of the facts is, among other things,
an obligation to consider the evidence presented to a panel and to
make factual findings on the basis of that evidence. The deliberate
disregard of, or refusal to consider, the evidence submitted to a panel
is incompatible with a panel's duty to make an objective assessment of
the facts. The wilful distortion or misrepresentation of the evidence
put before a panel is similarly inconsistent with an objective
assessment of the facts. "Disregard" and "distortion" and
"misrepresentation" of the evidence, in their ordinary signification in
judicial and quasi-judicial processes, imply not simply an error of
judgment in the appreciation of evidence but rather an egregious error
that calls into question the good faith of a panel. A claim that a panel
disregarded or distorted the evidence submitted to it is, in effect, a
claim that the panel, to a greater or lesser degree, denied the party
submitting the evidence fundamental fairness, or what in many
jurisdictions is known as due process of law or natural justice.
153
163. We have scrutinized with great care Korea's allegations that the Panel acted in breach of its
duty under Article 11 of the DSU, especially Korea's contentions that the Panel applied a "double
standard" in assessing the evidence before it: one standard, relaxed and permissive, for the
complainants, and another, very strict and demanding, for the defending party, Korea. In our view,
notwithstanding Korea's express disclaimer that it is not challenging the good faith of the Panel, an
allegation of a "double standard" of proof in relation to the facts is equivalent to an allegation of
failure to render an "objective assessment of the matter" under Article 11 of the DSU. In European
Communities – Poultry, we observed:

153Supra, footnote 47, para. 133.

An allegation that a panel has failed to conduct the "objective
assessment of the matter before it" required by Article 11 of the DSU
is a very serious allegation. Such an allegation goes to the very core
of the integrity of the WTO dispute settlement process itself . ... 154
(emphasis added)
164. We are bound to conclude that Korea has not succeeded in showing that the Panel has
committed any egregious errors that can be characterized as a failure to make an objective assessment
of the matter before it. Korea's arguments, when read together with the Panel Report and the record
of the Panel proceedings, do not disclose that the Panel has distorted, misrepresented or disregarded
evidence, or has applied a "double standard" of proof in this case. It is not an error, let alone an
egregious error, for the Panel to fail to accord th e weight to the evidence that one of the parties
believes should be accorded to it.
165. In light of the above, we do not believe that the Panel has failed to make an objective
assessment of the matter before it within the meaning of Article 11 of the DSU.
E. Article 12.7 of the DSU
166. Korea claims that the Panel has failed to fulfil its obligation under Article 12.7 of the DSU to
set out the basic rationale behind its findings and recommendations. Korea maintains that "much" of
the Panel Report contains contradictions and that it is vague.
155
167. Article 12.7 of the DSU reads, in relevant part:
Where the parties to the dispute have failed to develop a mutually
satisfactory solution, the panel shall submit its findings in the form of a
written report to the DSB. In such cases, the report of a panel shall set
out the findings of fact, the applicability of relevant provisions and the
basic rationale behind any findings and recommendations that it makes.
… (emphasis added)
168. In this case, we do not consider it either necessary, or desirable, to attempt to define the scope
of the obligation provided for in Article 12.7 of the DSU. It suffices to state that the Panel has set out
a detailed and thorough rationale for its findings and recommendations in this case. The Panel went
to some length to take account of competing cons iderations and to explain why, nonetheless, it made

154Supra, footnote 47, para. 133. This passage was cited in our Report in Australia – Measures
Affecting Importation of Salmon, adopted 6 November 1998, WT/DS18/AB/R, para. 265.

the findings and recommendations it did. The rationale set out by the Panel may not be one that
Korea agrees with, but it is certainly more than adequate, on any view, to satisfy the requirements of
Article 12.7 of the DSU. We, therefore, conclude that the Panel did not fail to set out the basic
rationale for its findings and recommendations as required by Article 12.7 of the DSU.
V. Findings and Conclusions
169. For the reasons set out in this Report, the Appellate Body:
(a) upholds the Panel's interpretation and application of the term "directly competitive or
substitutable product" which appears in the Ad Article to Article III:2, second
sentence, of the GATT 1994;
(b) upholds the Panel's interpretation and application of the term "so as to afford
protection", which is incorporated into Article III:2, second sentence, by specific
reference to the "principles set forth in paragraph 1" of Article III of the GATT 1994;
(c) upholds the Panel's application of the rules on the allocation of the burden of proof;
(d) concludes that the Panel did not fail to make an objective assessment of the matter
as required by Article 11 of the DSU; and
(e) concludes that the Panel did not fail to set out the basic rationale behind its findings
and recommendations as required by Article 12.7 of the DSU.
170. The Appellate Body recommends that the Dispute Settlement Body request Korea to bring
the Liquor Tax Law and the Education Tax Law into conformity with its obligations under the
General Agreement on Tariffs and Trade 1994.

Signed in the original at Geneva this 16th day of December 1998 by:
Mitsuo Matsushita
Presiding Member
_________________________ _________________________
Claus-Dieter Ehlermann Florentino Feliciano
Member Member