Document: Appellate Body report
Document codes: WT/DS75/R; WT/DS84/R
Complainant: U.S.
Respondent: South Korea
Third parties: Canada, Mexico
Dispute stage: Appellate Body
Agreements cited: Art. III:2  GATT 1994

VII. ANSWERS TO QUESTIONS
A. EUROPEAN
 COMMUNITIES
7.1. In response to a question concerning levels of cross-price elasticity, the European
Communities states that:
(a) As noted by the Appellate Body in Japan - Taxes on Alcoholic Beverages II, how
much broader the category of "directly co mpetitive or substitutable products" may be
in a given case is a matter for the panel to determine based on all the relevant factors
in that case.285 Accordingly, it would be inappropriate to try and define a standard of
general application, and in particular a quantitative one.
 (b) There is no support for Korea’s contention that the notion of "directly competitive or
substitutable products" must be interpre ted "strictly". On the contrary, as
demonstrated by the complainants, an examination of the drafting history of GATT
and of previous Panel and Appellate Body reports (including the two cases on Japan -
Taxes on Alcoholic Beverages II) shows that in practice the "directly" has been given
a rather broad interpretation.
 (c) In Japan - Taxes on Alcoholic Beverages II, the Appellate Body made it clear that
cross-price elasticity is not " the decisive criterion"
286 for establishing whether two
products are directly competitive or substituta ble. According to the Appellate Body,
cross-price elasticity is but one of the means of examining a relevant market. In turn
looking at competition in the relevant markets is just "one among a number of
means"287 of identifying the products that are directly competitive or substitutable in a
particular case. The other means mentioned by the Appellate Body are the physical
characteristics, the end uses and the customs classification of the products.
(d) Furthermore, the relevance of a particul ar level of cross-price elasticity may vary
according to the circumstances of each case. For instance, if two products have been
sold for a long time and under similar cond itions on the same geographical market, a
"very low rate of cross-price elasticity" could be an indication that they re not
"directly competitive or substitutable".
(e) On the other hand, in a situation where one of the products concerned has dominated
a geographical market for a long time and the other product is a new entrant in that
market (e.g. because until then it has been excluded ther efrom by import and/or tax
barriers), it would be unwarranted to conc lude from the mere fact that the initial
cross-price elasticity is relatively low that the two products are not "directly
competitive or substitutable". The more so in the case of products such as spirits,
where market penetration is slow and short- term reactions to price changes tend to be
relatively low.
(f) Korea’s position in this case appears to be that Article III:2, second sentence, would
apply only if and when imported products succeed in establishing themselves in a
market. Foreign products would have to ach ieve first a level of market penetration
such that it is possible to prove statistically a high rate of cross-price elasticity. This
approach, however, disregards the obvious f act that protective taxes may be a factor

285 Appellate Body Report, supra., p. 25.
286 Ibid.
287 Ibid.

that delays or prevents imported products from ever reaching that level of market
penetration. Clearly, such an approach is at odds with the well-established principle
that Article III protects "competitive opportunities". There is no reason to limit such
"opportunities" to those that are available to a product in the very short term. Article
III protects any competitive opportunities that a given product may have by reason of
its inherent characteristics.
(g) In connection with this question, the European Communities further argued that the
Dodwell study does not purport to provide a precise measurement of cross-price
elasticity. In order to do that, it would have been necessary to carry out an
econometric analysis based on historic sales and price data. In the present case,
however, that type of analysis was precluded by the fact that western spirits have
been virtually excluded fro m the Korean market until only a few years ago. This
means that the available sales and price data are too few to allow a statistically valid
analysis.
(h) The Dodwell study has a more modest purpose. It aims at testing by means of a
consumer survey the hypothesis that a reduction in the prices of western spirits and/or
increase in the prices of soju resulting fro m the elimination of the existing tax
differentials will lead to an increase in the consumption of western-style spirits at the
expense of soju. The results of the Dodwell study clearly validate that hypothesis.
(i) Additionally, the study indicates that th e extent of potential substitution could be
significant. For example, in one of the possible after-tax harmonization price
scenarios the percentage of respondents who would choose whisky instead of
standard soju would increase from 14.2% to 23.8%. While, for the reasons explained
elsewhere, it was appropriate to distinguish in the survey between premium and
standard soju, this has the consequence th at the survey only measures the shift of
respondents from standard soju to western spirits, and not the additional shift from
premium soju to western spirits. Furthermore, since the prices of premium soju are
not increased in parallel with the prices of sta ndard soju (so as to reflect the fact that
taxes would be increased on all diluted soju), but rather decreased, the survey
overestimates the shift from standard to premium soju at the expense of the shift from
standard soju to western spirits. In compar ison, in the same scenario, the percentage
of respondents choosing premium soju would increase from 12.6% to 19.8%. Thus,
the Dodwell study suggests that the elastic ity of substitution between standard soju
and whisky could be higher than the elas ticity of substitution between standard soju
and premium soju, two products which have been described by Korea as being close
"substitutes".
(j) Moreover, it should be borne in mind that a consumer survey like the Dodwell study
necessarily underestimates the degree of potential competition between soju and
western spirits.
(k) In the first place, the Dodwell survey can show only the immediate reaction of
consumers to price changes. Yet, spirits consumption is to a large extent based on
habits, which only change gradually. This means that, over a certain period of time,
the price changes resulting from the elimina tion of tax differentials will lead to a
more substantial shift from soju to western spirits than the one shown in the Dodwell
study.
(l) Secondly, it must be recalled that west ern spirits are new entrants in the Korean
market and still hold only a small share of th at market. This has two implications.

The first one is that the respondents are generally less familiar with western spirits
than with soju. This leads to a lower re sponse in the survey than in the case of two
products which were both well known to the respondents. The second implication is
that western spirits still have considerable potential to increase their share of the
market through marketing efforts (in advertising, distribution, etc.). The impact of
those efforts would be considerably boosted by the price changes envisaged in the
Dodwell study. On the other hand, the c ontinued application of protective taxation
would discourage such efforts. The interaction of these two factors, however, is not
and cannot be addressed by a survey like the Dodwell study.
(m) Finally, the Dodwell study considers only the price changes that could result directly
from the elimination of the existing tax diffe rentials. It does not take into account
that the elimination of tax differentials could lead as well to a decrease of the pre-tax
prices of western spirits and, consequently, to further substitution.
7.2. In response to a question as to whether there is a de minimis standard in assessing the question
of "so as to afford protection", the European Communities states that:
 (a) In Japan - Taxes on Alcoholic Beverages II , the complainants expressed different
views with respect to the interpretation of the third element of Article III:2, second
sentence. The European Communities argue d that the measures at issue afforded
protection to domestic production because a majority of the sales of the less taxed
product (shochu) were domestically produced in Japan. In turn, the United States
argued that the measures afforded protec tion to domestic production because their
structure and design evidenced that they were not aimed at achieving any legitimate
policy objective but only at providing an advantage to Japanese shochu. The
approach established by the Appellate Body in Japan - Taxes on Alcoholic Beverages
II appears to combine both positions. While putting the emphasis on the objective
aim of the measures, as revealed by their structure and design,
288 the Appellate Body
also noted the fact that Japanese shoc hu was "isolated" from imports of shochu 289.
Thus, the Appellate Body seems to have c onsidered that the demonstrated actual
protective effects of a measure may be taken into account as an indication that a
measure is aimed at protecting domestic production.
290
(b) On the other hand, there is no suggestion in Japan - Taxes on Alcoholic Beverages II
that in order to meet the third element of Article III:2, the tax measures must afford a
minimum "degree" of protection to the l ess taxed product. The Appellate Body
agreed with the Panel that the reasoning required under Article III:2, second sentence,
is the following:
 If directly competitive or substitutable products are not
"similarly taxed", and if it we re found that the tax favours
domestic products, then protection would be afforded to such
products, and Article III:2 second sentence is violated.291
(c) Thus, the third element of Article III: 2, second sentence, is concerned only and
exclusively with the question whether, by taxing one product less than another

288 Ibid., p. 29.
289 Ibid., p. 31.
290 See also the Appellate Body Report on Canada - Certain Measures Concerning Periodicals ,
supra., pp. 31-32.
291 Ibid., p. 29.

directly competitive or substitutable product, the measures "favour" domestic
production over imports, not with the extent of the "protection" afforded to the less
taxed
292 product. In other words, the third element of Article III:2, second sentence,
is not about how much protection is afforded, but rather about who is protected.
(d) The view that in order to establish a viol ation of Article III:2 it is necessary for the
complainants to show that the measures actually afford a certain "degree" of
protection by effectively reducing sales of imports above a de minimis level would be
in contradiction with the well establish ed principle that GATT Article III is
concerned with the protection of competitive opportunities and not of actual trade
flows. More specifically, according to the Appellate Body:
 [i]t is irrelevant that the "trade effects" of the tax differentials
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.
293
(e) In sum, the European Communities is of the view that the third element of Article
III:2, second sentence, does not introduce another de minimis threshold, in addition
to those which result from the application of the first and the second element. If two
products are "directly" competitive or subs titutable, any tax differential above the de
minimis level must be deemed to affect that competitive relationship and, as result, to
"protect" the less taxes product. The only remaining issue is then whether the
"protection" given to the less taxed product favours a "domestic production".
7.3. In response to a question concerning the price mix of exports to Korea compared to other
markets, the European Communities states that:
(a) The pre-tax prices of western spirits are not higher than the pre-tax prices of soju only
because of Korea’s Liquor Tax system. The differences in prices reflect also
differences in production and transportation co sts as well as the impact of tariffs.
Nevertheless, the pre-tax prices of western spirits are higher than they would be under
a neutral tax system.
(b) As already explained in the EC submissions, one of the effects of Korea’s tax regime
is that higher priced premium brands account for a disproportionate share of the sales
of western spirits. For example, as shown by Annex 1, premium brands account for
as much as 70 per cent of all sales of Scotch whisky in Korea. The same Annex
shows that in a number of representative export markets with a neutral system of
taxation the proportion of premium brands is much lower: 3 per cent in Australia; 6
per cent in New Zealand and 14 per cent in Venezuela. The preponderance of
premium brands in the Korean market as co mpared to other export markets is further
confirmed by the fact that whereas in 1997 the average unit price of all exports of
Scotch whisky (for 70 cubic litre bottles at 40% volume) was £2.79, the average unit
price of the exports of Scotch whisky to Korea was £4.42.

292 In contrast, under Article III:2, first sentence, it is not necessary to demonstrate that a difference in
taxation between two types of "like" products lead s to discrimination between imports and "domestic
production". Like products must always be taxes equally.
293 Ibid., p. 16.

7.4. In response to a question concerning compar ison of legal standards under competition law
with standards under Article III, the European Communities states that:
(a) The basic criteria applied in order to de fine the relevant product market for the
purposes of EC Competition law are the same as those applied in order to establish
whether products are directly competitive or substitutable for the purposes of GATT
Article III:2, second sentence".
294
 (b) There is, nevertheless, an essential di fference. When applying GATT Article III:2,
first sentence, Panels must take into acc ount the "potential" competition which would
materialise between the products concerned in the absence of the tax differential in
dispute and not the "actual" competition existing under current taxation conditions. In
contrast, competition authorities tend to c onsider tax differentials as a permanent
barrier to competition and disregard any additional competition which may arise from
removing that barrier.
295 As a result, the scope of the "relevant product" markets
defined for competition purposes will genera lly be narrower than the scope of
"directly competitive products" defined fo r the purposes of Article III:2, second
sentence.
(c) It must also be borne in mind that the notions of "competition" and of
"substitutability" are relative ones. From an economic perspective, two products are
not either "competitive" or "non competitiv e". Rather, products are "more or less"
competitive. For that reason, as important as the criteria for defining a relevant
market or for defining the notion of "direc tly competitive or substitutable products" is
the degree of competition which is deemed relevant in each case. That degree will
determine the standard by which the criteria are to be interpreted. That standard may
vary depending on the purpose of the legal provi sion to be applied. It may vary also
from one jurisdiction to another.
 (d) This link is expressly recognised in an EC Commission Notice on the definition of
relevant markets for Competition law purposes, which states that "the concept of
relevant market is closely related to the objectives pursued under Community
competition policy".
296 Further, that Notice acknowledges that the definition of the
relevant market may vary depending "on the nature of the competition issue being
examined."297

294 The applicable EC competition regulations define the notion of "relevant product market" for the
purposes of EC Competition law as follows:
A relevant product market comprises all those products and/or services which are regarded as
interchangeable or substitutable by the consumer , by reason of the products' characteristics,
their prices and their intended use.
See the Commission Notice on the definition of relevant market for the purposes of Community competition law
(published in OJ of 9.1.97, C 372/5, hereafter "the Notice"), para 7.
295 Ibid. at para 42. The decision in the Case No IV/M 938 - Guinness/Grand Metropolitan mentioned
by Korea in one of its questions to the EC provides an ex cellent illustration of this difference. The parties to the
merger had provided to the Commission consumer surveys which suggested that all spirits were within the same
relevant market. The Commission, however, disregarded those surveys because:
where those surveys (most of which were originally aimed at addressing taxation issues)
employed price-change data, the overall levels of change (which mainly reflected changes in
taxation) were much higher than those normally used by competition authorities as an aid to
market definition (para 10).
296 Notice, para 10.
297 Notice, para 12.

(e) In this regard, it is clear that the objec tive of competition law is very different from
the objective pursued by GATT Article III:2, and more generally by the WTO
Agreement. The general objective of competiti on law is to preserve a certain degree
of competition against action by the market participants. If the competition authorities
of a certain country aim at maintaining a high degree of effective competition, they
will apply the relevant criteria strictly, thereby arriving at a narrow definition of the
relevant market.
(f) On the other hand, the purpose of GATT Article III:2, second sentence is to prevent
Members from applying internal taxation so as to afford protection to domestic
production. Unlike the objective of competiti on law, the objective of Article III:2,
second sentence, is furthered by a broad interp retation of the relevant criteria, rather
than a strict one.
(g) For the above reasons, the EC is of the view that the decisions taken by its
competition authorities with regard to the definition of relevant product markets are
devoid of relevance for the purposes of a pplying the notion of "directly competitive
or substitutable products" in this dispute.
 (h) In this regard, a parallelism can be draw n to the notion of "like product". The criteria
for applying the notion of "like products" are the same in all the GATT provisions
where that notion is found. Yet, in Japan - Taxes on Alcoholic Beverages II, the
Appellate Body confirmed that the notion of "like products" is a relative one which
may have a different scope in each GATT provision concerned.
298 In Article III:2,
first sentence, it must be construed narr owly. In other GATT provisions, it may be
construed more broadly. A fortiori , the notion of "directly competitive or
substitutable" may also have a different scope in Article III:2 of GATT and in the
competition laws of Members, which pursue an altogether different objective.
 (i) More relevant for the interpretation of GATT Article III:2 is the case law of the
European Court of Justice (ECJ) regarding the application of Article 95 of the EC
Treaty,299 whose wording is almost identical to that of GATT Article III:2 and
therefore, unlike EC Competition Law, shar es a similar purpose. In a long line of
cases, the ECJ has concluded that all distilled spirits are either "similar" (the
equivalent concept of "like") or "directly competitive or substitutable".
300

298 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., pp. 21-22
299 Article 95 of the EC Treaty reads as follows in the pertinent part:
No Member State shall impose, directly or indirectly, on the products of other member States
any internal taxation of any kind in excess of that imposed directly or indirectly on similar
domestic products.
Furthermore, no member State shall impose on the products of other Member States any
internal taxation of such nature as to afford indirect protection to other products.

300 The standard reasoning followed by the ECJ in those cases is the following:
"There is, in the case of spirits considered as a whole, an indeterminate number of beverages
which must be classified as "similar products" within the meaning of the first paragraph of
Article 95, although it may be difficult to decide this in specific cases, in view of the nature of
the factors implied by distinguishing criteria such as flavour and consumer habits. Secondly,
even in cases in which it is possible to recognise a sufficient degree of similarity between the
products concerned, there are nevertheless, in the case of all spirits , common characteristics
which are sufficiently pronounced to accept that in all cases there is at least partial or potential
competition. It follows that the application of the second paragraph of Article 95 may come
into consideration in cases in which the rela tionship of similarity between the specific

7.5. In response to a question concerning the relevance of production processes to assessing
whether products are like or directly competitive or substitutable, the European Communities states
that:
 (a) Similarities or differences in production processes may be relevant only to the extent
that they affect the characteristics of th e products. This principle flows clearly from
the Panel Report on US - Standards for Reformulated and Conventional Gasoline .
301
Although that Panel report is concerned w ith GATT Article III:4, the European
Communities is of the view that the same principle applies also with respect to
Article III:2.
(b) In the present case, it is relevant that a ll distilled spirits are obtained by the same
manufacturing process (distillation) because it h as the consequence that all of them
share the same basic physical characteristics. On the other hand, differences
regarding the method of distillation (continuo us or pot-still), the method of filtration
(through white birch or other methods) or the production volume (artisanal v.
industrial) are irrelevant because they have either no impact at all or only a minor
impact on the physical characteristics and end uses of the products.
B. UNITED
 STATES
7.6. In response to a question whether if two products have a very low cross-price elasticity that is
sufficient to consider them directly competitive or substitutable products, the United States asserts
that:
(a) The standard that should be used to establish that two products are "directly
competitive or substitutable" within the me aning of Article III:2 is a case-by-case
examination that may consider a number of factors. There is no one standard that can
operate across all cases. Cross-price elasticity is but one factor that may be helpful in
conducting an analysis of whether products are directly competitive or substitutable.
It is unlikely that a very low cross-price elasticity in and of itself will be sufficient to
make a determination in any particular case.
(b) The quotation from the second US submission expresses the economic point that any
shift away from one product to another in response to a relative rise in the first
product's price is a sign of cross-price elasticity and therefore substitutability.
However, the US response did not purport to establish what degree of substitutability
was "direct" within the meaning of Article III:2. Clearly the word "directly" in the
Note Ad Article III:2 places some limits on the scope of Article III:2. However, this
case does not present a situation where it is necessary to test those limits. In this case,
the products are physically similar, and several other factors support the fact that the
products are directly competitive or substitutable.
(c) The Panel should be in a position to determ ine substitutability largely on the basis of
common physical characteristics, which ar e reflected in a common HS heading,
302

varieties of spirits remains doubtful or contested" (Judgement of the ECJ of 27 February 1980,
Commission of the European Communities v Kingdom of Denmark , Case 171/78, ECR 1980,
447, at par. 12)
301 Panel Report on US - Standards for Reformulated and Conventional Gasoline , adopted on 20 May
1996, WT/DS2/R, para 6.11-6.12
302 According to the United States, contrary to Korea's allegation, the Appellate Body in Japan - Taxes
on Alcoholic Beverages II did not reject the existen ce of a single tariff heading as significant guidance in
examining substitutability. The Appellate Body distinguished between tariff nomenclature and tariff bindings,

and the Dodwell study presents evidence of a supplementary nature. The Appellate
Body in Japan - Taxes on Alcoholic Beverages II did not, as Korea has claimed
incorrectly, require a market analysis or prescribe the use of a cross-price elasticity
study as the sole means of establishing whet her products are directly competitive or
substitutable. To the contrary, the issu e only arose because some parties argued it
was inappropriate to place undue emphasis on the market place generally or such
studies specifically. The Appellate Body fi rst determined that it "did not seem
appropriate" to look at the actual market in addition to physi cal characteristics,
common end uses and tariff classification. In approving the Panel's use of the ASI
cross-price elasticity study (which the Dodwell study emulated) the Appellate Body
underscored that cross-price elasticity of demand was not the "decisive criterion" for
its determination that the products were di rectly competitive or substitutable. The
Appellate body Report finds no support for the suggestion that a failure to show a
positive cross-price elasticity in general or a particular cross-price elasticity can be
the basis for concluding that products are not directly competitive or substitutable
under GATT Article III:2.
7.7. In response to a question about whether there is a de minimis standard in assessing the
question of "so as to afford protection", the United States argues that:
(a) the criterion for meeting the third element of the analysis under the second sentence
of Article III:2 is set out by the Appellate Body in Japan - Taxes on Alcoholic
Beverages II:
"[P]rotective application can most often be discerned
from the design, the architecture, and the revealing
structure of the measure. The very magnitude of the
dissimilar taxation in a particular case may be
evidence of such a protective application, as the
Panel rightly concluded in this case. Most often,
there will be other factors to be considered as well.
In concluding this inquiry, panels should give full
consideration to all the re levant facts and all the
relevant circumstances in any given case".
303
(b) In concluding that the panel had not erre d in determining that the tax was protective
solely on the basis of the large differentia ls between tax rates applied to shochu and
Western spirits, the Appellate Body appears to have reasoned that the large
differences between such physically si milar products could not be otherwise
explained. The United States considers that the magnitude of the differences in tax
rates between such similar products in this case compel the same inference. On the
other hand, however, the Appellate Body di d not determine that panels must find a
large differential in rates in order to find protective application; the differentials in
rates is addressed by the second element of the Article III:2 analysis, whether the
products are not "similarly taxed".
(c) It would not be appropriate to determin e that a measure does not have a protective
application simply on the basis of significantly different pre-tax prices. A number of
factors can affect pre-tax prices, such as exchange rates, and recent experience has

which it said could include a wide range of products and therefore must be viewed with caution in examining
the term "like". Appellate Body Report, supra., pp.21-22.
303 Appellate Body Report, supra., p. 29.

shown how quickly those factors can change . It would not be appropriate to base
determination of protective effect on a "sna pshot" of pre-tax prices. Instead, the
Appellate Body Report makes it clear that the panel must examine all the facts and
circumstances concerning the structure of the law. In this instance, the structure of
Korea's Liquor Tax Law distinguishes between products on the basis of arbitrary
physical characteristics in a way that can only be explained by an intention to identify
and define products that happe n to be imported. Combined with Korea's long history
of protecting soju from imports of wester n spirits, the differential tax rates then
further support the conclusion that the law is structured to protect imports.
(d) There is no de minimis interpretation of the concept "so as to afford protection to
domestic production." The prohibition is ab solute - any measure applied so as to
afford protection of a directly competitive or substitutable import that is not
"similarly" taxed is providing too much protection.
(e) In light of the Appellate Body's emphasis on the structure of the measure, it would
not be appropriate to limit the inquiry to the tax differentials and require a
complaining party to determine the extent to which in the current market, with respect
to current products at current prices, th e taxes are effective in reducing sales of
imports. Such an approach would, at a mini mum, be at odds with the basic principles
of the WTO Agreement. As Korea's law applies obviously punitive taxes on Western
spirits not on the basis of price differen ces, but on the basis of arbitrarily physical
criteria, the higher rates adversely affect all products within the criteria - including
products in a wide range of prices available in the United States.
7.8. In response to a question concerning the price mix of exports to Korea compared to other
markets, the United States argues that:
(a) The pre-tax prices of imports reflect costs such as transportation and tariffs
(20% ad valorem in Korea), costs that are not reflected in prices of domestic
products. The punitive taxes on Western spirits likely contribute to higher
pre-tax prices than would otherwise exist under a neutral tax structure".
(b) The majority of imports of distilled spirits into Korea are from the European
Community, and accordingly, the United St ates is not in a position to draw any
general conclusions about mark eting of obvious brands in the Korean market at this
time. Aside from some bulk shipments, the overwhelming majority of US exports are
of Jack Daniels and Jim Beam Whisky, bra nds which enjoy partic ular international
name recognition. Such name recognition is of particular value in developing a
presence in new markets due to the high costs of exporting.
(c) The US Government does not have access to the pre-tax prices charged by distilled
spirits around the world by particular brand, which, according to industry
representatives, is considered confidential information by the respective companies.
7.9. In response to Panel questions and arguments raised by Korea with respect to competition
issues, the United States notes that it did not consider it would be appropriate to borrow market
analysis under national competition laws in analyz ing what products are “directly competitive or
substitutable” for purposes of Article III:2. The Unit ed States considers it important to bear in mind
the different objectives of antitrust law, on the one hand, and of GATT Article III:2 on the other.
Article 3.2 of the DSU makes clear that the provi sions of the GATT 1994 and other WTO agreements
are to be construed “in accordance with customary ru les of interpretation of public international law.”
As the Appellate Body has noted on several occ asions, Articles 31 and 32 of the Vienna Convention

of the Law of Treaties embody the customary internat ional law of interpretation. Article 31 sets forth
the basic principle that treaties ar e to be interpreted “in good fait h in accordance with the ordinary
meaning to be given to the terms of the treaty in their context and in the light of its object and
purpose.”
7.10. According to the United States, consistent with this principle, GATT Article III:2 should be
interpreted in the light of the overall purpose of Ar ticle III, which is “to avoid protectionism in the
application of internal tax and regulatory measures.”
304 Article III is an anti-discrimination provision
aimed at ensuring that government measures do not sk ew competitive conditions in favor of domestic
products. Competition laws, by contrast, address pr ivately-created threats to market competition,
regardless of whether the competing producers or products are domestic or foreign. Because the
object and purpose of the two sets of rules are quite different, it would not be appropriate to borrow
and apply a competition analysis in deciding whethe r a tax measure is consistent with GATT Article
III:2.
C. KOREA
7.11. In response to a question concerning the ingred ients and comparability of pre-mixes, Korea
states that:
(a) Pre-mixes first became available in May 1994 with a view to attracting women
consumers and consumers in their twenti es who preferred low alcoholic beverages. 305
Pre-mixes have 10 per cent to 15 per cent alcoholic content.
(b) Standard soju has 25 per cent alcoholic content. The salient features which
distinguish premixes from standard soju are that the former contains scent, coloration
and more than 2 per cent extract. To be precise, pre-mixes do not contain standard
soju. The mixture is a combination of various ingredients and joojung (ethyl
Alcohol) which is the raw material from which standard soju is produced.
 (c) To make the pre-mixes appeal to women, the producers first eliminated the pungent
odour and taste of joojung by adding fruit scen ts (such as lemon and cherry). Thus,
the producers add lemon/cherry juice con centrate, acerola juice concentrate, and
lemon/cherry spices which cannot be added to standard soju pursuant to the law.
Sweeteners such as stevioside, sugar and fructose are added in higher dosage than
standard soju to give the pre-mixes a sweeter taste.

 304 Appellate Body Report on Japan – Taxes on Alcoholic Beverages II, supra., p. 16.
 305 See the Sofres report: "In the past Korean women had negative sentiments towards alcohol.,
However, the current generation of women is drinking more frequently each year. The Korean distillers and
producers reflect this trend by offe ring low alcoholic content drinks lik e ... "Lemon Soju". Please note that
Korean producers do not use the term "soju" in the brand name for these pre-mixes. Some examples of names
are "Lemon 15", "Cherry 15", "Lemon Remix" and "Cherry Remix".

 P r e - m i x e s
 Standard soju
 (Lemon/cherry remixes) (Green, Chungsaek soju)

 Sugar Sugar
 Citric Acid Stevioside
 Co2 Gas Citric Acid
 Lemon/Cherry concentrate Mineral Salt
 Acerola juice concentrate Amino acid
 Lemon/cherry spices Solbitol
 Food colours
 Fructose
 Stevioside
(d) Korea further stated that standard soju is served in a typical small glass, and is rarely
if ever drunk mixed. Standard soju is served "straight", and commonly drunk with meals.
(e) Pre-mixes, otherwise known as soju-based cocktails, have quite a different, much
sweeter taste than standard soju (they are also classified as liqueurs in the liquor tax
law). They have a lower alcohol content as well. Their composition is different, as
indicated above. Soju-based cocktails are not suited for consumption with meals.
(f) It is inappropriate to associate pre-mixes w ith standard soju, in the same way that it
would be inappropriate to associate Bailey’s (a blend of, inter alia, fresh cream and
whisky) with whisky. Bailey’s and soju-based cocktails are classified under the same
heading, with other liqueurs, in the Korean liquor tax law.
(g) Finally, it is easy to overestimate the popularity of soju-based cocktails, as the
European Communities has done. As their novelty has worn off, the increases in
sales of them have tapered off.
7.12. In response to a question concerning whethe r Article III:2 covers potential or future
competition, Korea states that:
 (a) If "potential competition" refers to compe tition that would exist "but for" an allegedly
discriminatory tax, Korea could imagine that potential competition falls within the
scope of Article III:2. Korea’s discussion of "pre-tax" prices addressed this argument
and shows that even if the effect of the tax were eliminated, the products at issue
would not be in direct competition. The pre-tax prices of the products at issue,
according to the complainants’ own figures, range from 400 per cent more expensive
than soju before tax to more than 1 800 per cent more expensive.
(b) If by "future competition", the panel mean s competition that would appear at some
point in the future if, for example, consumers changed their habits, or if the pre-tax
price of whisky fell to the level of soju, then Korea considers that "future
competition" is not covered by Article III: 2. Complainants cannot base Article III:2
allegations on speculations about future cha nges in the market. Rather, complainants
must wait to bring a WTO case if and when relevant changes appear.

7.13. In response to a question about the possible expl anations of apparent inconsistencies in the
Dodwell study, Korea states that:
(a) Choice subject to large random elements
(i) If one were seeking an explanation of ostensible inconsistencies of choice in
real life, the idea that choice is subject to a large random element would be an
obvious first hypothesis. It leads to a view of buyers choosing good X one
day or hour and good Y the next, de pending on mood or a host of other
circumstances. The relative price of X and Y might affect the frequency with
which each is chosen. In a short eno ugh period of observation, however, the
random element might dominate, so th at some consumers will appear to
respond to a rise in the price of X by buying less Y.
(ii) As an explanation of inconsistenc ies in answers to a questionnaire based
upon hypothetical prices, however, this hypothesis is problematic. An
interview will normally be short, so that mood or other factors that might
drive the purchase of one good rather than another might reasonably be
assumed to be constant throughout the interview. If that assumption is
correct, however, random elements affe cting demand cannot be called upon
to explain inconsistencies in results.
(iii) Of course, the assumption that mood is constant through the interview may be
false. If it is false, however, interpreta tion of the results of the survey faces a
different problem. In the present cont ext, for example, the purpose of the
Dodwell survey is to isolate the effects of changes in prices from other factors
that might affect demand. But if mood or other factors change within the
interview, or if respondents are allo wed to imagine themselves making one
choice in one mood, and another choice in another mood, the interview has
failed to isolate changes in prices from other factors affecting demand. Its
results will give a false picture of the effect of prices on demand.
 (b) Mistakes in reporting responses
A simple explanation of the inconsistenci es is that respondents are being consistent,
but that interviewers are mis-reporting their responses. This hypothesis is included
for completeness only.
(c) Possible explanation of unexpected responses
Were the responses in unexpected directions, but consistent, the facts to be explained
would be different. We offer below two hypotheses that might in principle explain
unexpected results, and also comment on why these seem incapable of explaining
inconsistencies in result.
(d) Gifts and prices
(i) Respondents who think they are being asked about a single bottle purchase,
may answer questions with the purchase of a bottle of spirits as a gift in
mind. In that case, however, they might respond to price changes in ways
that appear perverse. A reduction in price might make a spirit less desirable
as a gift, and an increase might make it more desirable. The position would

be further complicated if respondents an swered some questions thinking in
terms of gifts, and some questions thinking in terms of personal consumption.
(ii) But while the gift motive might in principle explain ostensibly perverse
reactions to changes in price, it lacks explanatory power in the present case.
That is because, first, it is inconsistent rather than perverse reactions that are
primarily at issue here. Second, the inconsistent reactions in chart 2 are
responses to changes in the price of soju , not whisky, and standard soju is not
usually given as a gift: it is too cheap to play that role.
 (e) Whisky and soju are complements in consumption
(i) There is no great difficulty in imagining circumstances in which two
alcoholic beverages are complements, at least for some drinkers. In some
communities, for example, whisky is typically drunk with a beer "chaser".
Alternatively, drinkers might follow a ritual of drinking two rounds of
whisky and then two rounds of beer. In either case, beer and whisky might
behave as complements rather than substitu tes - rather than a rise in the price
of whisky increasing the quantity consum ed of beer, which is what would
happen if beer and whisky were substitutes, the rise in the price of whisky
might reduce the quantity consumed of beer.
(ii) Drinkers may act as if whisky and a beer chaser, for example, is a single
drink. Thus, an increase in the price of either beer or whisky will reduce the
number of drinks taken. It will therefore reduce the quantity consumed of the
drink whose price has remained constant.
(iii) The problem, though, is that in D odwell Chart 2, whisky and soju act like
substitutes when the price of soju ri ses from 1 000 to 1 100 won, but like
complements when the price of soju rises from 1 100 to 1 200. It is not the
latter fact that is hard to explain (at le ast in principle!) - it is the inconsistency
between the two.
(iv) One might think in terms of a p opulation made up of some drinkers who
regard scotch and soju as substitutes, and some who regard them as
complements. For some price chang es the first group dominates, while for
others the second group determines the direction of the net change.
(v) Before pressing along that theoretical path, however, it is well to recall what
is driving the problem. At issue is the effect of a 100-won change in the price
of a bottle of soju
306. But for soju and scotch to be complements, they must
be drunk in a tight combination with one another. What then counts is the
price of the combination. But with th e price of scotch so many multiples of
the price of soju, a 10 per cent change in the price of soju will have only a
very small effect on the price of a soju-whisky combination. For a 100-won
rise in the price of soju to cause the number selecting premium whisky to fall
from 41 to 36, and the number selecting standard scotch to fall from 56 to 49
requires a sensitivity to price that is nether plausible nor suggested by
anything else in the Dodwell findings.

306 At the current exchange rate, 100 won equals US$ 0.0691 and ECU 0.0637 (as of 23 March 1998).

(f) Korea concludes by noting that in its firs t submission, it described the inconsistencies
as "troubling", but commented that the Dodwell Study "has much more serious
problems".307 Korea sees no reason to change that assessment.
(g) Korea also continues to believe that the attention of respondents might have
wandered during their progress though the 16 sets of hypothetical prices offered them
by Dodwell interviews (to say nothing of that of the interviewers themselves). That
hypothesis is the one that seems to best fit the facts.
7.14. In response to a question concerning the water content of distilled and diluted soju, Korea
states that:
(a) For the benefit of the Panel Korea hereby provides an answer related to the water
content of both standard and distilled soju and also explains briefly the manufacturing
process to better understand the differences.
(b) In case of standard soju, water is adde d before and after distillation. Prior to
distillation, one steams tapioca and/or sweet potatoes so that they are in a mashed
form. Second, water is added. Third, enzymes and yeast are added so that the
mashed tapioca and/or sweet potatoes will fe rment. This fermentation process will
lead to a 10-11 per cent alcoholic content liquid which is in a sludge form. The
ingredients constitute 20 per cent, water 79.9 per cent and yeast 0.1 per cent.
(c) Then the material undergoes continuous distillation until one obtains as pure an
alcohol as possible (95 per cent ethyl alcohol). After distillation, water is added and
then six to seven additives are inserted. Ethyl alcohol (joojung) constitutes 26.4 per
cent and water constitutes 73.6 per cent at this stage.
(d) Contrary to the notion that standard soju is simply a diluted form of distilled soju, the
latter uses different base materials, primarily rice and sometimes other grains. Water
is added only prior to distillation. No wa ter is added after distillation. Producing a
45 per cent distilled soju through single distillation is a know-how developed by
Korean producers over several hundred years.
(e) In case of distilled soju, one takes white rice and steams it. Afterwards, one adds
water and yeast which acts as a catalyst to commence the fermentation process. The
ingredients take up 40 per cent, water 59 per cent and yeast 1 per cent. After the
material ferments, one has a product which has a low alcoholic content. Then the
fermented product undergoes a single distilla tion so that the final product has 45 per
cent alcoholic content. No water is added after distillation.
The percentage of water added is illustrated in the following chart:
 Before distillation
 After distillation
Standard soju 79.9% 73.6%
Distilled soju 59.0% 0%

307 See Attachment 2 of Korea, p.6.

7.15. In response to a question about the physical differences between exports of soju and shochu to
Japan, Korea states that:
(a) The three leading brands of standard so ju exported to Japan are Jinro, Doosan’s
Green and Bohae. Jinro and Doosan only use sugar and citric acid in their products
exported to Japan. Bohae’s standard soju exported to Japan uses no additives. On the
other hand, Korean standard soju can use seven additives.
(b) The difference in additives can be illustra ted by the difference in additives by the two
products Jinro exports to Japan.

 Jinro Gold Jinro Export
Alcohol content 25% 25%
Citric acid x x
Sugar (natural) x
Fructose x
Oligosaccharide x
Stevioside x
Refined salt x
Amino acid x

(c) The difference in the number of ingredients leads to different consumption patterns.
In Japan, shochu A is almost always consumed with water, either warm or cold, other
beverages and on the rocks. In Korea, st andard soju is almost always consumed
straight.
(d) The source of this information is enterprises such as Jinro that are engaged in
marketing these products on the Japanese market, and who have found it necessary to
export soju to satisfy Korean expatriates living in Japan, and to produce a different
product to meet the needs of Japanese consumers.
(e) This can be easily verified by the Panel by looking at the bottles of Jinro Gold (the
Korean soju, which targets the Korean resi dents in Japan) and Jinro export (targeting
Japanese consumers) provided by Korea. The labels of Jinro Gold contain Korean
characters, whereas those of Jinro Export contain no Korean characters.
(f) The labels of these bottles also give an indication regarding their tax treatment in
Japan. The label on the back of Jinro Gold refers to "spirits", whereas the label on the
back of Jinro Export refers to "shochu A".

7.16. In response to a question concerning a hypothe tical comparison of an expensive bottle of
wine and a cheaper table wine, Korea states that:
(a) For the purposes of Article III:2, in order to find that two products are "like", one
must show to begin with, that the tw o products are "directly competitive or
substitutable". According to the panel in the recent Japan - Taxes on Alcoholic
Beverages II:
"Like" products should be viewed as a subset of directly competitive
or substitutable products.
308
Accordingly, a finding of "likeness" in Article III:2 presupposes an even stronger competitive
relationship between two products than a findi ng of directly competitive or substitutable
products.
(b) Price has an impact upon the competitiv e relationship between products. Where
prices vary greatly, this can mean that two products do not compete. In the example
given by the Panel of cheap wine and a rare Bordeaux, it might be that in a particular
market the large difference in price means that the two products do not compete, and
are therefore neither "like" nor directly co mpetitive or substitutable products. This is
so because most consumers will not consid er a $1 000 bottle of wine to be a
substitute for a $5 bottle of wine, notwithst anding apparent similarities concerning
physical characteristics between the two products (colour, packaging, alcoholic
content).
(c) That conclusion is likely to be supported by other divergences. Indeed, the fact that a
person chooses to pay more for a rare bordeaux when he or she has the option of
buying a cheap table wine is a measure of the differences between the two products.
Between a cheap wine and a vintage bordeaux, for example, important differences
might be the age of the wines, the type, year, and provenance of the grapes used, the
blending, the way the wine was cared for and stored, all of which have an impact on
the organoleptic qualities of the wine. The rare bordeaux might come from a famous
vineyard or chateau, and the purchaser might not be interested in drinking the wine at
all, or at least not with a regular meal. He might see it as an investment or as a wine
for very special occasions These typ es of differences would also support the
conclusion that these products are not "like" or directly competitive or substitutable
products.
(d) In the case at hand, Korea has shown that pr ice is an important factor in the directly
competitive or substitutable products, and th erefore, "like" product analysis. The
complainants’ own evidence (notably, the Dodwell Study) indicated that there are no
overlaps in the prices of standard and premium soju on the one hand, and western-
style spirits on the other hand. Thus, the mo st expensive form of standard soju (i.e.,
premium) is still much less expensive than the cheapest western- style spirits. In
contrast, prices of wine might cover a whole range of prices.
(e) Moreover, the products in this case also di ffer in a number of other ways, in particular
in their physical characteristics and end uses. Korea maintains that an overall
assessment of the products at issue in this case must lead to the conclusion that these
products are neither "like" nor directly competitive or substitutable products.

308 See Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., at para. 6.22.

7.17. In response to a question about the likeness or competitiveness of physically similar products,
Korea states that:
(a) When two products are physically identical in the sense that no known test or
procedure can distinguish between them, it se em to Korea that the products must be
like. Physical identity in this strict sen se, however, seems to imply either that the
market prices of the products are the sa me, or that only one of them is sold, or that
consumers are ignorant of their likeness. If two products both appear in a market,
selling at different prices, but chemists, physic ists, or other experts maintain that they
cannot distinguish between them, there is therefore a problem. In effect, there is a
conflict of evidence experts say they cannot detect any differences but consumers of
the products act as if they can.
(b) In that event, Korea does not believe that the expert evidence alone is enough to
declare the products either "like" or "direc tly competitive or substitutable products".
To take that step, it is necessary to refu te the hypotheses that the expert tests are
incapable of detecting differences that are significant to consumers; or that the
experts have not properly designed or targeted their tests to detect them; or that they
are misinterpreting their results.
(c) With respect to "physically identical or n early so", it seems to Korea that the addition
of "or nearly so" to "physically identi cal" raises difficulties. One problem is
circularity; defining "nearly so" so that any change in the pr oduct that has only a
small effect on consumer demand is judge d to leave a "nearly identical" product,
whereas any change that has a substantial effect on demand is judged to lead to a
different product. Such a definition of "nearly identical" would render this question
meaningless - if such a definition is used , products that fall under it are likely to be
directly competitive or substitutable products.
(d) Korea believes, however, that many chang es that are "small" in a technical sense will
lead to products that are very different by the test of market performance. To take
one example, the addition to a food or drink product of small amounts of an
unpleasant substance, or a substance perceived to be unpleasant, may, if known to
consumers, cause demand for the product to fall to zero, even though the substance
does not alter taste or threaten health and its presence cannot be detected by
consumers. The "small" addition may convert a sought-after product into one that is
no longer saleable at any price. Moreover, the elasticity of substitution between the
original product and the "nearly identical" product may be zero or insignificant.
Korea is far from convinced that "nearly identical products" with different market
demands and prices and a low or zero cross-price elasticity of demand should be
considered directly competitive or substitutable products.
(e) Korea believes that products may be physically identical or nearly so but not directly
competitive or substitutable products. Korea believes that differences that are small
in a technical sense may be important to bu yers, and that perform ance in the market
place is the ultimate test of directly compe titive or substitutable. Alternatively stated,
Korea does not believe that there is any tec hnical short-cut that can determine direct
competitiveness or substitutability without reference to market performance.

(f) The relevant physical distinctions are those that are important to customers. The
WTO is concerned with markets, and mark ets are ultimately dependent on consumer
tastes and habits. In the present case, re garding spirits, Korea has pointed to the
following distinguishing physical characteristics:
 (i) raw materials, additives
 (ii) production process
 (iii) alcohol percentage
 (iv) flavour, smell and colour
(g) Together with the difference in end-use and price, the distinctions indicate the lack of
a directly competitive and substitutable rela tionship between Korean sojus on the one
hand, and the western-style liquors at issue on the other hand.
(h) When looking at physical characteristics, the appropriate measure of relevance is the
importance to consumers. In the present case, Korea has argued that the differences
in physical characteristics, together with other market-related factors (such as price
and end use), indicate that none of the western-style liquors competes directly with
any of the two Korean sojus on the Korean market.
7.18. In response to a question about comparing prem ium diluted soju to standard diluted soju,
Korea states that:
(a) Korea included premium diluted soju in its comparison of diluted soju with other
liquors because the differences between premium and standard diluted soju, as
compared to the differences between dilu ted soju (including premium soju) and
imported liquors, are of minor importance. Premium diluted soju is only an
"upgraded" version of standard soju. Thus, premium diluted soju could be compared
to a Renault’s compact car "Clio" with leather seats which, although it is a luxury
version, is still a compact car. To proceed with this analogy: imported liquors are
Mercedeses, Jaguars and Rolls Royces compared to diluted soju. The price of a
Renault Clio, even equipped with leathe r seats, is substantially lower than the
cheapest Mercedes, let alone a Jaguar or Rolls Royce.
(b) By taking the same criteria by which one distinguishes products in a like-or directly
competitive or substitutable products-analy sis, the differences resulting from a
premium and standard comparison are small. For example, the price difference
between standard diluted soju and premium diluted soju amounts to a factor of 1.76,
as opposed to a factor of 5 for the cheapest imported liquor (gin), and more than 19
for the most expensive imported liquor (cognac/brandy).
(c) For one of the leading premium diluted soju brands, Kimsatgat, the primary
difference has been that one of the seven possible additives (stevioside) is replaced by
honey. In contrast, for the imported liquors at issue (whisky, vodka, gin, brandy,
rum) there are differences in taste, physical characteristics, and end-use. The taste of
gin, for instance, is quite different from th e taste of diluted (including premium) soju,
due to the different physical composition. Gin is not drunk with Korean meals,
whereas diluted (including premium) soju is, and so on.
(d) This analysis led Korea to the conclusi on that standard diluted soju and premium
diluted soju are sufficiently similar and su fficiently competitive that they should be
grouped together in the analysis required by this case. To be sure, Korea has treated

distilled soju separately from diluted soju, as between these two products the
differences are significant (price, use, marketing, raw material, tax classification).
7.19. In response to a question about competition between types of whiskies, Korea states that:
(a) There is no reason to assume that imported whiskies are not directly competing with
or unlike domestic whiskies because of the price differences cited. The prices cited
concern individual brands. Both domes tic and imported whiskies cover the whole
gamut of prices (for instance, cheap whiskies are bottled in Korea, but also expensive
ones). Taking into account all sales, dom estic whisky is on average somewhat more
expensive than imported whisky.
309
(b) There are no other differences (such as physical characteristics or end use) to suggest
that imported and domestic whisky are positi oned differently on the Korean market.
Next to the small difference in price, th is is relevant as well. As Korea has
emphasized before, the decision of whether products are "like" or directly competitive
or substitutable products is a matter of an overall appreciation of their relationship,
weighing all the relevant factors. Of cour se, no distinction is made in Korea’s liquor
and education tax rates between imported and domestic whisky.
7.20. In response to a question about the negotiating history of Article III and Ad Article III, Korea
states that:
(a) These examples show that physically differ ent products may be in a sufficiently close
competitive relationship for Article III:2 to a pply. Whether that is, in fact, the case,
depends on a case-by-case analysis, according to the Appellate Body in Japan - Taxes
in Alcoholic Beverages II.
(b) It may well be that apples and orang es are directly competitive or substitutable
products in certain markets. Then again, one can conceive of a number of reasons
why such fruits are not directly competitive or substitutable (e.g., with breakfast it is
more common to have orange rather than apple juice; most consumers can make
orange juice themselves, but not apple juice; apple pie is more common in many
countries than orange pie; in countries where oranges are not grown they are more
expensive than apples; etc.). In fact, cert ain fresh fruits, such as bananas, have been
found to be in a market of their own, at least in the EC market.
310 Such
determinations, also in respect of the ot her products cited, ca nnot be made in the
abstract.
(c) These examples then are relevant to the pr esent case, in that they illustrate that
products with different physical characteristics may be directly competitive or
substitutable products. This was also shown in the Japan - Taxes on Alcoholic
Beverages II, where whisky and certain other spir its were found to be in a directly
competitive or substitutable product-relations hip with Japanese shochu. That case
also shows, however, that such findings depend on a factual analysis of individual
markets.

309 See Korea's, Attachment 5.
310 Judgment of the Court of Justice of the European Communities of 14 February 1978, Case 27/76,
United Brands Company and United Brands Continental BV v Commission of the European Communities , 1978
ECR 207.

7.21. In response to a question concerning legal requi rements for sweetness in soju, Korea states
that there is no legal requirement regarding the minimum sugar content for soju in Korea. The
sweeter taste of Korean soju can be explained by the use of such additiv es as stevioside and/or
aspartam, which are 150-300 times sweeter than sugar.
7.22. In response to a question about consumption of soju with food, Korea states that the bulk of
standard soju is consumed with meals. Other than this, a small proportion is consumed in some other
on-premise locations. Some standard soju will also be consumed at home without a meal (finishing a
bottle after the meal is over, for instance).
7.23. In response to a question about uses of distilled soju as a gift, Korea states that, as has been
emphasized in Korea’s first submission, distilled soju is an artisanal product that occupies a "niche" in
the Korean market, and is mainly given as a gift. Wh en distilled soju is received as a gift, it is usually
consumed with meals on traditional occasions such as New Year’s Day and Korean "Thanksgiving”
(August 15). Other instances in which distilled soju is consumed are rare. In some very expensive
and traditional Korean restaurants and Japanese restaurants, distilled so ju is offered, at very high
prices.
7.24. In response to a question whether the questions and methodology in the Dodwell study are
similar to those used in the ASI study in Japan- Taxes on Alcoholic Beverages II , and whether Korea
disagrees with that Panel's use of the ASI study in reaching its conclusions, Korea states that it is
confident that the Panel in Japan – Taxes on Alcoholic Beverages II examined the ASI study with
appropriate care. Korea, however, has not studied the detail of the ASI report, which was submitted
to a different panel in a different case, and is conc erned with a market in a different country. It is
therefore unable to comment on the merits of the ASI study. Moreover, Korea doubts the value of a
post-mortem on either the ASI study itself, or the use of it by the Panel in Japan – Taxes on Alcoholic
Beverages II. If the ASI study is free of the flaws of the Dodwell study, its use by the Panel was
proper, but that fact cannot provide a sound argument for reliance on the flawed Dodwell study in this
proceeding. If the ASI study is as defective as the D odwell Study, the fact that the Panel relied on it
cannot make a sound case for repeating the same mistake.
7.25. In response to a question concerning cross-price elasticity, Korea stated:
 (a) Korea agrees with the implied observation th at the position of the US on this issue is
inconsistent with that of the EC.
 (b) To discuss the comments of either pa rty, however, a context is needed. One
important element of such a context is the kind of world to which te comments are intended to
apply – is it a theoretical world in which informa tion is fully and freely available, or the real
world in which accurate information is difficult to get?
 (c) The US suggestion that + any shift … should be interpreted as a sign of positive cross-
elasticity and therefore substitution" seems to Ko rea to cast the Article III:2 net too widely if
it is intended to apply to a full-information world, and therefore to be a statement of principle.
That criterion would make spirits, beer and wine DSSP, spirits and soft drinks quite possibly
DCSP, and beer and soft drinks almost certainly DCSP. It seems unlikely that any WTO
member thought that membership entailed an oblig ation to apply the same rate of tax to such
a wide range of products – and few, if any, do.
 (d) If the US criterion is intended for a pplication to the real world, however,
imperfections of information provide additional reas ons to reject it. In the real world, there
are problems of error in the construction a nd organisation of samples and problems of
statistical error – to say nothing of the blunderi ng of those "fallible human beings" that have

become a feature of recent EC argument in this case. Even if the US criterion were accepted
in principle, the existence of such sources of mistakes in estimation would require a
substantial margin to allow for errors in estimation – a margin that the US position denies.
7.26. In response to a question about a de minimis standard for the question of "so as to afford
protection", Korea stated:
 (a) If products that are only very weakly substitutable can be DCSP, a tax on a domestic
product that is lower than the tax on a DCSP foreign product may ha ve only a very small
effect on the quantity demanded of the foreign product in the country applying the tax. Korea
considers that such a small effect should not be sufficient to meet the "so as to afford
protection" requirement of the second sentence Article III:2.
 (b) Indeed, Korea submits that de minimis protective effects do not trigger the application
of the second sentence. This is based on the te xt and structure of this provision, which is
unlike the hard-and-fast prohibitions incorporated in the first sentence of Art. III:2, or such
other GATT provisions as Art. I or XI.
 (c) To begin with, where DCSP are concerned, not just any tax differential is
problematic. Only tax differentials that are more than de minimis can become a problem.
WTO members are thus left with some flexibility in designing their tax systems.
 (d) Similarly, the insertion of the "so as to afford protection "requirement in the second
sentence of Article III:2 must also have b een meant to allow governments a measure o
flexibility. Article III:2 only interferes in a Member's tax system where an (appreciable) tax
discrepancy raises real concerns about protectionism.
 (e) Therefore, Korea considers that where th e tax differential can only be said to have a
minimal protective effect, it should not be cons idered to have met the "so as to afford
protection" threshold.
7.27. In response to a question concerning the product mix of imports, Korea stated:
 (a) Under a system of specific taxes, all bottl es of scotch, for example, have the same tax
whatever their price, so the specific tax raises the price of high-price brands by a smaller
percentage than the price of low-price brands. Alternatively stated, the specific tax lowers the
price of high-priced scotch relative to low-pri ced scotch, and therefore provides an incentive
to the purchase of high-price brands.
 (b) Korean taxes on sprits, however, are ad valorem – they have no effect on the price of
one spirit in a particular class (for example, wh isky, brandy) relative to another member of
that class. Korea therefore sees no basis for th e proposition of the EC that the Korean tax
system favours the purchase of high-price rather than low-price brands of scotch.
 (c) Korea does not know whether its residents import a higher proportion of high-priced
scotch than those of similar countries. If it is a fact, however, Korea believes that an
explanation for it must be sought elsewhere than in its tax system.

VIII. THIRD-PARTY ARGUMENTS
A. CANADA
8.1. Canada's submission is limited to the issue of the criteria to be taken into account in assessing
whether a difference in tax rates is applied so as to afford protection to domestic production.
8.2. Canada asserts that it welcomed the outcome of the Japan - Taxes on Alcoholic Beverages II
case and was pleased with the principles for the inte rpretation and application of Article III of GATT
1994, set out by the Appellate Body in its report. Canada notes that the issues which arise in the
context of the Korean liquor tax regime bear str ong resemblance to matters which were under dispute
in Japan - Taxes on Alcoholic Beverages II and accordingly, the Panel’s disposition of the present
dispute should be guided by the principles establishe d in the reports of the Panel and Appellate Body
in that case.
8.3. Canada notes that all of the participants a ppear to have embraced the principles of the
Appellate Body report in approaching this case and in particular with respect to the interpretation of
the second sentence of Article III:2 of GATT 1994. In Canada's view, all participants appear to agree
that the phrase "so as to afford protection" in Ar ticle III:1, as it applied to the second sentence of
Article III:2, should be interpreted only with r espect to objective effects and that no subjective
element of intent should be taken into consideration. Canada urg es the Panel to base its decision in
the present case on these principles.
8.4. In that context, having examined the submis sions and evidence presented thus far, Canada
agrees with the European Commun ities and the United States that the assessment of whether the
measures are applied so as to afford protection to domestic production involves an objective analysis.
Canada further agrees that the facts and circumstan ces regarding the "structure of the measures" as
well as their "overall application on domestic as comp ared to imported products" demonstrate that the
Korean measures at issue are applied so as to afford protection to the domestic production of soju in
Korea.
8.5. Canada stresses that in examining the "design, architecture and revealing structure" of a
measure, only objective factors should be taken into account. For example, as noted by the Appellate
Body in Japan - Taxes on Alcoholic Beverages II , the magnitude of dissimilar taxation (which is an
objective factor that can be discerned from the structur e of a measure) in and of itself can be evidence
of protective application.
311 In fact, in Canada’s view, given th e magnitude of the tax differentials in
the dispute at hand, it is unnecessary to examine any other factors.312
8.6. Thus, in Canada’s view, assessing whether a measure is applied so as to afford protection to
domestic production is an analysis to be based on objective criteria, and in this case, the amount of the
tax differential is sufficient to make a finding that the measures at issue are applied in a manner that
protects domestic production.

311 Appellate Body Report, supra, p. 29.
312 Canada notes that according to th e EC and the US, the magnitude of the tax differentials at issue in
this dispute appear to be larger than those found to be sufficient evidence of protective application in Japan -
Taxes on Alcoholic Beverages II. In Canada's view however, even if the Panel were to find it necessary to take
into account additional evidence, the other factors presente d by the EC and the US are more than sufficient to
establish protective application.

B. MEXICO
1. Background
8.7. Mexico claims that since 1949, the Governme nt of Korea has used various measures to
protect its domestic production of soju such as quotas and exceedingly high tariffs. Until 1989, Korea
maintained quotas on bulk imports of whisky, and until July of that year, it prohibited the import of
bottled whisky.
8.8. Mexico further claims that it was not until the e nd of the 1980s that Korea began to liberalize
these barriers to the import of distilled spirits, and su bsequently, in the wake of the Uruguay Round, it
committed itself to reduce its tariffs of 100 per cent ad valorem to 30 per cent ad valorem in ten
annual periods. Its current bound tariff is 79 per cent ad valorem for almost all spirits of heading
22.08 of the Harmonized Commodity Description and Coding System (HS).
8.9. Mexico asserts that at the beginning of the 1990s Korea reduced some of its internal taxes. In
the case of the liquor tax, as of 1 July 1991 Korea re duced the rate applicable to whisky and brandy
from 200 per cent to 150 per cent; in January 1994 to 120 per cent; and in January 1996 to 100 per
cent. The category "other liquors" benefited from a single reduction from 100 per cent to 80 per cent
in July 1991. A tax of 35 per cent was levied on soju
313 until 1991, when soju was divided into two
subcategories, "diluted soju" and "distilled soju", taxed at 35 per cent and 50 per cent respectively.
8.10. Mexico further asserts that in 1990 the Korean Government began to apply the Education Tax
Law to certain spirits, thus offsetting to a cert ain extent the reduction in the Liquor Tax. The
Education Tax is a surtax applied to the sale of certain products pursuant to the application of the
other taxes. In this case it is levied upon the Liquor Tax.
8.11. The application of the Liquor Tax Law in conjunction with the Education Tax Law favours
the marketing of soju to the detriment of other spirits, thus affecting the marketing of the latter.
2. Legal Aspects
(a) General
8.12. Mexico claims that:
(a) The differential between the internal tax es applied to soju and other imported spirits
is a prima facie violation of Korea's obligations under Article III.2 of the GATT 1994
and, ultimately, constitutes a case of nullif ication or impairment of the benefits
accruing to Mexico under the said Agreement;
(b) because it is a prima facie violation of Korea's obligations under the GATT 1994, it is
up to Korea to rebut the charge.
(b) Article III.2, first sentence
8.13. Mexico notes that the first sentence of Article III. 2 of the GATT 1994 stipulates that:
"the products of the territory of any contr acting party imported into the territory of
any other contracting party shall not be subject, directly or indirectly, to internal taxes

313 According to Section I-A of Korea's Schedule, soju belongs to tariff heading 2208.90.4000.

or other internal charges of any kind in excess of those applied, directly or indirectly,
to like domestic products".
8.14. Mexico argues that according to the Appellate Body in Japan - Taxes on Alcoholic
Beverages II, for a tax measure to be in conformity with the first sentence of Article III.2 of the
GATT 1994, it is necessary to determine, "first, whether the taxed imported and domestic products are
'like’ and second, whether the taxes applied to the imported products are 'in excess of’ those applied to
the like domestic products".314
8.15. Mexico considers that Korea has contravened the first sentence of Article III.2 of the GATT
1994 for the following reasons:
 (a) Soju is a like product to the spirits of HS heading 22.08. 315
(i) The notion of "like products" varies according to the provision of the GATT
1994 to which it applies. Thus, in practice, likeness of products is
established on a case-by-case basis. With respect to Article III.2, the practice
of various panels
316 in the past suggests the application of the criteria of final
use of the product in a given market, consumer taste and habits, and the
properties, nature and quality of the products.
(ii) Spirits of HS heading 22.08, includi ng tequila and mescal, have the same
final use as soju in that they are drunk on their own, with spicy food "because
the drink's harshness cuts the spiciness of the food." They also correspond to
the tastes and habits of consumers of spirits and are equivalent in terms of
their properties, their nature and their quality. Mexico states that it should be
noted that soju like tequila and mescal, is divided into two categories: white
tequila and mescal correspond to dilu ted soju, while matured tequila and
mescal correspond to distilled soju. In both cases, the beverages are normally
drunk on their own in small glasses. In Mexico's view, like diluted soju, both
tequila and white mescal are clear very common and sold in great quantities,
while matured tequila and mescal are more expensive drinks whose
production process is more sophisticated and which, in many cases, are
packaged in special bottles and offered as gifts.
(b) Even if the tariff classification does not suffice in itself to determine whether the
products are "like products", it should be noted that both tequila and mescal are in the
same tariff subheading (six-digit classifi cation) as soju, i.e. HS subheading
2208.90.
317 It should be recalled that the six-digit classification is the maximum level
of precision in the HS. Moreover, the Appellate Body in Japan - Taxes on Alcoholic

314 Appellate Body Report, supra., para 1 of Section H, page 18-19.
315 This heading includes tequila and mescal, which are Mexican products.
316 See Border Tax Adjustments (L/3464, 18S/97); The Australian Subsidy on Ammonium Sulphate
(BISD II/188); EEC - Measures on Animal Feed Proteins, adopted on 14 March 1978, (BISD 25S/49); Spain -
Tariff Treatment of Unroasted Coffee , adopted on 11 June 1981 (BISD 28S/102); Japan – Taxes on Alcoholic
Beverages I, supra and United States - Taxes on Petroleum and certain Imported Substances, supra.
317 Mexico states that it is particularly interesting to note that in arguing that diluted soju and vodka are
not "like products" or "directly competitive or substitu table for each other", Korea points out that they are
classified under different HS subheadings. This would imply that Korea somehow recognizes the importance of
the classification of products, and th at more specifically, tequila and mes cal are like products and directly
competitive or substitutable for each other.

Beverages II stipulates that "if sufficiently detailed tariff classification can be a
helpful sign of product similarity".
318
8.16. Mexico asserts that the taxes levied on soju are higher than those levied on tequila. To
illustrate this point, Mexico submits to the Panel the following comparative table demonstrating that
the taxes levied on tequila and mescal, for example, are much "higher than those levied on soju":

 Distilled soju Tequila and mescal Margin of
discrimination against
tequila and mescal
Liquor Tax 50% 80% 160%
Education Tax 10% 30% 300%
Education Tax
(applied)
5% 24% 480%
Total taxes 55% 104% 189.1%

 Diluted soju Tequila and mescal Margin of
discrimination against
tequila and mescal
Liquor Tax 35% 80% 228.6%
Education Tax 10% 30% 300%
Education Tax
(applied)
3.5% 24% 685.7%
Total taxes 38.55% 104% 270.1%

(c) Article III.2, second sentence
8.17. Mexico notes that the second sentence of Article III.2 of the GATT 1994 stipulates that:
[n]o 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.
 In this connection, Mexico also notes that paragraph 1 stipulates that:
[i]nternal taxes and other internal charges [...] should not be a pplied to imported or
domestic products so as to afford protection to domestic production.

318 Report of the Appellate Body on Japan - Taxes on Alcoholic Beverages II, , supra., Section H, para.
1(a). See also: EEC - Measures on Animal Feed Proteins , supra.; Japan - Taxes on Alcoholic Beverages I ,
supra.; and United States - Standards for Reformulated and Conventional Gasoline, supra.

 Furthermore, Mexico notes that according to the interpretative note to Article III.2:
A tax conforming to the requirements of the first sentence of paragraph 2 would be
considered to be inconsistent with the provisions of the second sentence only in cases
where competition was involved between, on the one hand, the taxed product and, on
the other hand, a directly competitive or substitutable product which was not similarly
taxed.
8.18. According to Mexico, the second sentence of Arti cle III.2 must be read in conjunction with
the interpretative note. Thus, in order to determ ine the inconsistency of the adopted measure, the
following elements must be examined:
(a) whether the imported and domestic pr oducts are "directly competitive or
substitutable" and compete with each other;
(b) whether the directly competitive or subs titutable imported and domestic products are
not "similarly taxed"; and
(c) whether different taxes are levied on im ported and domestic directly competitive or
substitutable products "so as to afford protection to domestic production."
8.19. In Mexico's view, spirits of heading 22.08, including tequila and mescal, are "like products",
and hence directly competitive or substitutable products with soju.
319 And even assuming, for the
sake of argument, that the Panel considers that spir its of HS heading 22.08 are not "like products" to
soju, Mexico maintains that they are nevertheless "directly competitive or substitutable products".
8.20. Mexico also notes that in Japan - Taxes on Alcoholic Beverages II, which presented
practically the same characteristics as the case at issue the Appellate Body concluded that:
"[s]hochu and other distilled spirits and li quors listed in HS 22.08, except for vodka,
are 'directly competitive or substitutable products’".320
Mexico considers that this conclusion is applicab le to the case of Korean soju as well, given the
alleged likeness of the Korean and Japanese markets. 321 The Panel in that case accepted the evidence
submitted by Japan322 according to which a shochu-like product is produced in Korea.
8.21. According to Mexico, Korean soju and the othe r spirits of HS heading 22.08 are not similarly
taxed because as stated in the report of the Appellate Body in Japan - Taxes on Alcoholic
Beverages II, if a product is not to be considered to ha ve been "similarly taxed," the difference in
taxation must be greater than de minimis. In the case at issue, the differences in taxes are so great and
so evident that there cannot be the slightest doubt that they exceed any de minimis requirement that
the Panel might set.

319 Appellate Body Report, Canada - Certain Measures Concerning Periodicals, supra.
320 Appellate Body Report, supra, Section I, p.32.
321 According to Mexico, although Korea, in its firs t submission (paragraph 91, page 21), ignores the
Appellate Body in Japan - Taxes on Alcoholic Beverages II and states that the Panel cannot issue a report
referring to all products falling under HS22.08 in the abstract, it subsequently recognizes the importance of the
tariff classification in determining the likeness of the products.
322 Panel Report, supra, para.6.35. Japan also pointed out that Korean law contained a definition
similar to Japanese law, dividing s hochu into two subcategories: "diluted shochu" (shochu A) and "distilled
shochu" (shochu B).

8.22. Mexico argues that the Liquor Tax and the Education Tax introduced by Korea apply to
products imported so as to afford protection to domestic production because:
(a) Both the Liquor Tax Law and the Education Tax Law divide liquors into various
categories; however, that division is arbitrary and cannot be justified under
Article III of the GATT 1994. Moreover, the difference between the taxes is so great
that it is impossible to argue convincingly that the differentials were not introduced
with a view to protecting domestic production, as indeed they were.
(b) Although Korea's arguments are intended to achieve the opposite result it is
interesting to examine the relationship between Korea's internal taxes and its tariffs.
While the internal taxes favour soju, the tariffs applied by Korea to imports are
considerably higher for soju (30 per cent ad valorem ) than for other spirits of HS
heading 22.08 (where they vary between 15 and 20 per cent ad valorem). Mexico
attributes this particular relationship to a two-stage protection mechanism: First, by
levying internal taxes on soju that are cons iderably lower than for other spirits, Korea
is protecting the soju industry in general. However, in Mexico's view, this measure
puts Korean soju production in a vulnerabl e position with respect to other countries
which also produce soju/shochu,
323 obliging Korea to impose on its soju imports
tariffs 50 to 100 per cent higher than those a pplied to other spirits. As a result, on the
one hand soju imports are practically non- existent, while on the other hand, soju
accounts for almost the entire Korean production of spirits.
8.23. The Government of Mexico requests that the Panel:
(a) find that Korea has contravened its oblig ations under the first sentence of Article III.2
of the GATT 1994 in that its internal ta xes levied on various spirits of HS
heading 22.08 (including tequila and mescal) are higher than those applied to soju;
(b) find that Korea has contravened its obligations under the second sentence of
Article III.2 of the GATT 1994 in that its internal taxes afford protection to the
domestic production of soju;
(c) find that the provisions applying to th e Liquor Tax Law and the Education Tax Law
nullify and impair the benefits accruing to Mexico under the GATT 1994;
 (d) recommend that Korea amend its measures to bring them into conformity with the
provisions of the GATT 1994.
C. KOREA'S RESPONSE TO THIRD-PARTY ARGUMENTS
8.24. Korea's response to the Canadian third-party su bmission is that the submission is limited to
the 'so as to afford protection to domestic produc tion' requirement in the second sentence of Article
III.2, second sentence. According to Korea, that submission only addresses the situation where this
Panel would find a directly competitive and substitu table relationship betwee n a particular product
pair of a western-type liquor and a Korean soju.
8.25. Korea notes that Canada has not at all addressed the arguments Korea has made in its first
submission in respect of this particular requirement. Korea adds that Canada's submission raises no
new viewpoints.

323 Mexico noted that Japan mentioned the likeness of its shochu with Korean, Chinese and Singapore
soju.

8.26. Korea, however, takes issue with the third part y submission of Mexico. According to Korea,
Mexico's submission proceeds from the mistaken assumption that Mexico, being a third party,
somehow has the rights of a complainant to this di spute. Korea notes that Mexico requests this Panel
to find that the Korean Liquor Tax Law and Educ ation Tax Law have nullified or impaired the
benefits accruing to Mexico under the GATT 1994. In Korea's view, in order to obtain such a finding,
Mexico should have taken recourse to no rmal dispute settlement procedures itself.
324 Mexico has not
done so.
8.27. Korea also argues that another misunderstanding of Mexico is that Mexico assumes that it is
entitled to introduce products of its own choice into this proceedi ng, by referring to Tequila and
Mescal. Korea does not recall that Mescal has been mentioned at any point in time by the United
States or the European Communities. According to Korea, Tequila was mentioned only in the most
perfunctory manner. In Korea's view, if the Panel finds, as Korea has requested, that the only products
properly brought into this dispute by the European Communities and the US are certain western-type
liquors, notably whisky, brandy, vodka, rum and gin, then that is where the matter ends. Korea
concludes that Mexico, being a third party, can on ly support the conclusions of one of the parties
(presumably, the complainants) in this dispute and cannot expand the scope of this dispute.
8.28. Korea notes that Mexico also argues that Korea' s tax system and customs duties are suspect.
Mexico refers to, 'a two-stage protection mechanism' . In this connection Mexico draws attention to
the fact that Korea maintains somewhat higher tariffs on soju imports than on imports of other
distilled liquors. According to Korea, the explanation is much more straightforward than the sinister
intentions Mexico believes to have found. No tradin g partner has asked Korea to reduce its tariffs on
soju, and has been willing to bargain for such a reduction.
8.29. Significantly, according to Korea, Mexico clearly misinterprets the legal standard of Article
III.2. In Korea's view, the key issue here is to determine which western-type liquors are in a
sufficiently close competitive relationship with Korean sojus on the Korean market. In this
connection, Korea has pointed out that standard soju is an inexpensive drink, which Koreans like to
drink with their spicy meals. Mexico responds th at Tequila and Mescal also go well with spicy food.
Korea argues that although it may well be the case that in Mexican consumers like to drink Tequila or
Mescal when they eat spicy Mexican food, that is not the issue in this dispute.
8.30. According to Korea, the issue in this dispute is which liquor Koreans like to drink with their
meals; and, more generally, what the position of Tequila and Mescal is on the Korean market
(assuming for a moment these products would be con cerned by this dispute, which they are not).
Korea argues that Mexico has not adduced any evid ence to suggest that Ko rean consumers like to
drink Tequila and Mescal with Korea's spicy cuisine; or that Koreans drink Tequila or Mescal straight
and not mixed as a cocktail. More generally, accordin g to Korea, Mexico has not shown that Tequila
or Mescal directly compete with Korean soju.
8.31. Korea notes that Mexico makes much of the f act that the tariff classification of Mescal,
Tequila and soju are the same. According to Korea, this is not true. The sub-classifications, tariff
bindings, and applied rates for tequila and soju are different. Moreover, Mexico goes so far as to say
that all products falling under the basic four digit cl assification HS 22.08 are 'like products'. Even the
complainants do not go that far.
8.32. Korea refers to the Appellate Body in the Japan - Taxes on Alcoholic Beverages II, wherein it
was said that tariff classifications, when they are su fficiently detailed, can be a helpful indication to
decide whether the relationship between products that compete directly with each other is in fact so

324 See Article 10.4 DSU.

close that they can be considered 'like'.
325 For this reason, Korea referred to the tariff classification of
vodka and standard soju, as this is the only produc t combination which the European Communities
and the United States claim to be 'like'. With resp ect to Tequila and Mescal, the threshold question is
not even met: there is no indication to begin with that these products compete directly with the Korean
sojus on the Korean market, let alone that they ar e so competitive on the Korean market that they
could conceivably be considered 'like'.
8.33. Korea reminds Mexico, and the other complainan ts in this case, once more of the Panel's
holding in the Japan – Taxes on Alcoholic Beverages II : 'consumers' tastes and habits. change from
country to country'.326 According to Korea, if this case will ser ve a purpose, it is to show that markets
are different. Korea adds that the Japanese mark et is not, as asserted by Mexico, like the Korean
market, the Korean market cannot simply be equated with the Mexican market, etc.
8.34. According to Korea, therefore, before any c onclusions about the possibility of discriminatory
taxation within the meaning of Article III.2 are draw n, one has to make a detailed analysis of the
market

325 Appellate Body Report, supra., at p. 21. See also Panel Report, supra., at para. 6.22, stating that
'like' products are a subset of directly competitive and substitutable products.

IX. INTERIM REVIEW
9.1. In letters dated 7 July 1998 the European Communities, the United States and Korea all
requested an interim review by the panel of certain aspects of the Interim Report issued to the parties
on 26 June 1998. The requests dealt with certain aspects of the descriptive portion of the Interim
Report including the summaries of the arguments as well as with the Findings. None of the parties
requested a further meeting with the Panel.327
9.2. The major issue of concern of the parties w ith the descriptive portion (other than some
individual and technical points whic h we have accomodated) was inclusion of the oral statements of
the parties. In the initial version of the descrip tive portion of the report, little was included from the
oral statements. Oral statements generally are intended to be summaries of the written statements, not
presentations of new evidence or arguments. N onetheless, we have accommodated the requests as
appropriate. However, we must note a particular di fficulty in this regard in accommodating some of
the comments of the United States. In part of the comments, the United States did not request specific
portions of their oral statements to be included in specific spots in the descriptive portion. Instead, the
United States offered a redrafting of its arguments that effectively recast whole portions of their
presentation.
9.3. We have taken note of the implicit approach of the United States that parties to a dispute
should submit draft summaries of their arguments fo r inclusion in the descriptive portion of a panel
report. However, this is an approach that should be agreed with all the pa rties at the outset of a
proceeding rather than made by one party at the clo se of the proceedings. Future panels may wish to
adopt such an approach. Unfortunately, no suggestions were made and no discussion of this approach
was held at an early stage of these such pro ceedings. Therefore, we cannot accept the wholesale
changes requested by the United States. Instead, we attempted to include in the descriptive part some
of the sections of the U.S. oral statements reflecting the issues identified by the United States.
9.4. With respect to the Findings, the European Communities requested language changes in
several paragraphs. We agree with most of the recommended changes as clarifications of the existing
language and have amended paragraphs 10.43, 10.53, 10.100 and 10.101, accordingly.
9.5. The European Communities disagreed with the finding in paragraph 10.57 that the
complainants provided "no eviden ce whatsoever" with respect to distilled alcoholic beverages not
identified during the course of the proceedings. Th e EC's argument is that they have identified
physical characteristics and end-uses common to all di stilled alcoholic beverages and, therefore, that
all such beverages identified in HS classification 2208 should be included. These general statements
included very weak evidence with respect to products not even identified. In addition, these other
beverages were not even included in the Dodwell study. Economic studies such as the Dodwell study
are not necessary, but they are very useful. In other words, such market surveys are a source of
information, not a limitation. Paragraph 10.57 has been amended to clarify this point.
9.6. The United States made a number of recommended changes in language that we agree
provides greater clarity to the existing language. Therefore, we have amended the language in
paragraphs 10.1, 10.41, 10.42, 10.43, 10.47, 10. 51, 10.74, 10.95, 10.97, 10.100 and 10.101,
accordingly.328

327 The Interim Report constitutes Section IX of the Final Panel Report. Inclusion of this section makes
the Findings portion of the Report Section X. References to paragraph numbers and comments of the parties
have been adjusted accordingly.
328 The United States made a reference to paragraphs 10.42-10.43 in one comment. We assume they
were referring to paragraphs 10.41-10.42.

9.7. The United States requested changes in paragra phs 10.18 and 10.23 to the effect that the
issues covered in those paragraphs should be decide d on the basis that the Korean requests were not
within the panels terms of reference. We disagree with the US position. Under the US interpretation,
many jurisdictional and other issues affirmativel y raised by respondents would by definition be
outside the terms of reference of a panel because the terms of reference are defined by the substantive
issues raised in the complaining party's request for establishment of a panel. We think any panel has
the right and obligation to address fundamental juri sdictional questions and issues relating to the
proper functioning of the panel raised by any party to the dispute. Accordingly, we declined to
change the basis of our decision in this regard.
9.8. The United States requested we delete paragr aph 10.39 relating to discussions during the
original negotiating sessions. This paragraph deals with a hypothetical and does not draw any
conclusions about the specific products that were di scussed in 1947-48. Rather, it was the nature of
the discussion and what the discussion itself brought to light about the interpretation of Ad Article
III:2 which is of relevance. We do not reach a le gal or factual conclusion that "such products could
not compete 'directly' under Article III." We have amended the language of 10 .39 to provide further
clarification.
9.9. The United States requested that the panel elim inate the two sentences at the end of the
footnote in paragraph 10.42. In our view, the first sentence is a useful clarification. The second
sentence has been eliminated.
9.10. The United States recommended changing the fo urth sentence of paragraph 10.48. We
assume the United States is referring to the fifth sen tence. However, it is obvious from the whole
paragraph that we are discussing methodology, not th e facts of the Korean ma rket. Therefore, we
have declined to amend the paragraph.
9.11. With respect to paragraphs 10.55-10.57, the Un ited States argued that classification under the
same tariff heading is in itself evidence that produc ts compete directly. We do not agree with the
characterization of the issue proposed by the Unite d States. The products first must be properly
identified. As we noted above in regard to th e EC's comments, these general statements are very
weak evidence at best. The US argument also so mewhat begs the question because there is a related
issue of what level of detail in the tariff headings is appropriate for such analysis in any given case.
The problem in this case is that we were left uninf ormed about what products constitute the remainder
of the category. We declined to make the cha nges suggested by the United States in this regard
beyond the clarification mentioned with respect to the EC comments above.
9.12. With respect to paragraph 10.81, the United St ates requested several changes for purposes of
clarification. We have eliminated one sentence as redundant, but have otherwise kept the original
language.
9.13. Korea stated that it had great difficulty accepti ng the outcome of the case. In Korea's view,
the complainants failed to prove the necessary elements to establish a violation of Article III:2. In its
General Comments, Korea states, among other things, that soju is consumed "primarily" with meals
and that whisky and other spirits are consumed "p rimarily" as cocktails. We note as a general matter
that Korea was drawing far too fine a distinc tion between end-uses for purposes of Article III:2,
second sentence. We note that, even in Korea's appr oach (which we do not accept), it is only a matter
of the "primary" use where there are differences. There are overlapping end-uses even within the
Korean definition.
9.14. Korea further states that "Korea finds it diffi cult to accept that the Panel puts into doubt
Korea's description of its own market". Korea impl ies that any party to a dispute has an exclusive
authority to assess the facts relating to its domestic market. We find no support for such a proposition

in GATT/WTO jurisprudence. Indeed, that is the ve ry function of a panel in a case such as this, to
assess the facts and arguments and make findings based on a weighing of the evidence presented.
9.15. In its General Comments section Korea also ma de the specific comment that it did not argue
that western-style liquors were found in "expensive r estaurants" but soju was not. However, we note
that in writing its comments, Korea in fact describe d the restaurants referred to by the United States
that served whisky as well as soju as "expensive" restaurants.
329 This also is how Korea referred to
these establishments during the Second Meeting of the Panel. These establishments were not offered
as a representative sample and we did not view them that way. Rather, we reviewed all of the
arguments of all of the parties and took account of and balanced all of the evidence presented.
Arguments here and elsewhere that the Panel "r elied" upon any particular piece of evidence or
assessment must be evaluated in that light. Kor ea examines in too isolated a manner the various
other factors assessed by us in reaching our conc lusions. Ultimately, we relied upon all of the
evidence presented, not any single element. In our view, the arguments at that time and in the Korean
comments on the Interim Report were not persuasive, in light of all the evidence, in rebutting the case
established by the complainants.
9.16. With respect to paragraph 10.45, Korea emphasized that an analysis of the particular market
in question is required. We agree. However, as stated in the Findings, that does not imply that
evidence of product relationships from other markets is irrelevant to an assessment of the competitive
relationship of the products in the market in question. It is a matter of utilization and weighing of the
evidence. Korea then st ates that it is relevant to look at how Korean manufacturers market shochu
and soju in Japan and argues that there are differ ences. We do not disagree that there are some
differences between soju and shochu, but, in our vi ew, the differences are minor and we disagree that
such differences contradict our conclusions with respect to the Korean market.
330 We also note that
the Korean companies have created products and adve rtised them in Korean and international markets
that emphasize the similarity of soju to western-st yle beverages which is the question here. We took
into account the evidence presented by Korea with respect to soju and shochu. As part of our
weighing of the evidence, we also took note of other information from outside of the Korean market
for its implications for the situation within the Kor ean market. We declined to change paragraph 9.45
in this regard.
9.17. With respect to paragraph 10.52, Korea noted that the figures for premium diluted soju should
state that it is five percent of the soju market not the distilled beverages market. We have corrected
the reference. Korea also noted that premium soju sales currently have slowed. We do not think this
detracts from the conclusions. As complainants not ed, sales of imports have also slowed in recent
months due to the current financial crisis in Korea.
331 The higher priced products such as premium
diluted soju and imports have fa llen off and sales of lower priced products have increased. The
parties did not present extensive arguments about the relationship of the sales of the products to
events occurring during the recent financial crisis 332 and we did not refer to such a period extensively,
but, if anything, the similar trends in sales of imports and premium diluted soju (as well as the
differential movement of standard diluted soju) in the situation can be taken to support our Findings.
We made clarifications to paragraph 10.52 to reflect these comments.

329 Korea referred to the US statements about nine Ko rean-style restaurants found in the vicinity of the
US embassy. However, Korea describe s these establishments as "a few very expensive Korean restaurants" and
"these nine expensive restaurants". Korean Comments on the Interim Report at p. 1. (emphasis added)
330 We take note that Japan stated in the panel proceedings of Japan – Taxes on Alcoholic Beverages II
that soju and shochu were essentially identical products. Japan – Taxes on Alcoholic Beverages II , supra., at
para. 4.178.
331 See EC Answer to Questions, Question 1 from the Panel at 1-2, and accompanying chart.
332 We note that the Nielsen study and the Trendscope survey were done in 1998.

9.18. In comments regarding paragraphs 10.93 a nd 10.94, Korea took exception to several
statements regarding pricing information. Kor ea stated that "Korea cannot fathom how such huge
price differences can lead to a competitive relations hip". Our conclusion was that, overall, there was
persuasive evidence of a directly competitive relations hip in spite of the price differences. We recall
our observation that absolute price ratios are not a good basis upon which to assess whether there is a
directly competitive relationship between products. Information as to how c onsumers behave in the
face of relative price changes is more persuasive.
9.19. Korea also stated that it strongly objects to the Panel's alleged approach of narrowing the
price differences between the products and argues th at the Panel "conveniently" mismatched products
because some comparisons were made between imports and premium diluted soju rather than standard
diluted soju. However, in the textual discussion of the price differences, the first sentence of the
listing stated the price difference between premium diluted soju and standard diluted soju. There
followed a listing of the price differences between some imports and premium diluted soju. We
included a footnote with further price differences between imports and premium diluted soju and
standard diluted soju. We do not understand what Korea apparently thought was concealed by these
figures as all information was included. Nonetheles s, we will amend the paragraph and footnote to
calculate the remaining figures for purposes of clarity. We made the appropriate changes to
paragraph 10.94.
9.20. Also with respect to paragraph 10.94, Korea obj ected to the Panel's alleged reliance on prices
based on alcohol strength to support its conclusions. We made no such reliance. In mentioning price
adjusted for alcohol strength in a footnote to the paragraph, we merely observed that this was the
manner of the price comparisons used in the case of Japan – Taxes on Alcoholic Beverages II and
noted that the absolute price ratio differences in th e present case were more similar to those in that
case than would otherwise appear from a casual reference to the appendices in that case. Or,
alternatively, if the prices in the Japanese case were not adjusted for alcohol strength, the price ratios
between the imported and domestic products in Japan ar e shown to be more similar to the price ratios
of imported and domestic products in Korea than w ould otherwise appear to be the case. We further
clarified the language in the paragraph and footnote to reflect this concern.
9.21. Korea disagreed with our treatment of distilled a nd diluted soju. They note that the Korean
Fair Trade Commission ("KFTC") statement outlin es one difference regarding distillation methods,
but that there are others including differences in price. However, the KFTC did not simply state that
the method of distillation was a difference; it stated that it was "the basic difference".
333 After noting
this we went on to discuss the other differences, in cluding price. We declined to change paragraph
10.54 in this regard.
9.22. With respect to a footnote to paragraph 10.67 , Korea argued that the Findings take their
statements regarding differences in bottle sizes and types out of context. Korea states that it was
emphasizing that the bottles used for exports of so ju to Japan were different from shochu and that
shochu bottles were meant to be similar to imports such as whisky. Presumably, Korea wished us to
draw the conclusion that soju is marketed diffe rently from shochu and whisky as a point of product
distinction. This, in fact, was the issue we addressed. In any event, we clarified the specific reference
to bottle size and shape differences made by Korea.
9.23. Korea requested the panel to amend the Fi ndings in paragraphs 10.63 and 10.64 to
"incorporate and consider" Korea's arguments in its Second Oral Statement on whether bottled and tap
water are competitive products. We listened to Korea's statements in this regard and considered them.
Lack of a specific citation to every single argument made by parties in the Findings does not in any
manner imply that such arguments were not consider ed. We did not find the Korea analogy about tap

333 Emphasis added.

water and bottled water probative or useful. The an alogy is incomplete and refers to different
products in different countries and thus no useful in ference could be drawn for the inquiry at hand.
However, we have added Korea's requested statem ents to the descriptive portion of the Report but
have declined to amend these paragraphs in this regard.
9.24. Korea argued with the statement in paragra ph 10.78 that soju and shochu are traditional
drinks in their respective countries. Korea argues that sake "is the traditional drink of Japan".
334 We
did not state that shochu is the traditional drink of Japan. We referred to it and soju as traditional
drinks without further qualification. We do not agree that there is only one traditional drink per
country. Various regions or groups within countries ma y have traditional drinks We declined to alter
this paragraph.
9.25. With respect to paragraph 10.79, Korea noted th at references to colourings with respect to
premium soju are inaccurate. With respect to mention of the photographic exhibits submitted by
complainants, Korea objects to references to pictur es of premium diluted soju. We do not agree with
the objection; advertisements of premium soju are relevant. Korea also objected to use of
advertisements aimed at the Japanese market. Paragraph 10.80 deals with much of the Korea
disagreement. However, we take note of their poi nt with respect to some of the photographs. For
instance, Exhibit I should not be included in this specific footnote because it is a Japanese product.
However, we again note the statement by Japan in Japan – Taxes on Alcoholic Beverages II that soju
and shochu are essentially identical products. 335 We also take note that Exhibit D is distilled soju
rather than diluted soju. However, given our c onclusions regarding distille d and diluted soju, no
substantive difference results. The paragraph and footnote references were amended as appropriate.
9.26. Korea also objected to references in para graphs 10.79 and 10.80 to Jinro's website
advertisement because, according to Korea, all adve rtising is essentially local. We do not agree with
this argument. As discussed in these and other para graphs, we consider such evidence relevant. The
question is one of evidentiary significance, i.e., how much weight should be given to such evidence.
We declined to further amend these paragraphs in this regard.

334 Emphasis added.
335 Japan – Taxes on Alcoholic Beverages II, supra., at para. 4.178.

X. FINDINGS
A. C LAIMS OF THE PARTIES
10.1. The European Communities and the United States claim that Korea applies its internal tax
laws (the Liquor Tax Law and the Education Tax Law) on vodka in excess of taxes applied to soju
and is therefore in breach of its obligations under Article III:2, first sentence, of GATT 1994. The
complainants also argue that these internal tax laws are applied in a dissimilar manner to other
imported distilled alcoholic beverages so as to afford protection to the domestic industry in breach of
Korea's obligations under Article III:2, second sente nce. The complainants have identified the
imported products as all distilled alcoholic beverages described within Harmonized System
classification 2208. They have identified specific examples of such beverages as including whiskies,
brandies, cognac, liqueurs, vodka, gin, rum, tequ ila and "ad-mixtures". The complainants have
identified soju as the domestically produced distille d alcoholic beverage which they claim receives
preferential tax treatment.
10.2. Korea has responded that its internal tax measure s are not inconsistent with its obligations
under Article III:2. Korea argues that there are tw o types of soju, distilled and diluted, and that
neither of these products are like the imported pr oducts and that the imports and the domestic
products also are not directly competitive or substitu table. Korea argues that Article III:2 should be
narrowly construed so as not to unduly infringe the sovereign right of Members of the WTO to
structure their tax laws as they see fit. Korea clai ms that the complainants have not proved that with
respect to the Korean market the products in question are either like or directly competitive or
substitutable.
B. P RELIMINARY ISSUES
10.3. Korea raised the following preliminary issu es and requested preliminary rulings with
respect to:
(i) the specificity of the panel requests of the complainants;
(ii) the complainants' alleged non-compliance with certain provisions of the DSU relating
to the conduct of consultations;
(iii) alleged breaches of the confid entiality of the consultation process;
 (iv) alleged late submission of evidence; and
 (v) permission to have private counsel a ttend the Panel meetings and address the Panel.
336
1. Specificity
10.4. Korea argues that the European Communities, in its request for a panel, has referred to a
preferential tax rate on soju vis-a-vis certain al coholic beverages falling within HS heading 2208.

336 The question of confidentiality of consultations was first identified in a footnote to Korea's First
Submission and further explained by Korea at the first Panel meeting. The issues of specificity of the
complaints and adequacy of the consultations were raised for the first time in Korea's Statement at the first Panel
meeting. The complainants were given the opportunity to address the issues of confidentiality, specificity and
adequacy of consultations in writing in their rebuttal briefs and we delivered our decision on these matters at the
beginning of the second Panel meeting. The issue of the alleged late submission of evidence was raised by
Korea following the second Panel meeting. We address th e question here for the first time. The issue of private
counsel was raised and addressed prior to the first meeting of the Panel.

Korea states that the European Co mmunities has not, even in its written submission, clarified its
position on the category of alcoholic beverages falling within the scope of this dispute.
10.5. Korea states that the US request for a panel l acks specificity as well. Korea notes that the
United States, in its request for a panel, refers to higher tax rates on "other distilled spirits", while
specifically mentioning "whisky, brandy, vodka, rum, gin, and ad mixtures".
10.6. Korea argues that such vaguely worded complaints violate its rights of defence. According to
Korea, HS 2208 is a very broad tariff classificati on, which covers a wide variety of alcoholic
beverages, including non-western liquors such as kor yangu, Korean soju, Insam ju, Ogapiju, and
Japanese shochu. More precisely, Korea argues that this lack of specificity of the complainants'
claims is improper for two reasons:
(i) it frustrates Korea's right of defense, which Korea argues is a general principle of due
process implicit in the DSU;
(ii) it violates what Korea considers a clear obl igation of the DSU, which is that such a
request should "identify" the specific measures at issue, and "present the problem
clearly", as stipulated in Article 6.
Korea, therefore, requested the pa nel to issue a preliminary ruling, limiting the products at issue in
this dispute.
10.7. Korea also submits that it is unable to identify which items the United States is referring to by
its reference to 'ad-mixtures' in its request for a panel. Korea also claims that the complainants did not
clearly distinguish the domestic liquors that are su pposed to be more favourably taxed in Korea.
Korea states, in particular, that the complainants have not distinguished between Korea's distilled
soju, an artisanal product sold at very high prices in tiny quantities, and subject to a 50% tax rate, on
the one hand, and, on the other hand, diluted or standard soju, which is an inexpensive drink,
consumed in large quantities with meals and taxed at a rate of 35%. Korea argues that in their
requests for a panel, both complainants have referred to only one 'soju' product, without
acknowledging that there are, in reality, two different products, with two different tax rates.
10.8. The European Communities notes that its request for a panel refers to ".. certain alcoholic
beverages falling within HS 22.08", but rejects Ko rea's assertion that it has, through its first
submission, broadened the scope of its complaint as contained in the request for a panel. The
European Communities submits that its first submissi on refers to "soju and a ll other distilled spirits
and liqueurs falling within HS 22.08". In the EC view, these statements are consistent. According to
the European Communities, its panel request is more than sufficiently specific to meet the minimum
requirements of Article 6.2 of the DSU.
10.9. The United States argues that Article 6.2 of the DS U requires, inter alia, that the request for a
panel “identify the specific measures at issue and pr ovide a brief summary of the legal basis of the
complaint sufficient to present the problem clearly.” According to the United States, its panel request
satisfies both these requirements, and it also clearly includes all distilled spirits within HS heading
2208, as maintained in the first US submission. The United States argues that in accordance with
Article 6.2, its request for the establishment of a panel defined the Korean measures at issue: the
general Liquor Tax Law and the Edu cation Tax; and provided a brief summary of the legal basis of
the complaint.
10.10. The United States refers to European Communities - Regime for the Importation, Sale and
Distribution of Bananas (Bananas III ), where the Appellate Body, according to the United States,
noted that this provision concerning the legal basis requires that the request for a panel must be

sufficiently specific with respect to the claims being advanced, but n eed not lay out all the arguments
that will subsequently be made in the party’s submission.
337 The United States argues that Korea’s
request that the Panel limit the proceeding to five specific products (whisky, brandy, vodka, rum, and
gin) is equally without basis in Article 6.2. Acco rding to the United States, the panel request, which
defines the terms of reference of the panel, re fers to taxation of “other distilled spirits” -- i.e., distilled
spirits other than soju. By using the term “such as, ” the United States claims that it sets forth the five
products and “ad mixtures” as examples, and not as an exclusive list. According to the United States,
the extent to which the United States and the Euro pean Communities establish that all such products
are “like” or “directly competitive or substitutable” is a matter to be determined through the course of
these proceedings, beginning with the first written submission to the Panel.
10.11. As regards the question of defining which so ju is referred to, the European Communities
states that it regards all the varieties of soju as one product, with the necessary result that 'liqueurs' are
more heavily taxed than some soju. According to the European Communities, the question of whether
soju is or is not a single product is a substantiv e issue which cannot be decided by the panel in a
preliminary ruling. The United States also argues th at with respect to the use of the word “soju,” its
panel request makes it clear that the tax preference for all soju is covered, giving Korea ample
objective notice that the entire category was to be challenged.
10.12. We note that Article 6.2 of the DSU provides in the relevant part that:
The request for the establishment of a panel shall be made in writing. It shall indicate
whether consultations were held, identify the specific measures at issue and provide a
summary of the legal basis of the complaint sufficient to present the problem clearly.
10.13. The Appellate Body noted in Bananas III that:
As a panel request is normally not subjected to detailed scrutiny by the DSB, it is
incumbent upon a panel to examine the re quest for the establishment of the panel
very carefully to ensure its compliance with both the letter and spirit of Article 6.2.338
10.14. The question of whether a panel request satisfi es the requirements of Article 6.2 is to be
determined on a case by case basis with due regard to the wording of Article 6.2. The question for
determination before us, therefore, is whethe r the phrases used by the EC ("certain alcoholic
beverages falling within HS heading 2208") and th e United States ("other distilled spirits such as
whisky, brandy, vodka, gin and ad-mixtures") are sp ecific enough to satisfy the letter and spirit of
Article 6.2. In other words, the question is wh ether Korea is put on sufficient notice as to the
parameters of the case it is defending. As the Appellate Body noted in Bananas III:
It is important that a panel request be sufficiently precise for two reasons: first, it
often forms the basis for the terms of refere nce of the panel pursuant to Article 7 of
the DSU; and, second, it informs the defending party and the third parties of the legal
basis of the complaint.339
10.15. Korea argues that each imported product must be specifically identified in order to be within
the scope of the panel proceeding. The complainan ts argue that the appropriate imported product is
all distilled beverages. They claim, in fact, that for purposes of Article III, there is only one category

337Appellate Body Report on European Communities – Regime for the Importation, Sale and
Distribution of Bananas (Bananas III), adopted on 25 September 1997, WT/DS27/AB/R, at para. 141.
338Ibid., at para. 142.
339 Ibid., para. 142.

in issue. They claim to have identified specifi c examples of such distilled alcoholic beverages for
purposes of illustration, not as limits to the category.
10.16. The issue of the appropriate categories of produc ts to compare is important to this case. In
our view, however, it is one that requires a wei ghing of evidence. As such it is not an issue
appropriate for a preliminary ruling in this case. Th is is particularly so in light of the Appellate
Body's opinion in Japan - Taxes on Alcoholic Beverages II,
340 that all imported distilled alcoholic
beverages were discriminated against. That elem ent of the decision is not controlling on the ultimate
resolution of other cases involving other facts; how ever, it cannot be considered inappropriate for
complainants to follow it in framing their request fo r a panel in a dispute involving distilled alcoholic
beverages. While it is possible that in some cases , the complaint could be considered so vague and
broad that a respondent would not have adequate notice of the actual nature of the alleged
discrimination, it is difficult to argue that such no tice was not provided here in light of the identified
tariff heading and the Appellate Body decision in the Japan - Taxes on Alcoholic Beverages II.
Furthermore, we note that the Appellate Body recen tly found that a panel request based on a broader
grouping of products was sufficiently specific for purposes of Article 6.2. 341 We find therefore, that
the complainants' requests for a panel satisfied the requirements of Article 6.2 of the DSU.
2. Adequacy of consultations
10.17. Korea submits that what it considers to be exp licit obligations contained in Articles 3.3, 3.7
and 4.5 of the DSU have been violated. Korea in ef fect alleges that the complainants did not engage
in consultations in good faith with a view to reach ing a mutual solution as envisaged by the DSU.
According to Korea, there was no meaningful exchan ge of facts because the complainants treated the
consultations as a one-sided question and answer session, and therefore, frustrated any reasonable
chance for a settlement. Korea considers this non- observance of specific provisions of the DSU as a
"violation of the tenets of the WTO dispute settlement system" and requests the Panel for a ruling .
10.18. Both complainants assert that Korea's claim w ould appear to be that they have infringed
Articles 3.3, 3.7 and 4.5 of the DSU because they did not attempt to reach a mutually acceptable
solution to the dispute in the course of the consultations that preceded the establishment of this Panel.
The complainants refer to the panel decision in Bananas III for the proposition that the conduct of
consultations is not the concern of a panel but that the panel need only concern itself with the question
whether consultations did in fact take place, 342 and point out that Korea cannot dispute the fact that
consultations were in fact held on three separate occasions between itself and both the United States
and the EC. The complainants state that, in any event it is not true that they refused to engage in a
'meaningful exchange of facts' during the GATT Arti cle XXII consultations. They allege that it was
Korea's attitude during the consultations which prevented such exchange from taking place.
10.19. In our view, the WTO jurisprudence so far h as not recognized any concept of "adequacy" of
consultations. The only requirement under the DSU is th at consultations were in fact held, or were at
least requested, and that a period of sixty days h as elapsed from the time consultations were requested
to the time a request for a panel was made. What takes place in those consultations is not the concern
of a panel. The point was put clearly by the Panel in Bananas III, where it was stated:
Consultations are . . . a matter reserved for the parties. The DSB is not involved; no
panel is involved; and the consultations are held in the absence of the Secretariat.

340 Appellate Body Report on Japan - Taxes on Alcoholic Beverages ( Japan - Taxes on Alcoholic
Beverages II), adopted on 1 November 1996, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, at pp. 26, 32.
341 Appellate Body Report on European Communities – Customs Classification of Certain Computer
Equipment, adopted on 22 June 1998, (WT/DS62/AB/R, WT/DS67/AB/R), at paras. 58-73.
342Panel Report on Bananas III, supra at paras. 7.18-7.19.

While a mutually agreed solution is to be preferred, in some cases it is not possible
for parties to agree upon one. In those cases, it is our view that the function of a
panel is only to ascertain that the consultations, if required, were in fact held. ...
343
We do not wish to imply that we consider c onsultations unimportant. Quite the contrary,
consultations are a critical and integral part of the DSU. But, we have no mandate to investigate the
adequacy of the consultation process that took place between the parties and we decline to do so in the
present case.
3. Confidentiality
10.20. Korea alleges that both complainants have breached the confidentiality requirement of
Article 4.6 of the DSU by making reference, in th eir submissions, to information supplied by Korea
during consultations.
10.21. The European Communities argues that Korea's interpretation of Article 4.6 of the DSU is
wrong. According to the European Communities, the confidentiality requirement of Article 4.6 of the
DSU concerns parties not involved in the disput e and the public in general. The European
Communities stresses that the requirement cannot in an y way be read as referring to the panel itself.
In the EC view, Article 4.6 cannot be interpreted as a limitation on th e rights of parties at the panel
stage.
10.22. The United States argues that to the extent Korea is alleging a violation of the DSU, such a
claim is not within the terms of reference of the Pa nel. The United States further argues that Korea’s
complaints about the alleged inadequacy of the comp lainants’ attempts to settle the dispute or engage
in good faith consultations have no bearing on the authority of the Panel or the progress of this
proceeding.
10.23. We note that Article 4.6 of the DSU requires confidentiality in the consultations between
parties to a dispute. This is essential if the parties are to be free to engage in meaningful
consultations. However, it is our view that th is confidentiality extends only as far as requiring the
parties to the consultations not to disclose any info rmation obtained in the consultations to any parties
that were not involved in those consultations. We are mindful of the fact that the panel proceedings
between the parties remain confidential, and par ties do not thereby breach any confidentiality by
disclosing in those proceedings information acquire d during the consultations. Indeed, in our view,
the very essence of consultations is to enable the pa rties gather correct and relevant information, for
purposes of assisting them in arriving at a mutually ag reed solution, or failing which, to assist them in
presenting accurate information to the panel. It would seriously hamper the dispute settlement
process if the information acquired during consultations could not subsequently be used by any party
in the ensuing proceedings. We find therefore, that there has been no breach of confidentiality by the
complainants in this case in respect of information that they became aware of during the consultations
with Korea on this matter.
4. Late submission of evidence
10.24. Korea complains that its rights of defense were violated by the late submission of a market
study (the Trendscope survey) by the European Communities. Korea had submitted a study done by
the AC Nielsen Company as part of its responses to questions arising from the first substantive
meeting of the Panel. The European Communiti es responded to this with, among other things, the
Trendscope survey presented at the Second Meeting of the Panel. The Panel gave Korea a week to
respond to this and critique the r esults, methodology and questions used in the Trendscope survey.

343Ibid., para. 7.19. The issue was not appealed.

Korea argues that this time was insufficient, that it did not have copies in Korean of all the questions -
asked, and that it did not have time to provide further questions or comments based upon the answers.
10.25. We do not consider that Korea's rights under the DSU were violated. The European
Communities submitted its rebuttal survey at the ne xt available opportunity after receiving Korea's
Nielsen survey. Had Korea chosen to submit its survey at the first substantive meeting and the
European Communities failed to respond at the next opportunity (in such a case, it would have been in
the rebuttal submission), there obviously would have been more merit to the claim because then the
European Communities, it could have been argu ed, delayed submitting their evidence. As it
transpired, the European Communities submitted a new piece of evidence at the next available
opportunity which Korea then was able to examine for a week in order to provide comments. The
survey was not of a particularly complex type and, in our view, Korea had adequate time to respond
given the nature of the evidence. The Trendscope survey is not critical evidence to the complainants'
case; it serves as a supplement to arguments alrea dy made. If we considered that it represented
critical evidence, Korea's request for further time fo r comment would have been given greater weight.
While all parties to litigation might prefer open- ended potential for rebutting the other side's
submissions, we believe that for practical reasons su bmissions must be cut-off at some point and such
a point was reached in this case. Thus, neither the timing nor the importance of the evidence in
question support a finding that Korea's rights have been violated in this instance.
5. Private counsel
10.26. Korea indicated at the outset of the panel process that it wished to have the right to private
counsel at the substantive meetings of the Panel. In Korea's view, in order to fully defend its interests
and match the much greater resources of the complaining parties, Korea decided to retain the services
of expert counsel with long standing experien ce in matters of international economic law and
international economics.
10.27. Korea refers to the recent opinion of the Appellate Body in Bananas III , in which the
Appellate Body stated that it found nothing in the WTO Agreement, the DSU, its Working
Procedures, in customary international law or the prevailing practice of international tribunals, which
prevented a Member from determining its dele gation to the Appellate Body's proceedings.
344 Korea
adds that the Appellate Body also noted that re presentation by counsel of a government's own choice
in proceedings before it (the Appellate Body) mi ght well be a matter of particular significance to
enable WTO Members to participate fully in WT O dispute settlement proceedings. According to
Korea, the same holds true with respect to delegations presenting a case before a Panel. Korea further
submits that under customary international law, it has the sovereign right to determine the
composition of its delega tion to panel hearings. 345 Korea also believes its right to counsel of its
choice is consistent with what it considers to be basic due process principles implicit in the DSU.
Korea indicated that it appreciated that the Panel mi ght have concerns about the confidentiality of the
proceedings. Korea assured the Panel that it woul d ensure that any member of its delegation,
including private counsel, will fully respect the c onfidentiality of the proceedings in accordance with
applicable rules.
10.28. The European Communities indicates that it has no objection, in principle, to the presence of
private counsel as part of Korea's delegation during s ubstantive meetings of the Panel. The European
Communities states, however, that they attach great importance to the preservation of confidentiality
of panel proceedings. The EC acceptance was, th erefore, made conditional upon Korea assuming full
responsibility for any breach of confidentiality which may result from the presence at the Panel

344Appellate Body Report, supra., p. 8.
345Korea refers to Korea - Restrictions on Imports of Beef , adopted on 7 November 1989, BISD
36S/202.

meetings of non-governmental pe rsons. The European Communities take regard of the assurances
given by Korea to the effect that its private coun sel, like any other member of its delegation, would
fully respect the confidentiality of the proceedings.
10.29. The United States notes that the Members of th e WTO have agreed to abide by the rules and
procedures in the DSU. They have agreed that dispute practice in the WTO will be guided by, and
will adhere to, the established practice applied in disputes under the GATT 1947 system. According
to the United States, this practice has excluded th e routine presence of private lawyers in panel
proceedings. The United States asserts that the GATT and WTO practice reflects the dual nature of
the dispute settlement rules in the DSU; name ly, reaching mutually agreeable solutions and
adjudicating disputes. In the view of the United States, a decision by this panel to permit participation
of private lawyers in panel meetings is not a trivial step. The effectiveness of WTO dispute
settlement is a major accomplishment of the WTO as an international organization. The balance of
elements that created this success has evolved by expe rience over considerable time. It is also the US
view that if the Panel wishes to permit private la wyers or non-lawyer advisors to be in this
proceeding, the Panel should consider this decision with great care, and impose appropriate
safeguards with respect to the conduct of such persons.
10.30. The United States further argues that Panel must require effective safeguards that ensure that
private counsel will not leak confidential busine ss information or other privileged information
generated during the panel process, and that if th ey do, there will be meaningful consequences.
According to the United States, there is no excuse for damaging the interests of private parties by
leaks of confidential business information; such leaks will in turn damage the reputation of WTO
dispute settlement among trading businesses who are the strongest supporters of open trade.
10.31. Having considered the request of Korea for th e right to use private counsel at the panel
meetings, and the responses the European Communiti es and the United States, we decided to permit
the appearance of private counsel before the Pane l and to allow them to address arguments to the
Panel in this case. In our view, it is appropriate to grant such a request in or der to ensure that Korea
has every opportunity to fully defend its interests in this case. However, such permission is granted
based on the representations by Korea that the privat e counsel concerned are official members of the
delegation of Korea, that they are retained by and responsible to the Government of Korea, and that
they will fully respect the confidentiality of the proceedings and that Korea assumes full responsibility
for confidentiality of the proceedings on behalf of all members of its delegation, including non-
government employees.
10.32. We note that written submissions of the parti es which contain confidential information may,
in some cases, be provided to non-government advisors who are not members of an official delegation
at a panel meeting. The duty of confidentiality extends to all governments that are parties to a dispute
and to all such advisors regardless of whether they are designated as members of delegations and
appear at a panel meeting.
10.33. The United States offered several suggestions for new rules and procedures in regard to these
questions. However, in our view, the broader qu estion of establishing further rules on confidentiality
and possibly rules of conduct specifically directed at the role of non-governmental advisors generally
is a matter more appropriate for consideration by the Dispute Settlement Body and is not within the
terms of reference of this Panel.

C. MAIN ISSUES
1. Interpretation of Article III:2
10.34. Article III:2 provides two standards for examin ing complaints about a Member's internal
taxation laws. The first sentence of Article III:2 provides:
The products of the territory of any Member imported into the territory of any other
Member shall not be subject, directly or indi rectly, to internal taxes or other internal
charges of any kind in excess of those applied, directly or indirectly, to like domestic
products.
The second sentence provides:
 Moreover, no Member shall otherwise apply in ternal taxes or other internal charges to
imported or domestic products in a manner contrary to the principles set forth in
paragraph 1.
Paragraph 1 of Article III provides:
The Members 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 pr oducts, and internal quantitative regulations
requiring the mixture, processing or use of products in specified amounts or
proportions, should not be applied to importe d or domestic products so as to afford
protection to domestic production.
The meaning of the second sentence in light of its refe rence to the first sentence is further clarified in
Ad Article III as follows:
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.
346
10.35. Thus, the first sentence of Article III:2 examines whether products of an exporting country are
taxed in excess of the taxes on the "like" domestic product. The second sentence examines whether
products of an exporting country are taxed simi larly to domestic products which are "directly
competitive or substitutable." Both sentences first examine the relationship between the domestic and
imported products; however, the second sentence i nvolves additional and different inquiries with
respect to two other elements; namely, an examination of the extent of the difference in taxation347 and
whether the taxation differences are applied so as to afford protection to the domestic industry.
10.36. The general approach in past Article III:2 cases has been to examine first whether any of the
products at issue are "like." However, previous cases have found that the category of like products is

346 Ad Article III has equal stature under international law as the GATT language to which it refers,
pursuant to Article XXXIV. See also Appellate Body Report on Japan -- Taxes on Alcoholic Beverages II,
supra, at p. 24.
347 If the products are determined to be "like" then any taxation of the imported product in excess of the
domestic product is prohibited. There is no de minimis possibility as there is under the second sentence where
Ad Article III provides only that they must be "similarly taxed."

a subset of those products which are directly competitive or substitutable.
348 It therefore seems more
logical to us to approach the issue by examining the broader category first.
10.37. Before beginning to analyze the evidence presen ted, we must first decide how the term
"directly competitive or substitutable" should be in terpreted. Article 31 of the Vienna Convention
summarizes the international law ru les for the interpretation of treaty language. It provides in
paragraph 1 that terms shall be interpreted in good faith in accordance with the ordinary meaning of
the terms in their context and in light of the object and purpose of the treaty. According to paragraph
2, the context includes the full text, the preamble, the annexes and any mutually agreed interpretive
language. Paragraph 3 provides that account shall also be taken of any subsequent practice or
interpretations as well as relevant rules of international law.
10.38. The Appellate Body in Japan – Taxes on Alcoholic Beverages II stated that "like product"
should be narrowly construed for pur poses of Article III:2. It then noted that directly competitive or
substitutable is a broader category, saying: "How mu ch broader that category of 'directly competitive
or substitutable products' may be in a given case is a matter for the panel to determine based on all the
relevant facts in that case." 349 Article 32 of the Vienna Convention provides that it is appropriate to
refer to the negotiating history of a treaty provision in order to confirm the meaning of the terms as
interpreted pursuant to the applica tion of Article 31. A review of the negotiating history of Article
III:2, second sentence and the Ad Article III language confirms that the product categories should not
be so narrowly construed as to defeat the purpose of the anti-discrimination language informing the
interpretation of Article III. The Geneva sessi on of the Preparatory Committee provided an
explanation of the language of the second sentence by noting that apples and oranges could be directly
competitive or substitutable.350 Other examples provided were domestic linseed oil and imported tung
oil351 and domestic synthetic rubbe r and imported natural rubber. 352 There was discussion of whether
such products as tramways and busses or coal and fuel oil could be considered as categories of
directly competitive or substitutable products. Ther e was some disagreement with respect to these
products.353
10.39. This negotiating history illustrates the key question in this regard. It is whether the products
are directly competitive or substitutable. Tramways and busses, when they are not directly
competitive, may still be indirectly competitive as tr ansportation systems. Similarly even if most
power generation systems are set up to utilize either coal or fuel oil, but not both, these two products
could still compete indirectly as fuels.354 Thus, the focus should not be exclusively on the quantitative
extent of the competitive overlap, but on the me thodological basis on which a panel should assess the
competitive relationship.
10.40. At some level all products or services are at least indirectly competitive. Because consumers
have limited amounts of disposable income, they may have to arbitrate between various needs such as
giving up going on a vacation to buy a car or abstaining from eating in restaurants to buy new shoes
or a television set. However, an assessment of whether there is a direct competitive relationship

348 Panel Report on Japan -- Taxes on Alcoholic Beverages II , supra., at para. 6.22. This finding was
not modified or reversed by the Appellate Body. See, Appellate Body Report, supra., at p. 23.
349 Appellate Body Report on Japan -- Taxes on Alcoholic Beverages II, supra., at p. 25.
350 EPCT/A/PV/9, at p. 7.
351 E/Conf.2/C.3/SR.11,p.1 and Corr. 2.
352 Ibid. at p. 3.
353 E/Conf.2/C.3/SR.40 at p. 2.
354 To follow on from these hypotheticals, it can be noted that some large power generation facilities
may be convertible from coal to fuel oil or a series of power stations in a particular market could be set for
replacement and alternative fuel sources might be under co nsideration. In such inst ances there may be direct
competition. Hence the statements of the delegates that a review of the specific market structure is necessary to
determine the nature of the competition.

between two products or groups of products requires evidence that consumers consider or could
consider the two products or groups of products as alternative ways of satisfying a particular need or
taste.
10.41. The Panel in Japan – Taxes on Alcoholic Beverages II noted that the 1989 Japanese tax
reform had eliminated the distinctions between various grades of whisky. The result was that
domestic whisky production declined relatively. Its market shar e fell and both shochu and foreign-
produced whisky's market share rose. The Panel stated:
 In the Panel's view, the fact that forei gn produced whisky and shochu were competing
for the same market share [held by domes tic whisky] is evidence that there was
elasticity of substitution between them.
355
Imported whisky and shochu may each have been co mpeting independently with domestic whisky.
We would agree with that panel that showing su ch indirect competition may provide evidentiary
support for a finding of direct competitiveness. Howeve r, such a showing is insufficient on its own.
To use a hypothetical case for illustration, it is possible that in some markets distilled beverages could
be shown to compete with wine; beer could also be shown to compete with wine. However, such
evidence does not reveal whether the relationship is di rect or indirect. More would need to be shown
in such a case to establish that distilled beverages and beer are directly competitive or substitutable
with respect to each other in that market.
10.42. In our view, it is also the case that quantita tive analyses, while helpful, should not be
considered necessary. In examini ng the Korean market, a determination of the precise extent of the
competitive overlap is complicated by the fact that, as the 1987 and 1996 panels noted in the Japan –
Taxes on Alcoholic Beverages I and II , the intervention of government policies can cause distortions,
including understatement, of the quantitative extent of the competitive relationship. Indeed, there
must be some 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. 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. The Appellate Body stated:
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.
356
10.43. The question for us to decide is whether in Korea the domestic and imported products are
directly competitive or substitutable. This requi res evidence of the direct competitive relationship
between the products, including, in this case, comparis ons of their physical characteristics, end-uses,
channels of distribution and prices.357

355 Panel Report on Japan -- Taxes on Alcoholic Beverages II, supra., at para. 6.30.
356 Appellate Body Report on Japan -- Taxes on Alcoholic Beverages II, supra., at p. 16. Obviously,
the expectation of competitive conditions must be a reasonable one.
357 These are the categories of evidence we have examined in this case to determine whether the
products in question are directly competitive or substitutable. Obviously, the availability and probative value of
categories of evidence may differ from case to case.

2. Evidentiary issues
(i) Cross-price elasticity
10.44. The Appellate Body approved the panel's decision in Japan – Taxes on Alcoholic Beverages
II to look not only at products' physical characterist ics, common end-uses, and tariff classifications,
but also at the market place. It approved the examination of the economic concept of "substitution" as
one means of examining the relevant markets. The use of cross-price elasticity of demand was
approved but it was specifically noted that it is not the decisive criterion.
358 While a high degree of
cross-price elasticity of demand would tend to support the argument that there is a direct competitive
relationship, it is only one evidentiary factor. If there is a high quantitative level of competition
between products, it is likely that the qualitative na ture of the competition is direct. However, the
lack of such evidence may be due to the governmental measures in question. As noted, both panels in
Japan – Taxes on Alcoholic Beverages I and II made the observation that government policies can
influence consumer preferences to the benefit of the domestic industry. It was stated that:
 a tax system that discriminates against imports has the consequence of
creating and even freezing preferences for consumer goods. In the Panel's
view, this meant that the consumer su rveys in a country with such a tax
system would likely understate the degree of potential competitiveness
between substitutable products.
359
This is particularly a problem if the products involved are consumer items that are so-called
experience goods which means that consumers te nd to purchase what is familiar to them and
experiment only reluctantly. This issue will be disc ussed further below. Thus the question is not of
the degree of competitive overlap, but its nature. Is there a competitive relationship and is it direct?
It is for this reason, among others, that quantitativ e studies of cross-price elasticity are relevant, but
not exclusive or even decisive in nature.
(ii) Evidence from outside the Korean market
10.45. Other elements of evidence besides cross-price el asticity are relevant to the analysis. In our
view, another element of relevant evidence is the nature of competition in other countries. We are
mindful of the admonition of the Appellate Body in the case of Japan -- Taxes on Alcoholic
Beverages II, that these disputes must be evaluated on a case-by-case basis taking into account the
conditions in the market in question. However, as 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 . Similarly, we consider it relevant as to how
Korean manufacturers of soju are marketing their be verages outside Korea. According to Korea, the
panel should strictly limit its view to what happens in the Korean market place. Nothing that happens
outside Korea can be considered relevant in determ ining whether the products in question are directly
competitive or substitutable within Korea. Also, Korean manufacturer's export marketing efforts are
to be given no weight. In our view, this is an overly restrictive approach and does not accord with
market realities. It is true that the question to be answered concerns the Korean market, but that in no
way implies that what happens in regard to the same products outside of the Korean market is
irrelevant to assessing the actual and potential market conditions within Korea.

358 Appellate Body Report on Japan -- Taxes on Alcoholic Beverages II, supra., at p. 25.
359 Panel Report on.Japan – Taxes on Alcoholic Beverages II, supra., at para. 6.28, citing, Panel Report
on Japan - Customs Duties, Taxes and Labelling Prac tices on Imported Wines and Alcoholic Beverages ,
adopted on 10 November 1987, BISD 34S/83, at para. 5.9.

10.46. In some cases, the only mark et evidence available may be with respect to non-domestic
markets due to the tax, duty and regulatory structure in the country in question. Sometimes, the only
reasonable manner of assessing what the market situa tion would be absent such policy structures is to
look at other markets and make a judgement as to wh ether the same patterns could prevail in the case
at hand. However, we do not need to decide such a stark issue in this case; there is considerable
evidence available as to what is taking place within th e Korean market. We do not need, in this case,
to give substantial weight to conditions in market s outside Korea, but such factors are relevant and
should be taken into consideration in determining the nature of th e competitive relationships involved
here.
360 As noted above, the panels stated in Japan – Taxes on Alcoholic Beverages I and II that
systems of government tax policies may have the e ffect of freezing consumer preferences in place in
favour of the domestic product. To completely ignore such evidence from other markets would
require complete reliance on current market informa tion which may be unreliabl e, 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 di scriminatory government policies would be safe from
challenge under Article III due to the lack of domestic market data.
(iii) Potential competition
10.47. Another question that has arisen is the temporal nature of the assessment of competition. All
parties agree that the Panel should look at both actual and potential competition. However, Korea
argues that potential competition does not include futu re competition. They argue that at most, the
Panel must make a "but for" decision. That is , but for the taxes would the products be directly
competitive or substitutable at the present moment. Ko rea further argues that if the market changes,
then the complainants are within their rights to raise the matter again at some time in the future.
10.48. Korea's arguments in this regard are not persuasive. We, indeed, are not in the business of
speculating on future behaviour. However, we do not agree that any assessment of potential
competition with a temporal aspect is speculation. It depends on the evidence in a particular case.
Panels should look at evidence of trends and changes in consumption patterns and make an
assessment as to whether such tre nds and patterns lead to the conclu sion that the products in question
are either directly competitive now or can reasonabl y be expected to become directly competitive in
the near future. It is not eviden t why such an assessment is any more speculative in nature than the
"but for" analysis itself. Such an analysis al so requires making an assessment about what would
happen in the theoretical case of the tax differentia ls being removed. In our view, the approach
suggested by Korea is too static. It would be a profoundly troubling development in GATT/WTO
jurisprudence if Members were for ced to return to dispute settleme nt on the same laws over and over
only because the market in question had not yet changed enough to justify a finding at a particular
moment. Such an interpretation would be contrary to the settled law that competitive expectations
and opportunities are protected.
361 As noted above, the Appellate Body in Japan -- Taxes on
Alcoholic Beverages II stated:
Article III protects expectations not of any particular trade volume but rather of the
equal competitive relationship between imported and domestic products.362
According to the 1949 Working Party Report on Brazil Internal Taxes:

360 See, Appellate Body Report on European Communities – Customs Classification of Certain
361 We also note that a requirement of substantial current market presence would be a particularly high
hurdle for less wealthy exporters.
362 Appellate Body Report in Japan Alcoholic Beverages II, supra., at p. 16 (emphasis added).

[The majority of the working party] argued that the absence of imports from
contracting parties during any period of time that might be selected for examination
would not necessarily be an indication that they had no interest in exports of the
product in affected by the tax, since their potentialities as exporters, given national
treatment, should be taken into account.
363
10.49. Similarly, the panel in the 1987 case of Un ited States -- Taxes on Petroleum and Certain
Imported Substances stated:
For these reasons Article III:2, first sentence, cannot be interpreted to protect
expectations on export volumes; it protects expectations on the competitive
relationship between imported and domestic products.364
The Shorter Oxford English Dictionary defines "potential" as follows:
potential 1. possible as opposed to actual; capable of coming into being; latent.365
The same dictionary defines "expectation" as follows:
expectation 1. The action of waiting for someone or something. . . .4. A thing
expected or looked forward to.366
10.50. The interpretation proposed by Korea is not consistent with the standard meaning of the terms
in question both of which clearly have a temporal el ement to their definitions. 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 d ecided 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. To try to limit the inquiry as to what might happen this instant were the tax laws changed
would involve us in making arbitrary distinctions between expectations now and those in the near
future. Obviously, evidence as to what would happ en 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 ite ms, then trends are particularly important and it
would be unrealistic and, indeed, analytically unhelp ful to attempt to separate every piece of evidence
and disregard that which discusses implications for market structure in the near future.
3. Products at issue
10.51. In order to determine whether the imported and domestic products are directly competitive or
substitutable, it is necessary to properly identify such products. With respect to the domestic product,
soju, there are two primary categories identified. There is distilled soju and diluted soju. Distilled
soju has been described as so ju made from a mix of additives and water blended into an alcohol

363Brazilian Internal Taxes, BISD II/181 at p. 185, para. 16 (emphasis added).
364United States -- Taxes on Petroleum and Certain Imported Substances, BISD 34S/136, at p. 158,
para. 5.1.9 (emphasis added). We do not consider it a meaningful distinction on this issue that this quote refers
to the first sentence of Article III:2 rath er than the second sentence. To fi nd otherwise would be to imply that
one could refer to expectations with respect to determining the market conditions for examining like products
but not for examining whether products are directly comp etitive or substitutable. Given that like products are a
subset of directly competitive or substitutable products, this would be illogical.
365L. Brown (ed), The New Shorter Oxford English Dictionary (Clarendon Press, 1993), Vol. 2 at p.
2310 (emphasis in the original).
366Ibid. Vol. 1 at p. 885 (emphasis in original).

solution extracted by a method of single-step distillation.
367 It is identified separately in the Korean
tax law, although not in Korea' s WTO Schedule of tariff bindings . Distilled soju accounts for less
than one percent of soju sales in Korea. Distilled soju is taxed at a higher rate than diluted soju.
10.52. The other type of soju is what we have descr ibed as diluted soju. There was considerable
discussion about the proper appellation for this product. The complainants described it as diluted soju
and Korea maintained that it should be referred to as standard soju. We have adopted the name
diluted soju for the product for purposes of descriptiv e clarity only, without any intention of thereby
drawing substantive conclusions from the name. With in this category there is standard diluted soju
and premium diluted soju. 368 Standard diluted soju is a lower priced product that has been dominant
since the 1960's. Premium diluted soju, which generally has additives for flavouring, has been
introduced in the past few years. It is higher pr iced and the advertising for it has cultivated a more
"up-market" image. Its market share has grown rapidly and it now represents approximately five
percent of soju sales.369 All parties have agreed that premium and standard diluted soju are variations
of one product. Diluted soju is described as:
 soju made from a mix of additives, water and grain solution (or distilled soju solution
-- the Liquor Tax Act classifies soju as being ' diluted' soju where the ratio of the
grain solution or the distilled soju solution amounts to 20% or less of the total volume
of alcohol), blended into an alcohol solution extracted by a method of "continuous
distillation".
370
10.53. Korea has argued that distilled soju and diluted soju are tw o separate product categories for
purposes of analysis under both sentences of Article III: 2. Korea argues that the complainants must
prove the imported products are like or directly co mpetitive with or substitutable for each of the two
domestic products separately and provide a comparis on with each on a product-by-product basis.
Complainants, on the other hand, argue that the two ty pes of soju are nearly identical and therefore all
soju is a single product for purposes of analysis in this case.
10.54. The distinction between distilled and diluted so ju is more relevant to a discussion of like
products where the product categories are narrower. The Korean Fair Trad e Commission has stated
that:
the basic difference between those two types of soju is whether the alcohol was extracted by
means of single-step distillation or continuous distillation.371
We are not convinced that this difference is significan t. Moreover, in our view, to the extent there are
differences between the two types of soju, distilled so ju is more similar to the imported products than
diluted soju. Distilled soju is higher priced than diluted soju; distilled soju (40-45 percent) has a
higher alcohol content than diluted soju (20-25 percen t); distilled soju often is used as gifts, an end-

367 See Korea First Submission, Attachment 1, Deci sion of the Fair Trade Commission of the Republic
of Korea Case No. 9607, Advertisement 1023, 30 November 1996, at 3.
368 See discussion at footnote 20, above. To have decided otherwise would have left us discussing
"standard soju" and "premium standard soju", terminology which would have been confusing.
369 The EC argues that it might account for as much as 10 percent of the market. Apparently, it is
difficult to judge the market share precisely because there is no legal definition which would assist in compiling
statistics. See para.6.24. Korea states that sales of premium diluted soju ha ve declined recently. We also note
that sales of imports have declined at the same time due, presumably, to the current financial crisis in Korea.
The lower priced product, standard diluted soju has incr eased sales. These changes in levels of sales, if
anything, can be taken as further support for the relationship of the products. See EC Answers to Questions,
Question 1 from the Panel at pp. 1-2, and accompanying chart.
370 Korea First Submission, Attachment 1, supra., at 3.
371 Ibid.

use identified by Korea as one also pertaining to imports; distilled soju is aged as is the case with
many of the imports. As is discussed further below, we do not think that these types of differences are
sufficiently important to meaningfully distinguish between two products. We will proceed with an
examination primarily of the competitive relations hip of the imported products with diluted soju,
including both standard and premium subcategories of diluted soju. If we find that diluted soju is
directly competitive with and substitutable for the imported products, it will follow that this is also the
case for distilled soju because distilled soju is intermediary between the imported products and diluted
soju. Indeed, distilled soju is, on the one hand, more similar to the imported products than diluted
soju and is, on the other hand, more similar to diluted soju than are the imported products.
10.55. With respect to the imported products, there is a fundamental and important disagreement
between the parties to the dispute. Complainants argue that all distilled beverages are directly
competitive or substitutable with each other. They have presented evidence with respect to several
categories of such imported products, but not a ll products within the tariff heading 2208 which
constitutes the parameters of the terms of referenc e. They have argued that they have presented
evidence with respect to the primary imported products as examples of the broader category. The EC,
in particular, argued that to present information on each and every type of distilled beverage would
put too much of a burden on complainants and w ould overwhelm the Panel with details of little
substantive importance. Both complainants have argued that the Appellate Body ruled that all
imported distilled beverages were directly competiti ve with or substitutable for shochu in the case of
Japan -- Taxes on Alcoholic Beverages II . They argue that we should take guidance from the
Appellate Body's decision in that case.
10.56. The Japan – Taxes on Alcoholic Beverages II case provides unclear guidance for the present
case. The panel in that instance made findings with respect to the western-style alcoholic beverages
for which specific evidence was provided. However, the panel did not explicitly state that it was not
making a determination with respect to the other pr oducts within HS 2208. The Appellate Body ruled
that, as a matter of law, the panel erred in not ma king determinations with respect to all of the
products within the terms of reference. The Appellate Body went on to find that all imported products
identified by HS 2208 were directly competitive with or substitutable for the domestic product,
shochu. In that case, the Appellate Body did not fu rther explain its reasoning. We are unaware of the
specifics of the Japan – Taxes on Alcoholic Beverages II case in this regard. While taking note of the
Appellate Body's finding on this issue, we also re call the Appellate Body's statement that findings
with respect to Article III:2 are to be made on a case-by-case basis.
10.57. In the present case, we are of the view that we cannot make affirmative findings with respect
to products for which the complainants have pr ovided virtually no evidence with respect to their
physical characteristics, end-uses, retail outlets or prices.
372 It may be possible that the products
identified by the complainants serve as adequa te representatives of a broader category, but
complainants did not provide such evidence and re lied instead on assertions combined with reference
to the prior Appellate Body decision regarding Jap an. While, as stated, we will make reference to
other markets when such markets provide relevant evidence to the determin ation, the evidence from
the Japanese market and the determination of the Ap pellate Body in that case serves as an inadequate
evidentiary basis for us to conclude that all prod ucts within HS 2208 are the appropriate category of
imported products in the case of Korea. Indeed, to make the determination as requested by the
complainants without further evidence could be to, in some circumstances, prejudge the case. If we
were to follow their reasoning that the Appellate Body decision in Japan – Taxes on Alcoholic
Beverages II case had determined the parameters of the imports for all cases, then because soju is

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

within the HS category of 2208, it could be claimed that the whole issue of the case is decided without
any evidence relating to the specific case of Korea. To look at it another way, complainants would
like us to establish that all products within 2208, including soju, presumptively are covered and then
leave it to Korea to prove that soju is not properly included with respect to the Korean market. This
could, in some circumstances, have the practical effect of shifting the burden of proof onto the
defending party without the complaining parties having first established a prima facie case. It may be
that such evidence concerning the whole category could be developed with respect to the Korean
market or may exist with respect to other market s, as apparently was the case with respect to the
Japanese market, but in this case we can only make determinations with respect to the products
specifically discussed by the complainants. These are vodka, whiskies, rum, gin, brandies, cognac,
liqueurs, tequila and ad-mixtures.
373 The complainants have not ca rried their burden of establishing a
prima facie case with respect to the remainder of the products under HS 2208.374
10.58. We include tequila for which evidence was presented. We note that a third party, Mexico,
provided arguments with respect to both tequila and mescal. The complainants provided specific
evidence for tequila, but not mescal. We consider it appropriate to take into consideration information
provided by a third party. In this case, mescal was mentioned without pos itive evidence of the actual
or potential competitive nature of the product in th e Korean market. Tequila was included in the
Dodwell study where there was evidence of the resp onse of consumers to the relative changes in the
prices of soju and tequila. Tequila is a white al coholic beverage which is also used, among other
things, to accompany spicy foods.
10.59. While we have declined to find all products identified by HS 2208 are included in our
determination, we also do not accept the Korean ar gument that we are required to make an item by
item comparison between each imported product and both types of soju. Relying on product
categories is appropriate in many cases. Indeed, in this case parties generally referred to the category
of "whiskies" which included several subcategories of types of whisky such as Scotch (premium and
standard), Irish, Bourbon, Rye, Canadian, etc, a ll of which have some differences. The question
becomes where to draw the boundaries between categor ies, rather than whether it is appropriate to
utilize categories for analytical purposes.
10.60. In our view, it is appropriate to group toge ther all of the imported products for which
evidence was presented. We note that Korea in its arguments often referred to western-style
beverages. The "high-class" restaurants and bars th at allegedly did not serve soju, were said to sell
western-style beverages. There are some phy sical differences between the various imported
beverages but, as discussed below, we do not find the se differences sufficient to make it inappropriate
to group them together as imported products. The prices of the imported products show a spread over
a certain range, but as with the relationship to soju, we do not think the prices so distinct as to prohibit
us from examining the identified imports as a group. The imports appear to be distributed in similar

373These are contained within portions of Korea's domestic tariff schedule, as follows:
 2208.20 Spirits obtained by distilling grape wine or grape marc
 2208.30 Whiskeys
 2208.40 Rum and tafia
 2208.50 Gin and geneva
 2208.60 Vodka
 2208.70 Liqueurs and Cordials
 2208.90.10 Brandies other than that of heading No. 2208.20
 2208.90.40 Soju
 2208.90.70 Tequila

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

manners for similar purposes. Therefore, based on the evidence, including th at discussed more fully
in section 4 below, we find that, on balance, all of the imported products specifically identified by the
complainants have sufficient common characteristics, end-uses and channels of distribution and prices
to be considered together.
 375
4. Product comparisons
10.61. We next will consider the various characteris tics of the products to assess whether there is a
competitive or substitutable relationship between the imported and domes tic products and draw
conclusions as to whether the nature of any such rela tionship is direct. We will review the physical
characteristics, end-uses including evidence of advertising activities, channels of distribution, price
relationships including cross-price elasticities, and any other characteristics.
(i) Physical characteristics
10.62. Complainants argue that the defining physical characteristic of bot h imported and domestic
products is the fact that they are distilled beverages. Other differences such as colouring or flavouring
have no relevance in an analysis of whether produ cts are directly competitive or substitutable. As
summarized by the complainants:
The basic physical properties of soju and other categories of liquors concerned in this
dispute are essentially the same. All dis tilled liquors are concentrated forms of
alcohol produced by the process of distillation. At the point of distillation, all spirits
are nearly identical, which means that the raw materials and methods of distillation
have almost no impact on the final pr oduct. Post-distillation processes such as
ageing, dilution with water or addition of flavourings, do not change the basic fact
that the product sold is still a concentrated form of alcohol.
376
10.63. Korea argues that the different physical characteristics are substantial. They argue that
distilled liquors can be derived from a variety of sources and that the selection of raw materials can
play an important role in determining the ultimate qualities of the finished product. Korea argues that
there is a distinction between brown spirits such as whisky and white spirits such as soju and gin. The
brown colouring generally comes from aging in barre ls whereas white spirits are not aged before
bottling. Korea argues that even very minor diffe rences in physical characteristics can be
determinative if consumers percei ve them as important. To put it another way, in response to a
question from the panel, Korea argues that two produc ts which are nearly physically identical can be
found not directly competitive or substitutable if c onsumers perceive them differently. According to
Korea the question's reference to nearly physically identical begs the question, because "nearly" must
be defined in terms of consumer perception rather than comparison of physical characteristics by non-
consumers such as chemists.
10.64. We do not agree with Korea's narrow interpretation. The Panel is examining the nature of the
competitive relationship and determining whether there is an actual or potential relationship
sufficiently direct to come within the strictures of Article III:2, second sentence. The physical
characteristics themselves must be reviewed for if tw o products are physically identical or nearly so,
then it obviously means that there is a greater poten tial for a direct competitive relationship. The
United States argued that there can be two products of identical physical properties such as name

375 This decision does not prejudge the substantive discussion; rather we are merely identifying an
analytical tool. It is possible that during the course of a dispute, evidence will show that an analytical approach
s h o u l d b e r e v i s e d . I n t h i s c a s e , h o w e v e r , w e n o t e t hat the results of the inquiry described in the following
sections confirm the appropriateness of grouping the imports together for purposes of analysis.

brand and generic aspirin which are marketed somewhat differently and perceived somewhat
differently by consumers. Nonetheless, they would be considered directly competitive or
substitutable and the identical or nearly identical ph ysical characteristics would be a significant factor
in the analysis. We find this analogy useful.
10.65. The panel on Japan – Taxes on Alcoholic Beverages II referred to the usefulness of
examining marketing strategies.
377 Marketing strategies that highlight fundamental product
distinctions or, alternatively, underlying similar ities may be useful tools for analysis. However,
marketing strategies sometimes aim to create distinctions that are primarily perceptual between
products with very similar physical characteristics. The existence of such perceptions based on
marketing strategies rather than physical simi larities and potential end uses does not mean that
products are not at least potentially competitive. I ndeed, it is natural and logical that marketers would
recognize the possibility of capitalizing on the tax differentiation to create a marketing advantage.
10.66. As noted above, we have found it most fruitful to first examine whether the imported products
are directly competitive or substitutable and only to turn to the question of whether they are like
products second. The determination of whether two products are "like" has traditionally turned to a
greater extent (although not exclusively), on the physi cal characteristics of products. It would be an
incorrect reading of the law to argue that products' physical similarities were somehow less relevant
for the category of directly competitive or substitu table products than for the subcategory of like
products. To put it another way, if two products ar e physically identical or nearly so, it is highly
probable that they are "like." They should not then be found to be not directly competitive or
substitutable because marketing campaigns (or government tax regimes) have created a distinction in
consumer perceptions. Such cons umer perception distinctions are relevant but not determinative
when the question is the nature of an actual or potential competitive relationship rather than merely a
quantitative analysis of the current extent of comp etition. To find otherwise might allow allegedly
discriminatory government measures to create self-justifying product distinctions between identical or
nearly identical products.
10.67. We note that for purposes of the analysis under Article III:2, second sentence, products do not
need to be identical to be directly competitive or substitutable.
378 However, as discussed above,
physical similarities are relevant to the inquiry, par ticularly with respect to potential competition. All
the products presented to the Panel have the essential feature of being distilled alcoholic beverages.
Indeed, Korea imports ethyl alcohol for use as the base ingredient for diluted soju. Such ethyl alcohol
is also used in a similar process for vodka and shochu, among other products. 379 All are bottled and
labelled in a similar manner.380 In our view, the differences due to the filtration or aging processes of
the beverages described are not so important as to render the products non-substitutable. Aging in
barrels will impart some flavour to the product as well as a dark colour, usually amber. But
differences in color do not render products non-substitutabl e. We note that rum also is sold in light
and dark versions, albeit not as a result of barrel ag ing. There have been no arguments that the two
types of rums are not competitive due to this physi cal difference. Some beverages have flavourings

377 Report of the Panel on Japan -- Taxes on Alcoholic Beverages II, supra., at para. 6.28.
378 Appellate Body Report on Canada -- Certain Measures Concerning Periodicals, adopted on 30 July
1997, WT/DS31/AB/R, at p. 28.
379 See para. 6.153 and para.6.161. Korea has argued that this statement takes in too much. It would
also imply that certain industrial products might also be like soju or directly competitive or substitutable for it.
We agree that this commonality of source material is not, in and of itself, sufficient for our analysis in this case.
However, it is a factor which we take into considerati on for it does go to show th at there is a fundamental
similarity in the basic materials used in the manufacturing process.
380 Korea attempted to place a great deal of emphasis on the differences in bottle sizes and labelling.
Korea argued that bottles of soju were very different from bottles of shochu whic h were, according to Korea,
made to look more like whisky. We find these differ ences relatively minor compared to the similarities in
presentation.

added, e.g., juniper berries are added to clear spir its to make gin. However, we find that these
differences in flavour or colour are relatively mi nor. We note that soju may also contain various
sweeteners and flavourings. Indeed, the premium soju that has entered the market recently,
corresponding to the entry of the imported products, has increased amounts of these additives.
381
While there are some differences in the physical characteristics of the products, weighing the evidence
presented, we find that there are fundamental phys ical similarities between the imported and domestic
products that would support a finding that the impor ted and domestic products in question are directly
competitive or substitutable.382
(ii) End-uses
10.68. The issue of end-uses for these products has drawn much attention from the parties in this
case. The complainants have argued that all dis tilled beverages have common end-uses. They have
identified these as follows:
1. all of them are drunk with the same purposes: thirst quenching, socialization,
relaxation, etc.;
2. all of them may be drunk in similar ways: "straight," diluted with water or
other non-alcoholic beverages or mixed with other alcoholic beverages;
3. all of them may be consumed before, after or during meals; and
4. all of them may be consumed at home or in public places such as restaurants, bars,
etc.
10.69. These are very broad categories of end uses. In response to questions from the Panel, the
complainants identified "relaxation" from the conc entrated alcohol content as perhaps a defining
characteristic. They also responded that such beve rages as soft drinks could not be included even
though they fit some of the end-uses description because they contained no alcohol.
10.70. Korea has structured its defense primarily aroun d two related aspects of the case. First is
price, which will be discussed below. Second is differing end-uses. The two are related because
Korea argues that the overwhelming end-use for soju, particularly diluted soju, is drinking with meals
in Korean-style and other traditional restaurants wh ereas western-style beverages allegedly are almost
never utilized in such a fashion. One of the reasons , allegedly, for this distinction is the great price
differences which make western-style beverages too expensive for such frequent use. There are other
reasons put forward by Korea for the end-use distinc tion as well. For instance, soju is said by Korea
to be a harsh drink particularly suitable for drinking with spicy Korean food.383
10.71. Prior to the second substantive meeting of the Panel, Korea produced a study by the A.C.
Nielsen company which Korea argued documented the very distinct end-uses of soju and western-

381 See para. 5.55 and para. 7.18.
382 We note that these findings with respect to physical characteristics support our conclusion in section
3, above, that the identified imported products should be considered as a single category.
383 We note that Korea elsewhere emphasizes the sweet ness of soju for purposes of distinguishing it
from shochu. (See para.5.55.) Also, Korea submitted a copy of an advertisement for a standard diluted soju
which emphasized its mildness. (Attachment 6 to Korean First Submission) This would seem to imply that
Koreans would be willing to substitute allegedly less ha rsh western-style beverages were they to experience
them. Furthermore, it is unclear how Korea's emphasis on the lower alcohol level of diluted soju relative to
western-style beverages accords with the assertion of its singular harshness. Finally, it also is unclear why food
should be seen as necessary to cush ion the effect on the stomach of a lower alcohol drink compared to a higher
alcohol drink.

style beverages. The survey concluded that while all Korean restaurants, Chinese restaurants and
mobile street vendors deal in standard soju, most cafes/western-style restaurants and bars deal in
whisky. The survey also found that 29.3% of th e respondents consumed alcoholic beverages at home
with meals, while 81% were found to have consumed such beverages with meal s at restaurants. The
authors of the report claimed that diluted soju w as the predominantly consumed alcoholic beverage
with meals. Drinking diluted soju with meals was most popular at Korean restaurants (73%),
followed by Japanese restaurants (18.7%). Of the 7 beverages offered to the respondents, none of
them were consumed with meals at cafes/western styl e restaurants, bars and hotel bars. Finally, the
survey found that soju is predominantly consum ed straight (98.6%), while whisky is usually
consumed on the rocks (63.8%).
10.72. The complainants responded to this survey by pointing out that there were several categories
of overlapping end-uses. For instance, all Japan ese restaurants served soju and 40% of them served
whisky; a further 6.7% served brandy or cognac. Of the responding Western-style restaurants and
cafes, 90% served whisky and a lesser number served other types of western-style beverages.
However, 21.7% served soju. Also, the complainants noted that while only 1.7% of the individual
respondents drank whisky at home with meals, only 29.3% of all respondents consumed any alcoholic
beverages at home with meals. Therefore, the pr oper comparison was of the 1.7% with the 29.3 %,
thus leaving 5.8% of all respondents who consum ed alcoholic beverages with meals at home as
drinkers of whisky as the accompaniment. Complain ants have questioned some of the findings of the
Nielsen survey, but also have argued that these re sults are actually indications of overlapping end-
uses.
10.73. Complainants have noted that there were almost no western-style beverages in Korea until the
last five years following changes in the duty rates on imported distilled beverages. Furthermore, they
argue, alcoholic beverages, like ma ny foods and beverages, are e xperience based products. People
tend to purchase what they are familiar with and cha nge their tastes only over a period of time. They
will only make minor substitutions for the familiar product at first and highe r frequency will tend to
occur over a period of time until a fairly stable rate is achieved.
384 The trends shown in the Nielsen
survey -- as well as the substitutability shown in th e EC's market survey, the Dodwell study --
constitute, according to complainants, unmistakable evidence of the beginnings of substitutability and
common end-uses by imports. Trends are significant with respect to such products. We think there is
merit in these arguments and further note that th is is another reason why the distinction offered by
Korea between potential and future competition is too stark. Reasonable projections of increasing
substitutability over a period of time are relevant and valid for determina tions made pursuant to
Article III:2.
10.74. Korea offers an analogy between the alcoholic beverage market and th e automobile market
which we do not find particularly useful. Kore a argues that the imported products are Ferraris
compared to soju's Renault Clio. However, the an alogy is inapt. Automobiles are durable goods of
great value relative to income that are only pur chased periodically, generally only once every several
years. It is probable that the purchaser of a Re nault Clio has no option to purchase a Ferrari which
might cost considerably more than the Clio purch aser's annual salary. Alcoholic beverages, on the
other hand, are consumer goods which are purchase d frequently, and even the Clio purchaser can
afford to purchase a bottle of a more expensive be verage at least occasionally. The ratios between
$10 and $100 products may be the same as be tween $10,000 and $100,000 products, but the
purchasing decisions of ordinary consumers in the two situations are quite distinct.
10.75. The EC submitted a market survey conducted by Trendscope during the second substantive
meeting of the Panel. It was of the same general type as Korea's Nielsen survey. It examined end-
uses but did not go into specific price comparisons as did the earlier submitted Dodwell study. Korea

384 See para. 6.120

requests that we disregard the Trendscope survey. As discussed above, we decline to disregard the
survey; however, we do not, in fact, accord much wei ght to the submission by the EC. It adds little of
probative value to the extensive prior submissions of the parties. What was of more interest was the
nature of some of the substantive disagreements of the parties concerning information contained in the
Trendscope survey. Among other things there w as a disagreement over the correct Korean terms and
whether the questioners adequately distinguished between "meals" and "food." Korea apparently puts
a great deal of store in this distinction, arguing that one must look exclusively at "meals" where
Korean soju predominates rather than at mere "food" which might include snacks where western-style
beverages might be consumed.
10.76. We do not consider this a meaningful distinc tion between end-uses of products, certainly not
enough to establish separate and non-competing product categories for purposes of Article III:2,
second sentence. Neither this nor other panels shoul d be required to draw such fine distinctions
permitting significant differences in the applicati on of the law based upon such differences as saying
one beverage is used for snacks and another for meals. In reviewing the evidence of this case, we are
not convinced that such a distinction, even assumi ng Korea's argument that it exists is correct, is
sufficient. If a distilled alcoholic beverage is drunk with snacks, the nature of the competitive
relationship is that it can be drunk with meals, e ither as marketing campaigns change or persons
become more familiar with products new to the market. Indeed, we are unconvinced in general that
the distinction between drinking alcoholic beverages at meals and drinking them either before or after
meals was, in the context of this case, sufficient to render the pr oducts not directly competitive or
substitutable.
385 Furthermore, we do not agree with th e whole concept of basing a distinction on
preferences for traditional drinks with traditional meals. 386 Korean food may be spicy, but it is not
uniquely so in such a manner that soju and only soju is suitable for consumption with meals. It may,
in fact, transpire that most Koreans will continue to prefer their traditional drink of soju with
traditional food, but based on the information in the surveys and the trends in consumption patterns, it
does appear that some Koreans at some times pref er other beverages and that these trends towards
substitutability are likely to continue, even with respect to end-use categories we consider overly
narrow.
10.77. We also are of the view that the presence of ad -mixtures in the Korean market lends credence
to the conclusion of the substitutability of the impor ted and domestic products. Korea argued that the
domestic ad-mixtures are not soju, but as soju is defined in the Liquor Tax Law as essentially diluted
ethyl alcohol with some flavorings and additives, it is unclear what point Korea is making with this
alleged distinction. If alcoholic beverages can be and often are drunk mixed, either as pre-mixes or

385 Korea attempts to draw a number of product distinctions based on quite narrow differences. For
example, Korea drew distinctions between some products based on whether they were given as gifts. Some of
these assertions appeared to be contra dictory. For instance, Korea stated th at a distinction between diluted soju
and brandy was that cognac and brandy were generally used as gifts, unlike diluted soju. However, Korea later
stated that distilled soju was distinguishable from cognac and brandy because it was used for gifts while cognac
and brandy were sold in "high-brow restaurants." (See para. 5.259 and para.5.295) When asked to explain,
Korea responded with an even finer distinction as to what occasions particular gift beverages are used for. (See
para. 7.23) Korea attempts to draw too fine a line between products for purposes of analysis under Article III:2,
second sentence.
386 Korea has argued that the notion that distilled alcoholic beverages are not to be consumed with food
is a peculiarly western notion. It is not clear that this assertion concerning "western notions" is necessarily true.
Such drinks as vodka and whisky may very well be associ ated with traditional meals in some of the countries of
origin. Furthermore, even if it is true that westerners do not generally drink distilled beverages with meals, it
begs the question as to whether Koreans would like to, or sometimes do now, drink western style beverages with
their meals. Also, Korea's assertion that "soju is a volume drink; vodka is not" (See para.5.269) could be
questionable based on drinking behaviour in other markets. Again, while our decision is in regard to the Korean
market, consumption patterns elsewhere are relevant, at least for purposes of assessing potential
competitiveness.

mixed after purchase, it shows the potential for subs titution between the base drinks and the lack of
importance of the distinction which Korea attempts to draw based on alcohol strength.
387
10.78. End-uses constitute one factor which is pa rticularly relevant to the issue of potential
competition or substitutability. If there are common end-uses, then two products may very well be
competitive, either immediately or in the near and reasonably predictable future. In this regard, we do
find it relevant, albeit of less relative evidentiary we ight, to consider the nature of the competitive
relationship in other markets. If two products compete in a market that is relatively less affected by
government tax policies, it might shed light on whether those same two products are potentially
competitive in the market in question. Such a co mparison is not dispositive by any means; neither
should it be ignored. Its relevance consists primarily in whether it tends to corroborate the trends seen
in the market in question or whet her it reveals inconsistencies with complainants' case which deserve
further consideration. In this regard, we note that in Japan there was increasing end-use
substitutability between western-style beverag es and Japanese shochu as consumers became
increasingly familiar with the new product. Both so ju and shochu are traditional drinks in their
respective countries. Both markets involved sma ll but growing import pene tration following partial
liberalization. The trends that the panel and Appellate Body observed in Japan appear to be
beginning in Korea.
10.79. Article III cases deal with markets
388 and the response of Korean producers to changes in the
markets provides significant evidence of at least a competitive relationship between soju and the
imports. The trend towards increasingly overl apping end-uses are supported by the marketing
strategies of the domestic Korean companies. These companies met the potential threat of imports of
western-style beverages by creating and selling prem ium diluted soju. This beverage had more
flavourings and was marketed in a manner more si milar to western-style beverages than standard
diluted soju. However, it remained within the defini tion of diluted soju in the Korean tax law. The
physical characteristics were changed enough to be more similar to such imports while still enjoying
the price advantages provided by lower tax rates. The complainants also produced evidence that these
products were being adver tised as competitive with western-style beverages. 389 Indeed, one
advertisement referred to soju as a vodka-like pro duct and also showed a new product called barley
soju which clearly is intended to be comp arable to imported products such as whiskies. 390 Evidence
was also produced from various sources including Korean Air's in-flight magazine showing very
similar advertising strategies for distilled soju and western-style beverages.
391
10.80. Korea argued that advertisements in Korean Air's in-flight magazine should not be considered
as aimed at the broad domestic market. Similarly, according to Korea, information from the website
of the largest Korean soju producer, Jinro, in E nglish or other advertisements in Japanese would be
aimed at the export market not at the Korean domest ic market, which is the only relevant one here.
We take note of Korea's criticisms of these material s. However, we continue to disagree that the only

387 The question of mixes highlights another of the inconsistencies that emerge from Korea's narrow
product-by-product comparisons. For example, Korea argues that an important distinction between soju and
vodka is that soju is almost always drunk straight whereas vodka is a mixing drink. (See paras. 5.268-5.269) If
this is an important distinction, it would seem an important similarity then between soju and whisky, for
example, that the two are often drunk straight. Or if wh isky is mixed, it generally is with ice or water which
also would seem to highlight the similarity with diluted soju on the basis of alcohol strength of the consumed
product. It is also unclear what the basis is for Korea's assertion that vodka is a mixing drink. While it
frequently is served that way, it also is served straight.
388 Appellate Body report on Japan -- Taxes on Alcoholic Beverages II, supra., at p. 25.
389 See US Exhibits E and F and EC First Submission, Annex 12. See also the Sofres Report, supra., at
pp. 23-24.
390 US Exhibit Q.
391 US Exhibit D.

relevant market for collecting data is the Korean domestic market.
392 Rather the Korean market is the
one that is the subject of our decision. In assessing the potential for products to be directly
competitive with or substitutable for the domestic pr oducts it is relevant to look at how the domestic
Korean companies produce, advertise and distribu te their products in other markets as well as in
Korea. Such evidence may be valuable for confirming or challenging trends and identifying
important characteristics of the market which is the subject of the determination. In this case, the
trends in the Japanese market where shochu and imported western-style beverages became
increasingly used for the same purposes and the behavi our of Korean firms that met the challenge of
imports with versions of soju increasingly sim ilar to such imported beverages are relevant
confirmation of what exists, albeit in a somewhat nascent form, in the Korean market.
10.81. The issue was raised wh ether the Panel should use the same criteria for defining markets
under Article III:2 as under competition law. Korea was generally supportive of utilizing competition
law market definitions for purposes of Article III and even went further and queried whether
competition law market definitions might be too broad for purposes of Article III. Complainants
argued, on the other hand, that Article III has a different purpose from competition law. Article III,
they argue, is an anti-discrimination provision ai med at ensuring that government measures do not
result in competitive conditions which favor the dom estic industry. Therefore, the interpretation
should be broad. According to the complainants , antitrust law has a different purpose of addressing
the actions of individual firms or persons that threaten competition and such laws generally do not
recognize any distinction between foreign or domestic persons. While the specifics of the interaction
between trade and competition law are still being deve loped, we concur that the market definitions
need not be the same. Trade law generally, and Ar ticle III in particular, focuses on the promotion of
economic opportunities for importers through the elimination of discriminatory governmental
measures which impair fair international trade. Thus, trade law addresses the issue of the potentiality
to compete. Antitrust law generally focuses on firms' practices or structural modifications which may
prevent or restrain or eliminate competition. It is not illogical that markets be defined more broadly
when implementing laws primarily designed to protect competitive opportunities than when
implementing laws designed to protect the actual mechanisms of competition. In our view, it can thus
be appropriate to utilize a broader concept of mark ets with respect to Article III:2, second sentence,
than is used in antitrust law. We also take not e of the developments under European Community law
in this regard. For instance, under Article 95 of the Treaty of Rome, which is based on the language
of Article III, distilled alcoholic beverages have been considered similar or competitive in a series of
rulings by the European Court of Justice ("ECJ").
393 On the other hand, in examining a merger under
the European Merger Regulation,394 the Commission of the European Communities found that whisky
constituted a separate market. 395 Similarly, in an Article 95 case, bananas were considered in
competition with other fruits. 396 However, under EC competition law, bananas constituted a distinct
product market.397 We are mindful that the Treaty of Rome is different in scope and purpose from the
General Agreement, the similarity of Article 95 and Article III, notwithstanding. Nonetheless, we
observe that there is relevance in examining how th e ECJ has defined markets in similar situations to

392 It is not clear that all the advertisements were aimed completely outside the Korean market as Korea
claims. The advertisements in U.S. Exhibit D appear to be in Korean as well as English.
393 See Commission v. France , Case 168/78, 1980 ECR 347; Commission v. Kingdom of Denmark ,
Case 171/78, 1980 ECR 447; Commission v. Italian Republic , Case 319/81, 1983 ECR 601; Commission v
Hellenic Republic, Case 230/89, 1991 ECR 1909.
394 Council Regulation No. 4064/89 of 21 December 1989 on the control of concentrations between
undertakings.
395 Case No. IV/M 938 – Guinness/Grand Metropolitan.
396Commission v. Italy, Case 184/85, 1987 ECR 2013.
397 United Brands v. Commission, Case 27/76, 1978 ECR 207.

assist in understanding the relationship between th e analysis of non-discrimination provisions and
competition law.
398
10.82. In making our assessment with respect to degree and nature of overlapping end-uses, we wish
to make clear that we are not putting a burden of proving the negative on Korea. Rather, we think that
the complainants submitted adequate evidence, inter alia, in the form of the Dodwell study, anecdotal
evidence, and evidence of trends and results in ot her markets to establish this portion of their case.
We also have taken note of the information in the Nielsen and Trendscope studies. All the beverages
described are utilized for socialization purposes in s ituations where the effect of drinks containing
relatively high concentrations of alcohol is desired. They may be used in a variety of social settings,
including with food, either meals or otherwise. Korea's attempts to rebut this argument ultimately
were unpersuasive. The distinctions that Korea wo uld have us draw are too narrow and transitory.
We decline to base a decision on whether a particular type of food is a meal or merely a snack.
Indeed, as discussed above, we are sceptical of the w hole meal-based rationale which is an important
part of the Korean case. In balancing the eviden ce in this regard, we are mindful of the examples
offered by the drafters of Article III and Ad Article III who considered apples and oranges directly
competitive or substitutable products. Thus, we conclude that, on bala nce, the evidence is that there
are current and potential overlapping end-uses su fficient to be supportive of a finding that the
domestic and imported products are directly competitive or substitutable.
399
(iii) Channels of distribution and points of sale
10.83. There is a considerable degree of overlap between the questions of common end-uses and
common channels of distribution. Often, consumer products will be distributed in a manner that
reflects their intended end-uses. Channels of distribution tend to reveal present market structure while
end-uses deals with both the current overlap, if any, and potential for future overlap. In the present
case, it is evident that soju and western-style beverages are currently sold through similar retail outlets
in a quite similar manner for off-premise consumption. 400 Korea has argued that when taken from
such outlets soju is consumed differently; this argument is addressed in the preceding section.
Similarly, the complainants have shown that there are some similarities in other presumably more
minor outlets such as duty free sales.
10.84. The primary area of disagreement is with resp ect to the channels of distribution for on-
premise consumption. Korea argues that soju is so ld primarily for use with Korean food in Korean-
style restaurants. This was broadened and furthe r explained by Korea through the Nielsen survey,
which Korea argues provides evidence that most soju for on-premise consumption was sold to
traditional Korean-style restaurants, as well as Jap anese and Chinese restaurants and mobile vendors.
Conversely, western-style beverages were so ld for on-premise consumption primarily to
cafes/western-style restaurants and bars.
10.85. As discussed above, the complainants have noted that there was overlapping distribution in
the Japanese-style restaurants and cafes/western-style r estaurants in Korea's Niel sen survey. We also
noted from the Nielsen survey that, with respect to sales to cafes/western-style restaurants, while only
13 of the 60 survey respondents said they sold soju compared with 54 of the 60 saying they sold
whisky, they sold 22,710 ml per month of soju compared with 11,702 ml of whisky. That is, more

398 In finding the relationship of the provisions to each other relevant, we do not intend to imply that we
have adopted the market definitions defined in these or other ECJ cases for purposes of this decision.
399 We note that the conclusions we reach in this s ection regarding end-uses supports our conclusion in
section 3, above, that the identified imports should be considered a single category.
400 US Exhibit G; EC First Submission, Annex 11. See also paras. 6.93-6.94 and 6.188-6.189. We note
that this evidence also shows that imports are sold in a similar manner to each other and supports our conclusion
in section 3, above.

soju was sold than whisky in this allegedly west ern-style beverage channel of distribution. This
seems to detract from the Korean claim that this type of on-premise channel of distribution
overwhelmingly favoured whisky.
10.86. Korea asserted that western-style beverag es are limited for on-premise consumption to
"classy" establishments such as "high-class" ba rs, karaoke bars and expensive restaurants.
401 I n
response to these arguments, the United States sent its embassy personnel in Seoul in search of large,
traditional Korean-style restaurants to test the hy pothesis. They claim to have found nine such
establishments in the vicinity of the US Embassy that sold both whisky an d soju. This prompted a
discussion among the parties as to whether the id entified restaurants would be typical or more
expensive than normal. The resolution of th e question of whether these restaurants were
representative or were too expensive to qualify as "tra ditional Korean-style" is less important than the
nature of the discussion itself. We do not think th at a product distinction in a dispute under Article
III:2, second sentence, can turn on such a thin and changeable distinction as Korea has attempted to
make based on whether a restaurant is "high-class" or "expensive" or not. The only meaningful
distinction in channels of dist ribution and points of sale that came to light in this case was the
distinction between on-premise and off-premise distri bution, but that distinction does not appear to
distinguish between the imported a nd domestic products at issue. We find that, overall, there is
considerable evidence of overlap in channels of di stribution and points of sale of these products and
such evidence is supportive of a finding that th e identified imported and domestic products are
directly competitive or substitutable.
(iv) Prices
10.87. Complainants have submitted a study of Kor ean consumer behaviour (the Dodwell study)
related to relative price movements of soju and various western-style beverages, including premium
Scotch whisky, standard whisky, cognac, vodka, gin, rum, tequila and liqueurs. The Dodwell study
purports to show what happens when either the pri ce of soju increases or the price of western-style
beverages decreases, both done in specific incremen ts. The survey also attempted to determine
whether there was any evidence of cross-price elasticity. In response to Korea's challenges to the data
and methodology, the complainants responded that the study was not attempting to show actual
calculations of cross-price elasticity ratios becau se of difficulties inherent in the situation.
Complainants said that the imported products had not been available in sufficient quantities to provide
adequate consumer familiarity with the products and, furthermore, the Korean tax measures at issue
also skewed the pricing and product availability stru cture such that it would be difficult to calculate
actual cross-price elasticity ratios. As noted above , the complainants argued that alcoholic beverages
were experience goods. People tend to consume what they are fa miliar with. Brand and product
loyalty are strong and consumers will change their patterns only slowly over a long period of time
following significant marketing activity and de pendent upon plentiful product availability.
Complainants emphasized the statem ent in the study that it was inte nded to "determine whether any
evidence exists of cross-price elasticity between di fferent spirits categories" rather than actually
calculating such elasticities. Complainants referred to this as a more modest goal that was achievable
and all that was possible in the circumstances.
10.88. Complainants stated that the evidence of substitutability was quite strong when the two
separate trends of lowering import prices and rais ing soju prices occurred. The United States
summarized this in charts which showed the Dodw ell results concluding that the respondents would
chose imported brown spirits rather than soju 15. 22% of the time under current price conditions, but
28.4% of the time when the price of diluted soju was raised 20% and the price of brown spirits was
lowered to its lowest point in the survey. Similarly, with respect to white spirits the choice went from

401 Statement of Korea at First Meeti ng of the Panel at p. 8; Statemen t of Korea at Second Meeting of
the Panel at p .20.

13.8% for imports at current levels to 23.8% when soju was again increased 20% in price and imports
were at their lowest survey levels.
402
10.89. Korea provided considerable criticism of the Dodwell study. Citing a EC Commission notice
on submissions related to EC competition law, Ko rea argued that any market study done for the
purposes of influencing decision makers must be su spect. Korea also noted that surveys based on
asking consumers hypothetical questions about opinions rather than direct factual questions are
inherently untrustworthy because, among other thi ngs, there may be ambiguity in the questions and
there was a need to infer factual results from opinions. Korea also noted that the firm retained to do
such a survey has an incen tive to try to provide answers consiste nt with the clients desires so that it
might be retained again in the future. Specifically , Korea criticized the complexity of the questions
and the unrepresentative nature of the respondents. Korea pointed out a number of anomalies in the
results such as increases in soju consumption when the price increased from 1,100 won to 1,200 won.
Korea also complained that premium diluted soju was included in the alternative samples along with
imported beverages rather than included along with st andard diluted soju as the base for comparison.
According to Korea, this skewed the results. Fina lly, Korea was critical of the formulation of the
questions, which Korea argued could be taken by the survey respondents to mean that they were being
asked if they would try a bottle of imported bevera ges as a one-time purchase if offered a special cut
rate price.
10.90. The complainants repeated that the Dodwe ll study had much more modest purposes than
calculating cross-price elasticities for alcoholic bevera ges in the Korean market. Complainants noted
that the Korean market had only been even partially deregulated for a few years and cited the findings
of both panels examining Japanese alcoholic beverage taxes to the effect that government regulations
and taxes often can freeze consumer preferences. In light of this, according to complainants, it stands
to reason that the Dodwell study must be based on a selection of persons who have tried western-style
beverages in order that they might have a frame of reference. Because of the recent arrival of
western-style beverages in the market, they had to be asked a series of hypothetical questions rather
than asking merely for factual information about current behaviour. Also, given the nature of
alcoholic beverage purchases as on-going decisions on relatively low cost consumables, it was correct
to ask whether the respondents to the survey would be willing to purchase some western-style
beverages if prices changed rather than asking them if they would change their fundamental drinking
habits. Complainants noted that there always will be statistical anomalies in any survey, but that in
the case of the Dodwell study the overall trends were clear even if there was an occasional negative
correlation in the data. Finally, complainants ha ve noted that the Dodwell study used the same
research methods as the ASI study cited by the panel in Japan – Taxes on Alcoholic Beverages II.
403
10.91. Korea correctly identifies some of the weaknesse s and anomalies in the Dodwell study. The
responses move in unexpected directions in some in stances. However, on balance, we consider that
the Dodwell study provided useful information regarding at least the potential competitiveness of the
imported and domestic products. We also do not agree that some of the issues highlighted by Korea
are detrimental to the results. We do not find it a flaw that the chosen respondents were not an
accurate cross-section of all of Korean society. The surveyors selected 500 men between the ages of
20 and 49 from 3 Korean cities who had purchased soju in the past month and whisky in the past 3
months.
404 The age, gender and geographic profiles make sen se. It is illogical to ask someone if they
would shift to another consumer product -- partic ularly a food or drink item -- following a price
change if such a person had never sampled such a product, or a similar one, before and the group
chosen seems to be the most likely to have done so. We also agree with complainants about the
prospective nature of the questions. If one is asking about the response to potential price changes, it is

402First Submission of the United States at paras. 78-85.
403 See Report of the Panel on Japan –Taxes on Alcoholic Beverages II, supra., at para. 6.32.
404 EC Annex 13 at p. 3.

difficult to understand how a question about current behaviour will elicit a useful response. Also,
when dealing with a consumable product which has a low price relative to income, it is not necessary
that a respondent will permanently change drin k preferences. The willingness to occasionally
substitute one product for another when there is a relatively high frequency of purchase should be
sufficient.
10.92. We must also note a general concern with so me of the Korean criticisms of the Dodwell
study. Article III serves to protect the expectations of competitive opportunities. Requiring a survey
based on current, actual behaviour would prevent a potential market entrant from ever challenging
government restrictions.
405 Indeed, it must be recalled that th e Appellate Body confirmed that such
surveys are not the decisive factor in decision making under Article III:2, second sentence. We do not
find the Dodwell study decisive, but it is consistent with other information and is therefore helpful
evidence. When dealing with an inquiry in th e nature of the competitive relationship between
products, quantitative analysis is helpful, but not necessary.
10.93. There was also considerable disagreement between the parties on the level of price
differences between soju and imported western-style beverages. Korea used weighted averages and
claimed that whisky was nearly 11 times more expensive than soju, making the effect of the taxes
negligible. Complainants responded that the price of standard Scotch whisky was only about three
times more expensive than premium diluted soju. On the other hand there were even greater
variations with categories such as whisky, for instance between bulk blended-in Korea brands and fine
malt Scotches, but Scotch whisky nevertheless was generally considered a single category of
beverages. The complainants also argued that b ecause of the high taxes and duties, the imports had
tended to be of the higher priced brands thus sk ewing the numbers used by Korea. Korea further
argued that the high priced brand argument was il logical because, unlike the Japanese system of
specific duties, the Korean tax system was ad valorem. Complainants said that in such a restrictive
market, it was not unusual for firms to lead entry in to the market with higher priced niche brands to
build awareness and sell with an exclusive cachet in segments where premiums could be charged and
the consumers had higher incomes and therefore woul d be relatively less affected by tax levels.
Complainants offered some evidence to support their claim by showing consumption patterns of
various brands in other selected markets where there was a heavier relative weighting of sales towards
lower priced brands than in Korea.
406
10.94. In examining the evidence before us, we found that, while there currently are significant price
differences between the imported and domestic produc ts, overall the differences were not decisive.
Korea presented prices as weighted averages whic h obscured the higher prices for premium diluted
soju, which was the small but fast growing category created specifically by Korean manufacturers to
be most competitive with imports. The price of pr emium diluted soju appears to be approximately
two times the price of standard diluted soju, wh ile vodka was four times the price and standard
whisky four and a half times the price of premium diluted soju. 407 Distilled soju was twice the price
of standard whisky. 408 There are greater price differences w ithin some categories, e.g., whisky, 409

405 As noted above in our discussion of potential competition, requiring surveys exclusively on current
actual behavior would make it even more difficult for less wealthy complainants to establish sufficient actual
market presence to establish a prima facie case of nullification or impairment.
406 See Annex 1 to EC Answers to Questions from the Second meeting of the Panel.
407 Thus, vodka was approximately eight times the price of standard diluted soju and standard whisky
was approximately nine times the price of standard diluted soju.
408 EC Second Submission to the Panel at Annex 7. Also, from the Dodwell study and other evidence
it appears that the following are the relationships be tween the prices of the other products: Gin is
approximately 3.25 times the price of premium diluted soju and 6.5 times the price of standard diluted. Tequila
is approximately 5.5 times the price of premium diluted soju and 11 times the price of standard diluted. Liqueur
is approximately 5 times the price of premium diluted and 10 times the price of standard diluted. Cognac is
approximately 12 times the price of premium diluted soju and 24 times the price of standard diluted soju. We

which none of the parties argued rendered such sub categories of products not directly competitive or
substitutable. Furthermore, we agree with the comp lainants that absolute pr ice differences are less
important than behavioural changes that occur due to relative price movements.
410 When examined as
a whole, the price differences are not so larg e as to refute the other evidence of potential
competitiveness and substitutability, and there was evidence that relative price movements are likely
to result in changes in consumption patterns. Overall, we found that the data on prices and the
potential for changes in consumer behavior based on relative price changes, to be supportive of a
finding that the identified imported and domestic products are directly competitive or substitutable.
(v) Conclusions with respect to "directly competitive or substitutable"
10.95. We are of the view that the weight of the evidence overall supports a finding that the imported
and domestic products at issue are directly competiti ve or substitutable. Complainants have sustained
their burden of proof in this case by showing that there is some degree of current competition as well
as trends towards relative shifts in consumpti on from soju to the identified imported distilled
beverages. The production and marketing decisions of the Korean beverage companies reflect a
realization of this in a very concrete manner by the development and rapid success of premium diluted
soju. There clearly is an attempt to develop an im age of certain types of soju that shows a direct
competitive relationship with importe d alcoholic beverages. It is probable that there are different
marketing focuses (e.g., whether identifying acco mpaniment with food as a favored mode of
consumption) by the importers compared to sta ndard diluted soju; however, marketing strategies
alone should not be the basis for finding products not potentially competitive. Marketing strategies
can be changed quickly and if there is substantial other evidence that products are potentially directly
competitive, it would be incorrect to find them otherwise based on transitory factors such as
marketing strategies especially when such strategies can be shaped by the very government policies in
question. On the other hand, when two products which have some presen t market differentiation
begin to be marketed in similar fashions, as is happ ening in the case of the Korean soju makers, it is
strong evidence of potential competition. Again, th e purpose of Article III is to protect competitive
opportunities, not protect actual market shares. Competitive opportunities should encompass the
ability to change marketing strategies without the n eed for beginning a new dispute settlement case.
A mere change in marketing strategy cannot be all that distinguishes success from failure of a
complaint pursuant to Article III:2. That clearly w ould be an overly narrow interpretation of the term
directly competitive or substitutable.
10.96. The levels of overlapping end-uses are currently relatively low if end-uses are defined as
narrowly as suggested by Korea. However, even within such overly-narrow end-use categories, the
evidence must be viewed in light of the relatively recent introduction of the western-style beverages to
the market. Furthermore, we do not agree with Korea's argument about the distinctness of current
market differentiation. We think Korea has dr awn too fine a distinc tion between products for
purposes of Article III:2, second sentence. Again we recall the examples of substitutable products

note that Korea offered some lower pri ce comparisons in its Interim Review comments to the effect that vodka
was 5.7 times more expensive than diluted soju, while gin was 5 times more expensive and rum 6.2 times more
expensive. Korea also stated that cognac/brandy was 19.2 times the price of diluted soju. Korea did not
indicate if weighted averaging caused these differences from the figures above.
We note that in the decision in Japan – Taxes on Alco holic Beverages II, adjustments were made for
alcohol content. Panel Report in Japan -Taxes on Alcohol ic Beverages II, supra., Annex VI, Figure 10. When
such adjustments are removed, it seems that the absolute price ratio differ entials in the present case are more
similar to those in Japan than otherwise appears.
409 See para.6.105; Dodwell Study.
410 Indeed, we must reiterate that caution must be exercised in relying on absolute price ratio
differences in making product distinctions in a market su ch as this. Prices can re spond to extraneous factors
such as exchange rates or can be affected through product mix or high overhead or distribution costs possibly
caused in part by the government policies at issue.

offered by the drafters, which included apples and ora nges. This also can be seen in the significantly
overlapping channels of distribution both for off-pre mise sales and on-premise sales. In our view, the
only meaningful distinction with r espect to channels of distribution in this case is the distinction
between on-premise and off-premise consumption a nd both imports and soju are distributed through
both channels.
10.97. There is evidence both of some level of current actual competition and significant potential
competition. However, complainants do not have to prove that there is a complete overlap in their
analysis of substitutability. Moreover, we take guidance from the earlier panel findings that the
current market conditions may be skewed by gove rnment tax and regulatory policies which tend to
freeze consumer preferences in favour of the domestic products. The current price levels are probably
the most telling evidence contrary to complainants assertions. In our view, the Dodwell study is a
useful piece of evidence showing the potential co mpetitive relationship between the domestic and
imported products under various pric ing scenarios. It is not perfect evidence, but we do not find the
Korean critique conclusive in rebutting its basic prem ises. Indeed, we find confirmation of some of
the basic points about potential competitiveness in both the Korean end-use survey conducted by the
AC Nielsen study and the Trendscope survey. Furthermore, we do not accept that the price
differences in the present case establish that th e products in question are not even potential
competitors. Prices are subject to change by extraneous factors such as exchange rates.
10.98. 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 re lationship 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.
5. Not similarly taxed
10.99. The Appellate Body in Japan – Taxes on Alcoholic Beverages II summed up its findings with
respect to this element of the decision as follows:
Thus, to be "not similarly taxed", th e tax burden on imported products must be
heavier than on "directly competitive or substitutable" domestic products, and that
burden must be more than de minimis in any given case.
411
10.100. In the present case, the Liquor Taxes on diluted soju are 35 percent and 50 percent on distilled
soju. The Education Tax is surtax of 10 percent levied on soju. With respect to imported alcoholic
beverages, the Liquor Tax ranges from 50 percent for liqueurs to 100 percent for whisky and brandy.
The Education Tax is 30 percent for all imported alc oholic beverages except liqueurs which have a 10
percent rate. Thus 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 ad-mixture s it is 104 percent; on whisky, brandy and cognac
it is 130 percent. Thus the tax rate on imported wh isky, for example, is mo re than three times the ad
valorem rate on diluted soju. These differentials are clearly in excess of de minimis levels.412

411 Appellate Body Report on Japan -- Taxes on Alcoholic Beverages, supra. , at p. 27. It should be
noted that in the case of Japan, the duties were specifi c and there was an ultimately unsuccessful argument by
Japan that the tax/price ratios were not dissi milar. Because Korea's taxes are strictly ad valorem, the rates are
more easily comparable and there is no such issue.
412 The fact that distilled soju and liqueurs are taxed at the same rate does not detract from this finding
with respect to the other products and with respect to liqueurs compared to diluted soju.

6. So as to afford protection
10.101. 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.
413 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.
10.102. In addition to the very large levels of tax differe ntials, we also note that the structures of the
Liquor Tax Law and the Education Tax Law are consis tent 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 excep tions 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 benefi ciaries of this structure are almost exclusively
domestic producers. 414 Thus, in our view, the design, architecture and structure of the Korean
alcoholic beverages tax laws (including the Educati on Tax as it is applied in a differential manner to
imported and domestic produc ts) afford protection to domestic pr oduction. We therefore conclude
that there is nullification or impairment of th e benefits accruing to the complainants under GATT
1994 within the meaning of Article 3.8 of the DSU.
7. Like Product
10.103. The complainants in this case argued that vodka is like soju. 415 Korea disagreed. 416 We note
that there are many similarities between vodka and so ju and that these are sufficient to establish that
the products are directly competitive or substitutabl e. However, as the Appellate Body found in
Japan – Taxes on Alcoholic Beverages II, the concept of "likeness" in Article III:2, first sentence, is to
be narrowly construed. 417 The question is whether the products are sufficiently close in nature that
they fit within this narrow category.
10.104. We find that there is insufficient evidence in this case to make a determination that vodka and
soju are like products. We do not find that they are " unlike". Rather we find that there is insufficient
evidence in the record of this case to establish that they are like. In making this finding, we recall that
the Appellate Body also noted that a determina tion of whether vodka was like shochu or was instead
only directly competitive or substitutable did "not materially affect the outcome of [the] case." 418 We
find this conclusion equally valid in the facts of the case at hand. Thus, while we have found that
vodka and the other identified imported distilled al coholic beverages and th e domestic products are
directly competitive or substitutable, we are unable to conclude that the imported products, or any
subcategory of them, are like the domestic products.

413 Appellate Body Report, on Japan -- Taxes on Alcoholic Beverages II, supra. , at p. 29. See also
Canada - Certain Measures Concerning Periodicals, supra., at pp. 30-32.
414 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.
415 See para. 5.100et. seq.
417 Appellate Body Report on Japan – Taxes on Alcoholic Beverages II, supra., at p. 21.
418 Ibid.

XI. CONCLUSIONS
11.1. In light of the findings above, we reached th e conclusion that soju (diluted and distilled),
whiskies, brandies, cognac, rum, gin, vodka, tequila, liqueurs and ad-mixtures are directly competitive
or substitutable products. Korea has taxed the im ported products in a dissimilar manner and the tax
differential is more than de minimis. Finally, the dissimilar taxation is applied in a manner so as to
afford protection to domestic production.
11.2. 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.