MEXICO – TAX MEASURES ON SOFT DRINKS AND OTHER BEVERAGES
Document: Report of the Panel
Date: 7 October 2005
Document codes: WT/DS308/R
Complainant: U.S.
Respondent: Mexico
Third parties: Canada, China, EU, Guatemala, Japan
Dispute stage: Appellate Body
Agreements cited: Art. III  GATT 1994

MEXICO – TAX MEASURES ON SOFT DRINKS
AND OTHER BEVERAGES

Report of the Panel

I. INTRODUCTION
1.1 In a communication, dated 16 March 2004, the United States requested consultations with
Mexico pursuant to Articles 1 and 4 of the DSU a nd Article XXII:1 of the GATT 1994, regarding tax
measures imposed by Mexico on soft drinks and ot her beverages that use any sweetener other than
cane sugar.1
1.2 The United States stated that it believed that these taxes were inconsistent with Mexico's
national treatment obligations under Article III of the GATT 1994. In particular, they appeared to be
inconsistent with Article III:2 of the GATT 1994, first and second sente nces, and Article III:4 of the
GATT 1994.
1.3 The consultations took place on 13 May 2004. Purs uant to its request, Canada was joined in
those consultations. However the parties failed to reach a mutually satisfactory resolution to this
dispute.
1.4 On 10 June 2004, the United States requested the establishment of a panel pursuant to
Article 6 of the DSU. 2 The DSB considered this request at its meetings of 22 June and 6 July 2004,
and established the Panel on 6 July with standard terms of reference as follows:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the United States in document , the matter referred to the DSB by the
United States in that document, and to ma ke such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those
agreements."
3
1.5 On 18 August 2004, the parties agreed to the following composition of the Panel:
Chairman: Mr Ronald Saborío Soto

 Members: Mr Edmond McGovern
 Mr David Walker

1.6 Canada, China, the European Communities, Guatemala and Japan reserved their rights to
participate in the panel proceedings as third parties.
4
1.7 The Panel met with the parties on 2 and 3 Dece mber 2004 and 23 and 24 February 2005. It
met with the third parties on 3 December 2004.
1.8 The Panel submitted its interim report to the pa rties on 27 June 2005. The final report was
issued to the parties on 8 August 2005.

1 WT/DS308/1.
2 WT/DS308/4.
3 WT/DS308/5/Rev.1.
4 Pakistan had reserved its third-party rights at the DSB meeting on 6 July 2004. However, on
20 August 2004, Pakistan informed the DSB that it did not want to participate as a third-party in the panel
proceedings.

II. FACTUAL ASPECTS
A. T
HE MEASURES
2.1 This dispute concerns certain tax measures im posed by Mexico on soft drinks and other
beverages that use any sweetener other than cane sugar.
2.2 The tax measures concerned include: (i) a 20 per cent tax on the transfer or, as applicable, the
importation of soft drinks and other beverages that use any sweetener other than cane sugar ("soft
drink tax"); (ii) a 20 per cent tax on specific serv ices (commission, mediation, agency, representation,
brokerage, consignment and distribution), when provided for the purpose of transferring products
such as soft drinks and other beverages that use any sweetener other than cane sugar ("distribution
tax"); and, (iii) a number of requirements imposed on taxpayers subject to the "soft drink tax" and to
the "distribution tax" ("bookkeeping requirements").
B. RELEVANT MEASURES
2.3 The soft drink tax, the distribution tax and the bookkeeping requirements are set out in the
following measures, which are at i ssue in this dispute: (1) the Ley del Impuesto Especial sobre
Producción y Servicios (Law on the Special Tax on Production and Services, or LIEPS), as amended
effective 1 January 2002, and its subsequent amen dments published on 30 December 2002, and 31
December 2003; and (2) related or implementing regulations, contained in the Reglamento de la Ley
del Impuesto Especial sobre Producción y Servicios (Regulations of the Law on the Special Tax on
Production and Services), the Resolución Miscelánea Fiscal para 2003 (Miscellaneous Fiscal
Resolution for the year 2003), and the Resolución Miscelánea Fiscal para 2004 (Miscellaneous Fiscal
Resolution for the year 2004).
2.4 The measures were introduced in the Mexican legi slation as a result of the amendments to the
LIEPS approved by the Congress of Mexico and pub lished in the Mexican Official Journal ( Diario
Oficial) on 1 January 2002. Since that date, the LI EPS has been amended on three occasions. The
amendments were published in the Official Journal on 30 December 2002, on 31 December 2003, and
on 1 December 2004.
Produccion y Servicios (Regulations of the Law on the Sp ecial Tax on Production and Services)
published in the Official Journal on 15 May 1990, in Title 6 of the Resolución Miscelánea Fiscal para
2004 (Miscellaneous Fiscal Resolution for the year 2004) published in the Official Journal on 30
April 2004, and in Title 6 of the Resolución Miscelánea Fiscal para 2003 (Miscellaneous Fiscal
Resolution for the year 2003) published in the Official Journal on 31 March 2003, which identify,
inter alia, details on the scope, calculation, payment a nd bookkeeping and recording requirements of
the IEPS.
C. PRODUCTS INVOLVED
2.6 The dispute concerns two categories of products. First, the products that will be generally
referred to as "soft drinks and syrups". Second, th e sweeteners used in the preparation of such "soft
drinks and syrups" and, particularly, three types of sweeteners: cane sugar, beet sugar and HFCS.
• Soft drinks and syrups: With respect to the challenged measures, this broad category includes
soft drinks; hydrating or rehydrating drinks ; concentrates, powders, syrups, essences or
flavour extracts that can be diluted to produce soft drinks and hydrating or rehydrating drinks;
and, syrups or concentrates for preparing soft drinks sold in open containers which use
automatic, electric or mechanical equipment. The category does not include other drinks such

as alcoholic beverages, beers, wine, fruit juices, vegetable juices, water or mineral water.
According to the available information, the Mexi can market for soft drinks is – as in other
parts of the world – dominated by multinational companies, such as Coca Cola and Pepsi
Cola. Coca Cola controls around 71.9 per cent of the Mexican carbonated soft drink market,
while Pepsi Cola controls around 15.1 per cent. The Peruvian-owned company Kola Real
holds around 4 per cent of the market and Cadbury Schweppes around 2 per cent.5
• Cane sugar : Cane sugar is a form of sucrose. Sucrose is a disaccharide composed of 50
percent glucose and 50 percent fructose bonded together. 6 According to the Food and
Agriculture Organization of the United Na tions (FAO), cane sugar is a non-refined,
crystallized material derived from the juices of sugar-cane stalk and cons isting either wholly
or essentially of sucrose.7
• Beet sugar: Beet sugar is another form of sucrose. In technical terms, and although derived
from a different source, beet sugar may be considered to be both chemically and functionally
identical to cane sugar. 8 The FAO defines beet sugar as a non-refined, crystallized material
derived from the juices extracted from the root of the sugar beet and consisting either wholly
or essentially of sucrose.9
• High-Fructose Corn Syrup (HFCS): This is a corn-based liquid sweetener made using a multi-
stage production process. It is high in fructose in relation to ordinary corn syrup. HFCS is a
liquid, composed of a monosaccharide mixture of varying amounts of glucose and fructose, as
well as small amounts of other saccharides. HF CS exists in the following three grades:
HFCS-55 is the primary grade of HFCS used in soft drink production. HFCS-42, while used
in soft drink and juice production, is also u sed in the production of bakery products, canned
goods, dairy products and other f oods. HFCS-90 is typically blended with HFCS-42 to make
HFCS-55, but it is also used as a sweetener in juices, candies, bakeries, and food processing.
10
According to the FAO, HFCS is part of the products known as isoglucose, a type of starch
syrups where glucose has been isomerised to fructose by using one or more isomerising
enzymes. Other syrups of this group are HFSS (high-fructose starch syrup) and HFGS (high-
fructose glucose syrup). HFCS is manufactured from corn starch, and is widely used in the
production of food and soft drinks.
11
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
3.1 The United States requests the Panel to find that the challenged tax measures are:
– inconsistent with GATT Article III:2, first sentence, as a tax applied on imported soft
drinks and syrups "in excess of those a pplied to like domestic products" (soft drink
tax and distribution tax);

5 United States' first written submission, para. 31 and exhibit US-18.
6 United States' first written submission, para. 22.
7United Nations Economic Commission for Europe, at
http://www.unece.org/stats/econ/iwg.agri/handbook.sugar.html (site consulted on 14 February 2005).
8 United States' first written submission, para. 22.
9United Nations Economic Commission for Europe, at
http://www.unece.org/stats/econ/iwg.agri/handbook.sugar.html (site consulted on 14 February 2005).
10 United States' first written submission, paras. 9-12.
11United Nations Economic Commission for Europe, at
http://www.unece.org/stats/econ/iwg.agri/handbook.sugar.html (site consulted on 14 February 2005).

 – inconsistent with GATT Article III:2, second sentence, as a tax applied on imported
soft drinks and syrups which are "not simila rly taxed" to the "directly competitive or
substitutable" Mexican products (soft drink tax and distribution tax);

– inconsistent with GATT Article III:2, first sentence, as a tax applied on imported beet
sugar "in excess of those applied to like domestic products" (soft drink tax and
distribution tax);

 – inconsistent with GATT Article III:2, second sentence, as a tax applied on imported
HFCS which is "not similarly taxed" to the "directly competitive or substitutable"
Mexican cane sugar (soft drink tax and distribution tax);

– inconsistent with GATT Article III:4 as a la w that affects the internal use of imported
HFCS and accords HFCS "treatment ... l ess favourable than that accorded to like
products of national origin" by:

(a) taxing soft drinks and syrups that use HFCS as a sweetener (soft drink tax),

(b) taxing the agency, representation, brok erage, consignment and distribution of
soft drinks and syrups sweetened with HFCS (distribution tax), and

(c) subjecting soft drinks and syru ps sweetened with HFCS to various
bookkeeping and reporting requirements (bookkeeping requirements)

– inconsistent with GATT Article III:4 as a la w that affects the internal use of imported
beet sugar and accords beet sugar "treatment ... less favourable than that accorded to
like products of national origin" by:

(a) taxing soft drinks and syrups that u se beet sugar as a sweetener (soft drink
tax),

(b) taxing the agency, representation, brok erage, consignment and distribution of
soft drinks and syrups sweetened with beet sugar (distribution tax), and

(c) subjecting soft drinks and syrups sweetened with beet sugar to various
bookkeeping and reporting requirements (bookkeeping requirements).

3.2 Mexico requests the Panel to:
 – decline to exercise its jurisdiction and r ecommend to the parties that they submit their
respective grievances to an Arbitral Pane l, under Chapter Twenty of the NAFTA,
which can address both Mexico's concern w ith respect to market access for Mexican
cane sugar in the United States under the NAFTA and the United States' concern with
respect to Mexico's tax measures.

– In the event that the Panel does decide to exercise its jurisdiction, Mexico requests it:

(a) to pay particular attention to the circ umstances that gave rise to the measures
at issue in this case to accord partic ular weight to Mexico's status as a
developing country, especially in the context of the broader dispute
concerning trade in sweeteners between Mexico and the United States, and to
find that the Mexican measures are justified under Article XX of the GATT
1994.

(b) to employ particular care in te rms of how it formulates its findings and
recommendations. In particular, Mexico requests the Panel to record that
whatever the parties' legal rights ma y be under other applicable rules of
international law, its findings apply solely to the parties' respective rights and
obligations under the WTO agreements and cannot be taken to pre-judge such
other legal rights;

(c) to recommend that the parties take steps to resolve the sweeteners trade
dispute within the NAFTA framework; and

(d) to make certain determinations of facts.
12

IV. ARGUMENTS OF THE PARTIES
4.1 The arguments presented by the parties in thei r written submissions and oral statements are
reflected below. 13 The parties' answers to questions and comments on each other's responses are
reproduced in Annex C.
A. REQUEST FOR PRELIMINARY RULING
4.2 In its first written submission, Mexico made a request that the Panel decline to exercise its
jurisdiction in this case. Mexico asked that the Pa nel make this decision through a preliminary ruling.
On 18 January 2005, the Chairman of the Panel wrot e to the representatives of the parties giving the
Panel's response to this request (see Annex B).
B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES
1. Introduction
4.3 Since 1 January 2002, Mexico has imposed discriminatory tax measures on soft drinks and
syrups that favour its domestic cane sugar industry, in violation of its obligations under Articles III:2
and III:4 of the GATT 1994. Specifically, in December 2001, the Mexican Congress approved an
amendment of the IEPS adding a 20 per cent tax on soft drinks and syrups that use HFCS or any
sweetener other than cane sugar ("HFCS soft dr ink tax"), as well as a 20 per cent tax on the
representation, brokerage, agency, consignment and distribution of such products ("distribution tax").
4.4 The HFCS soft drink and distribution tax is embodied in the following measures, which are
the measures at issue in this dispute: (1) the I EPS, as amended effective 1 January 2002, and its
subsequent amendments published on 30 December 2002, and 31 December 2003; and (2) related or
Producción y Servicios, the Resolución Miscelánea Fiscal para 2003, and the Resolución Miscelánea
Fiscal para 2004.
2. Legal argument
4.5 For purposes of sweetening soft drinks and sy rups, cane sugar is directly competitive and
substitutable with HFCS. In Mexico, cane sugar is the overwhelmingly dominant sweetener, with the

12 Written version of Mexico's oral statement during second substantive meeting of the Panel with the
parties, para. 36.
13 The summaries of the parties' arguments are based on the execu tive summaries submitted by the
parties to the Panel.

vast majority of soft drinks and syrups produced in Mexico being sweetened with cane sugar.
Conversely, in the United States the sweetener of choice for soft drink and syrup production is HFCS.
Further, cane sugar comprises over 95 per cent of Mexican sweetener production; whereas HFCS
before the discriminatory tax comprised nearly 100 per cent of Mexican sweetener imports from the
United States. Because the tax exempts cane sugar and soft dinks and syrups sweetened with cane
sugar, it clearly favours domestic cane sugar production over imports.
(a) The IEPS is an internal tax
4.6 The Ad Note to GATT Article III clarifies that an internal tax that applies to imported
products at the time of importation is, nonetheless , an internal tax within the meaning of GATT
Article III. The HFCS soft drink tax applies to imported soft drinks and syrups at the time of
importation and like domestic products upon their internal transfer. The HFCS soft drink tax also
applies to subsequent transfers of imported soft drinks and syrups in Mexico. The distribution tax
taxes the agency, representation, brokerage, consignm ent and distribution of so ft drinks and syrups
sweetened with HFCS in Mexico. The HFCS soft drink tax and distribution tax are, thus, internal
taxes within the meaning of GATT Article III.
(b) The HFCS soft drink tax and distribution tax ar e inconsistent with GATT Article III:2, first
sentence
4.7 A determination of an internal tax's inconsiste ncy with GATT Article III:2, first sentence, is a
two step process: First, the imported and domestic products at issue must be "like". Second, the
internal tax must be applied to imported products "in excess of" those applied to the like domestic
products.
(i) Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane
sugar are like products
4.8 "Like" products need not be identical in all respects. For example, vodka and shochu were
found in a previous dispute to be like products within the meaning of GATT Article III:2, first
sentence. Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with
cane sugar are like products because they have virtua lly identical physical properties, end-uses and
tariff classifications and are equally preferred by consumers.
Physical characteristics

4.9 Soft drinks and syrups sweetened with HFCS a nd soft drinks and syrups sweetened with cane
sugar are physically identical in virtually all respect s. First, soft drinks and syrups sweetened with
HFCS and soft drinks and syrups sweetened with cane sugar are identical in physical appearance.
Second, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane
sugar are virtually indistinguishable by the human body as both contain the same number of calories
and are digested and absorbed by the human body in the same manner.
4.10 Third, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened
with cane sugar have nearly the same chemical composition. Cane sugar and HFCS are similarly
mixtures of fructose and glucose. Thus, the only difference between an HFCS-sweetened and a cane
sugar-sweetened soft drink or syrup is the exact ratio of the fructose-glucose mixture.
4.11 Fourth, per the Mexican regulation, a soft dr ink or syrup sweetened with HFCS and one
sweetened with cane sugar bear the same ingredient on the label: "azúcares" ("sugars"). "Azúcares",
per Mexico's regulation, is defined as all mono- or disaccharide sugars. This definition captures both
the monosaccharide sugar, HFCS, and the disaccharide sugar, cane sugar.

End-uses and channels of distribution
4.12 Soft drinks and syrups sweetened with HFCS a nd soft drinks and syrups sweetened with cane
sugar share identical end-uses and channels of distribution. A soft drink or syrup's sweetener does not
affect its end-use. There is no evidence that, when Mexican bottlers, su ch as Coca-Cola Femsa,
switched to a blend of HFCS and sugar (or when United States bottlers switche d in the 1980s), these
end-uses in any way changed.
4.13 For similar reasons, whether a soft drink or sy rup is sweetened with HFCS or sugar does not
affect its channels of distribution. Major bottlers do not mentioned a soft drink or syrup's sweetener
as in any way affecting its channels of distribution. There is no evidence that channels of distribution
for soft drinks or syrups in Mexico changed in the period from the late 1990s through 2001 when
bottlers such as Coca-Cola Femsa had switched to a blend of HFCS and sugar for soft drink
production, nor that they changed again when, becau se of the HFCS soft drink tax and distribution
tax, bottlers switched back to 100 per cent cane sugar.
Consumer preferences
4.14 Prior to switching to use of HFCS, United States soft drink bottlers undertook extensive
consumer surveys to determine the consumer acce ptability of soft drinks sweetened with HFCS.
These surveys revealed that overall HFCS-sweetened and sugar-sweetened soft drinks were equally
acceptable to consumers. Other surveys conducte d were based on head-to-head comparisons of
HFCS- and sugar-sweetened soft drinks and showed no consistent pattern of preference for sugar-
sweetened soft drinks versus HFCS-sweetened soft drinks. Today, Coca-Cola reports "there is no
noticeable taste difference."
4.15 In the course of its anti-dumping determination on HFCS from the United States, the Mexican
Government noted that a panel of 30 tasters did not detect any significant difference in sweetness or
any pattern of preference. That same determina tion concluded overall: "These possible differences in
products manufactured with the two sweeteners in question may prove that these sweeteners are not
identical, but this does not mean that they do not ha ve an extremely similar taste." As a result of
positive consumer testing, United States manufacturer s of soft drinks and sy rups switched from sugar
to 100 per cent HFCS by the mid-1980s. Similarly, in the late 1990s in Mexico, Mexican soft drink
producers began increasingly to substitute HFCS for cane sugar.
4.16 In addition, with the exception of a handful of niche products, soft drinks are simply not
marketed on the basis of whether they contain sugar or HFCS as a sweetener.
Tariff classification

4.17 The tariff classification system in Mexico does not separately break out soft drinks and syrups
based on whether they are sweetened with sugar (whether cane or beet) or HFCS.
4.18 In sum, HFCS-sweetened and cane sugar-sweeten ed soft drinks are like products within the
meaning of GATT Article III:2, first sentence.
(ii) Soft drinks and syrups sweetened with HFCS a re taxed in excess of soft drinks and syrups
sweetened with cane sugar
HFCS soft drink tax
4.19 The HFCS soft drink tax applies a 20 per cent tax on soft drinks and syrups. Only internal
transfers of soft drinks and syrups sweetened excl usively with cane sugar are exempt from the IEPS.

Thus, with respect to imports, the IEPS taxes (1) a ll soft drinks and syrups upon their importation –
regardless of the sweetener used – an d then (2) taxes their subsequent in ternal transfer if they use any
sweetener other than cane sugar.
4.20 Virtually all regular soft drinks and syrups produced in the United States are sweetened with
HFCS, while all regular soft drinks and syrups pr oduced in Mexico are sweetened with cane sugar.
Therefore, by exempting soft drinks and sy rups sweetened with only cane sugar, the IEPS
successfully exempts all regular soft drinks and sy rups produced in Mexico from payment of the 20
per cent tax. A 20 per cent tax that applies to imported soft drinks and syrups but not to soft drinks
and syrups produced domestically is a tax "in exce ss" of that applied to like domestic products.
Therefore, as applied at the time of importation and up on internal transfers, the HFCS soft drink tax is
inconsistent with GATT Article III:2, first sentence.
Distribution tax

4.21 The IEPS also applies a 20 per cent tax on the representation, brokerage, agency, consignment
and distribution of soft drinks and syrups sweetened with HFCS. Soft drinks and syrups sweetened
with cane sugar are exempt from the distribution tax. A tax applied on the representation, brokerage,
agency, consignment and distribution of a good is, in effect, a tax on the good itself. Therefore, by
taxing the representation, brokerage, agency, consignm ent and distribution of soft drinks and syrups
sweetened with HFCS at 20 per cent while complete ly exempting soft drinks and syrups sweetened
only with cane sugar, the IEPS subjects HFCS-sweeten ed soft drinks and syrups to taxes "in excess
of" of those applied on like domestic products – soft drinks and syr ups made with cane sugar.
Accordingly, the distribution tax is also inconsistent with GATT Article III:2, first sentence.
(c) The IEPS is inconsistent with Article III:2, second sentence, of GATT 1994
4.22 A measure is inconsistent with GATT Article III:2, second sentence, if (1) the imported
product and domestic product are "directly competi tive or substitutable products;" (2) the directly
competitive or substitutable imported and domestic products are "not similarly taxed;" and (3) the
dissimilar taxation is applied "so as to afford pr otection to domestic production." The IEPS as a tax
on soft drinks and syrups made with HFCS, as well as a tax on the use of HFCS itself, meets each of
these elements such that the IEPS is inconsistent with Mexico's obligations under GATT Article III:2,
second sentence.
(i) The HFCS soft drink tax as applied to HFCS is inconsistent with GATT Article III:2, second
sentence
4.23 By imposing a 20 per cent tax on soft drinks and syrups sweetened with HFCS, Mexico has,
in effect, imposed a prohibitive tax on the use of HFCS.
HFCS and cane sugar are directly competitive or substitutable products

4.24 HFCS and cane sugar are directly compe titive or substitutable products. Whether two
products are "directly competitive or substitutable" must be determined on a case-by-case basis and in
light of all the relevant facts in the case. An assessment of whether there is a direct competitive
relationship between two products or groups of products requires evidence that consumers consider or
could consider the two products or groups of products as alternative ways of satisfying a particular
need or taste. This requires evidence of the di rect competitive relationship between the domestic and
imported products, including comparisons of their physical characteristics, end-uses, channels of
distribution and prices. Moreover, the category of directly competitive or substitutable products is
broader than the category of "like products": ev en imperfectly substitutable products can fall under
the second sentence of Article III:2. Products do not have to be substitutable for all purposes at all

times to be considered competitive. It is sufficient that there is a pattern that they may be substituted
for some purposes at some times by some consumers.
Physical characteristics
4.25 HFCS and cane sugar for use in soft drinks a nd syrups have substantially the same physical
characteristics. This analysis should focus on the defining physical characteristics of HFCS and cane
sugar for the purpose of competition in the marketpla ce. Because the HFCS soft drink tax applies on
the use of HFCS in soft drinks and syrups, the re levant "marketplace" is the soft drink and syrup
industry.
4.26 HFCS is a liquid sweetener that has substantia lly the same chemical characteristics as cane
sugar. Both HFCS and cane sugar are composed of a combination of glucose and fructose molecules
and, when in a soft drink or syrup, both exis t as monosaccharides within three to four weeks of
bottling. HFCS-55 contains just five per cent more fructose than cane sugar; HFCS-42 contains just
eight per cent less. The similar chemical composition of HFCS and cane sugar is not accidental. In
fact, when HFCS was developed, it was calibrated to be just as sweet as sugar as a sweetener for soft
drinks. This was done by developing a fructose-gluc ose ratio that closely mimicked that of cane
sugar.
4.27 Because the chemical constituents of sugar and HF CS are so similar, the taste perceptions in
soft drink and syrup formulations are extremely simila r. This is especially true after the sugar in a
soft drink has inverted, or broken down to a monosaccharide solution of fructose and glucose
molecules just as the molecules ex ist in HFCS. Testing conducted by the soft drink and HFCS
industries found that HFCS-sweetened soft drinks and sugar-sweetened soft drinks were comparable
and of equal acceptability to the consumer. HFCS and cane sugar are also physically similar when it
comes to smell and colour. Both HFCS and cane sugar are odourless and, as liquids, both are
colourless.
4.28 HFCS's form as a liquid sweetener does not distinguish it from cane sugar as a sweetener for
soft drinks and syrups. First, some producers of soft drinks and syrups actually use cane sugar in its
liquid form. Second, part of the bottling process when using cane sugar as a sweetener is mixing the
cane sugar with water to produce a sugar syrup, which is then mixed with other ingredients to produce
a soft drink.
4.29 In the context of the SECOFI anti-dumping investigation of HFCS in 1997-98, the Mexican
Government has also determined that cane suga r and HFCS share the same essential physical
characteristics and concluded that HFCS-55, HFCS -42 and sugar are "like products" for the purposes
of Mexico's anti-dumping law and Article 2.6 of the Anti-Dumping Agreement.
4.30 When this anti-dumping determination was chal lenged in binational pa nel proceedings under
NAFTA Chapter 19, the binational panel agreed with Mexico that sugar and HFCS are "like
products."
End uses and consumer preferences
4.31 Overlap in end-use is important in determining direct competitiveness or substitutability. The
existence of mixtures, and the use of two products in varying mixtures, also testifies to their overlap in
uses and to their commercial interchangeability. Commonality of end-uses in foreign markets and
consumer tastes are also relevant. For HFCS itsel f or sugar, the relevant consumers are sweetener
users of HFCS in the bottling industry and elsew here. The end-uses of HFCS and cane sugar, and
consumer tastes for these products, demonstrate their competitiveness or substitutability.

4.32 The evidence submitted by the United States shows that HFCS was developed with the end-
use of soft drink bottling as its major objective. Me xican soft drink producers have used varying
mixtures of HFCS and cane sugar, and have converted from cane sugar to mixtures of HFCS and then
back again. This free variation between sweetener s testifies to the commercial interchangeability of
HFCS and cane sugar in Mexican soft drink produc tion. When a soft drink bottler uses a blend of
HFCS and sugar, the bottler is using both sweetener s for the same purpose, in the same plant, for the
same brand of the same soft drink.
4.33 In addition, because the HFCS soft drink tax does not apply to fruit or vegetable juices, major
juice bottlers can, and do, use as much HFCS in thei r sweetened juices as they wish – up to 100 per
cent of sweetener in some cases. Mexican bottlers' reaction to the HFCS soft drink tax was to switch
back to 100 per cent sugar. The fo rmer use of HFCS and sugar in mixtures, and the use of up to 100
per cent HFCS by bottlers who are not subject to a pr ohibitive tax, testify to the distortion of market
choices created by the HFCS tax. In the United States and Canada, soft drink and syrup producers
have shifted almost entirely from sugar to HFCS over time.
4.34 Switching between HFCS and suga r is not expensive or difficult. Switching from HFCS to
sugar is more difficult and costly, and Mexican bottle rs would not have done so if they had not been
forced to by the 20 per cent tax. In the early 19 80s in the United States when United States bottlers
were using blends of HFCS and s ugar, varying the HFCS-sugar ratio in a given batch of soft drinks
could be done with relative ease.
4.35 Also, Mexican labelling regulations do not distinguish between "sugars" as a food or beverage
ingredient. Thus, a bottler can move between different mixtures of HFCS and sugar without changing
its labelling.
4.36 The Mexican Government has recognized the overlap in end-uses and consumer tastes
between HFCS and cane sugar. As noted above, in the final anti-dumping determination of January
1998, SECOFI found that HFCS and sugar "fulf il the same functions and are commercially
interchangeable in the marketplace." SECOFI not ed the ample proofs presented that consumers
"perceive no difference at all" between sugar, inve rt sugar and HFCS. The determination also notes
that a panel of 30 tasters did not detect any si gnificant difference in sweetness or any pattern of
preference for HFCS-55, refined sugar or invert suga r and that an examination of a range of food and
beverage industries showed a practice that substitu tion of HFCS for sugar was not promoted as a
change in brand or a "new flavour."
4.37 During the review of this determination by the binational panel under Chapter 19, Mexico
argued that "technical studies and testimonies of repr esentatives of the [soft drink] industry show that
HFCS and sugar are both used interchangeably in the industry without affecting the quality of soft
drink products," and that "HFCS and sugar while not perfect substitutes possess characteristics and
composition sufficiently similar that they serve a grea t number of similar functions. This allows them
to be commercially interchangeable in such a great variety of sub-sectors of the beverages and food
sectors." The Chapter 19 binational panel conc luded that sugar and HFCS are commercially
interchangeable.
4.38 Sugar and HFCS are therefore directly competitive or substitutable and in direct competition
in the marketplace.
Channels of distribution
4.39 The channels of distribution for HFCS and cane sugar, and for soft drinks sweetened with
them, provide additional evidence that these products are directly competitive or substitutable. HFCS

and sugar are sold through similar channels from producers to industrial bottlers, and in some cases
the same company sells both HFCS and sugar to similar customers.
4.40 HFCS of United States origin has been sold to Mexican customers through two channels: on
an f.o.b. basis directly from the United States exporter and terminals bu ilt by HFCS exporters in
Mexico. The latter received HFCS exports from plants in the United States and then sold the HFCS to
customers in Mexico. Mexican bottlers buy Mexican cane sugar directly from the sugar mill or from
a distributor. Any difference in distribution channels is , thus, attributable to the fact that HFCS is the
imported sweetener and cane sugar is the domestic sweetener. Bo th sweeteners are sold directly from
the sweetener producer to the end-user, which with respect to this dispute are soft drink and syrup
bottlers.
4.41 In the anti-dumping investigation on HFCS from the United States, SECOFI examined
distribution channels for HFCS and sugar and found th at they were the same, and were targeted at the
same customers.
Tariff classification
4.42 The classification of these products in the Mexican tariff schedule also supports the
conclusion that these are directly competitive or substitutable products. Although cane sugar is
generally classified under heading 1701 and HFCS under heading 1702, some cane sugar products
(i.e., liquid cane sugar and invert cane sugar) are classified under heading 1702.
4.43 With respect to soft drinks and syrups sweet ened with either HFCS or cane sugar, as
recounted above, the tariff classification system in Mexico does not separately break out soft drinks
and syrups based on whether they are sweetened with cane sugar or HFCS.
Price relationships and competition in the marketplace
4.44 The price relationships between HFCS and cane su gar in soft drink use also demonstrate that
they are directly competitive or substitutable pr oducts. The connection between the price, or
availability, of HFCS and the price of sugar has b een amply demonstrated by the real-world economic
experiment of the HFCS soft drink tax. In the three days following the enactment of the tax, for
example, 30 Mexican bottlers cancelled all orders for HFCS. By mid-January 2002, the HFCS soft
drink tax had resulted in a 8 per cent increase in Mexican sugar prices.
4.45 Because of the HFCS tax, and the collapse of demand for HFCS from bottlers, importers
shuttered their terminals or othe rwise virtually ceased imports of HFCS for soft drink and syrup
production, and domestic HFCS producers partially or totally idled their production. Yet demand for
sweeteners has remained constant or growing with annual growth in populati on and GDP. As sugar
replaced HFCS in soft drink and syrup production, the additional demand for sugar artificially created
a sugar shortage. The Secretariat of Economy explai ned its decision to provide an extraordinary cupo
(market access quota) for sugar imports during the la tter part of 2003: "This plan results from various
complaints about shortage problems in sugar, presented to the Secretariat of Economy by producers
who use sugar in their production processes. These concerns are fundamentally a consequence of the
entry into force of the Impuesto Especial sobre Producción y Servicios (IEPS) for soft drinks made
with fructose, which has generated a substitution of sugar for fructose ..."
4.46 The Mexican Government Comisión Federal de Competencia (CFC, or Federal Competition
Commission) has also recognized that sugar and HFCS are directly competitive with each other in the
marketplace, in two separate decisions regarding competition in the sugar industry. These decisions
were based on an examination of the detailed fact s of competition in the Mexican sweeteners market
and found that HFCS is a close substitute for refi ned sugar in carbonated drinks. As the panel in
Chile

– Alcoholic Beverages noted: the question of competition fro m an anti-trust perspective generally
utilizes narrower market definitions than used wh en analysing markets pursuant to Article III:2,
second sentence and it seems logical that competitive conditions sufficient for defining an appropriate
market with respect to anti-trust analysis would a fortiori suffice for an Article III analysis. The Panel
in this dispute should read the findings of the CFC to confirm that cane sugar and HFCS are directly
competitive or substitutable products in the Mexican market.
Summary on direct competition and substitutability
4.47 To set the HFCS-sugar comparison in perspective, the Panel might consider the WTO
disputes regarding discrimination in taxation of dis tilled spirits. Each of these disputes concerned a
situation of long-standing tax discrimination, in which tax barriers largely foreclosed the market to the
imported product. The panel and the parties in each of these cases had to place a particular focus on
potential competition and latent demand, since act ual discrimination was so severe and so long-
standing.
4.48 In the present case, there is not just poten tial competition between imported HFCS and
domestic cane sugar: the Panel has available to it data on actual competition between these products
including product switching before and just after th e HFCS soft drink tax was imposed. HFCS itself
was developed to mimic and improve on cane sugar in soft drink bottling operations, and its success
in the marketplace of the bottling industry testifies to how close a substitute it is for sugar. Indeed, if
HFCS were not quite so successful at competing with cane sugar, the Mexican Government might not
have acted to protect the Mexican sugar industry by enacting the HFCS soft drink tax to expel
imported HFCS from the soft drink and syrup market in Mexico.
4.49 For all these reasons, the Panel should find that for purposes of sweetening soft drinks,
imported HFCS and Mexican cane sugar are directly competitive or substitutable products, and
compete directly in the soft drink and syrups sweeteners marketplace in Mexico.
HFCS and cane sugar are not similarly taxed

4.50 There can be no question that the HFCS so ft drink tax taxes HFCS and cane sugar
dissimilarly. When contained in a soft drink or syrup, HFCS results in a 20 per cent tax on the value
of the finished soft drink or syrup. Use of excl usively cane sugar in that same soft drink or syrup
results in no tax at all. As applied to HFCS, how ever, the impact of the tax differential actually far
exceeds a 20 percentage point difference. This is because the HFCS soft drink tax is calculated on the
value of the finished soft drink or syrup such that th e tax results in a tax that is four times the value of
the HFCS – or in other words, a 400 per cent tax on HFCS. With a tax liability of 400 percent, the
HFCS producer cannot even provide HFCS to its cust omer for free: the producer would have to pay
the customer to take it. The HFCS soft drink tax is essentially a prohibitive tax on the use of HFCS in
soft drinks and syrups. Needless to say, a prohib itive tax applied to the imported product that is not
applied to the directly competitive or substitutabl e domestic product is a dissimilar tax within the
meaning of GATT Article III:2, second sentence.
HFCS soft drink tax is applied so as to afford protection to domestic production
4.51 The protective application of a measure is to be discerned from the structure of the measure
itself, including the very magnitude of the dissimila r taxation involved. A measure's purpose, to the
extent it is "objectively manifested in the design, architecture and structure of the measure" may also
be "intensely pertinent to the task of evaluating whet her or not that measure is applied so as to afford
protection to domestic production."

4.52 Mexico's tax on the use of HFCS is applied "so as to afford protection" to Mexican cane sugar
production. The HFCS soft drink tax is structured such that all soft drinks and syrups are taxed 20
percent, except those sweetened ex clusively with cane sugar. Cane sugar is a domestically-produced
sweetener in Mexico. Since Mexico does not impor t sugar – or does so in only very small amounts –
this is a benefit bestowed nearly exclusively on domestic producers. Domestic producers have, thus,
benefited from being placed in an un-taxed cate gory, while their greatest commercial rival, the
imports of HFCS, remain subjected to taxation.
4.53 Moreover, as indicated above, HFCS remains not only subject to taxation but taxation at a
prohibitive rate. As stated, a 20 per cent tax on the va lue of the finished soft drink or syrup results in
a 400 per cent tax on the use of HFCS itself. The en ormity of this dissimilar taxation has effectively
excluded imported HFCS from the Mexican sweeteners market. Dissimilar taxation of this magnitude
and nature objectively manifests the intention of the tax to protect Mexican cane sugar production.
4.54 Further, the structure of the HFCS soft drink ta x is such that the low-taxed product is almost
exclusively domestically-produced, while the high-taxed product, prior to imposition of the
discriminatory tax, comprised virtually all directly competitive or substitutable imports. Indeed, in
2001 HFCS accounted for 99.7 per cent of Mexican nu tritive sweetener imports. By contrast, in 2001
cane sugar comprised somewhere between 90 and 95 per cent of domestically produced sweeteners in
Mexico. Thus, at the time of its imposition, the HF CS soft drink tax applied to nearly 100 per cent of
sweetener imports but less than ten per cent of Mexican production. The Appellate Body addressed a
similar situation in Chile – Alcoholic Beverages.
4.55 The protectionist structure of the IEPS is conf irmed by a remarkable series of judicial and
political pronouncements that the purpose of the tax is to "protect the sugar industry." For example,
the highest interpretative authority in Mexico, the Supreme Court, has definitively and conclusively
characterized Mexico's tax scheme as designed to protect Mexican domestic production of cane sugar.
4.56 In sum, the HFCS soft drink tax, as a tax on HFCS but not the directly competitive or
substitutable domestic product cane sugar, is applie d in a manner so as to afford protection to
domestic production, and, therefore, is incons istent with Mexico's obligations under GATT
Article III:2, second sentence.
(ii) The HFCS soft drink tax and distribution tax as applied to soft drinks and syrups is
inconsistent with GATT Article III:2, second sentence
Soft drinks and syrups sweetened with cane sugar are directly competitive or substitutable
with soft drinks and syrups sweetened with HFCS
4.57 The category of "like" products is a subset of those products which are directly competitive or
substitutable. Therefore, as soft drinks and syrups sweetened with HFCS and soft drinks and syrups
sweetened with cane sugar are like products they ar e necessarily directly competitive or substitutable
products.
4.58 Moreover, soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened
with cane sugar are directly competitive or substituta ble products for many of the same reasons they
are "like". First, with respect to physical appearan ce, end-uses and channels of distribution, consumer
preferences and tariff classification, soft drinks a nd syrups sweetened with HFCS and soft drinks and
syrups sweetened with cane sugar are virtually the same. Second, HFCS-sweetened and sugar-
sweetened soft drinks and syrups compete in the sa me market and for the same customers. For these
reasons, as well as others examined in more detail above, soft drinks and syrups sweetened with
HFCS and soft drinks sweetened with cane sugar are directly competitive or substitutable products
within the meaning of GATT Article III:2, second sentence.

Soft drinks and syrups sweetened with HFCS a nd soft drinks and syrups sweetened with cane
sugar are not similarly taxed
4.59 As stated above, the HFCS soft drink tax impos es a tax at a rate of 20 per cent on (1) all
importations of soft drinks and syrups from the Unite d States and (2) subsequent internal transfers of
such soft drinks and syrups if they are sweetened with HFCS. The IEPS exempts from the latter soft
drinks and syrups sweetened with cane sugar. As also stated, all regular soft drinks and syrups
produced in Mexico are sweetened with cane sugar, such that the exemption successfully excludes all
regular soft drinks and syrups produced in Mexico from payment of the tax. Consequently, the HFCS
soft drink tax results in a 20 per cent tax on importe d soft drinks and syrups, and their subsequent
internal transfer if sweetened with HFCS, that is not similarly applied to directly competitive or
substitutable products. Imposing a 20-percentage point differential between the tax on the imported
product and the tax on the directly competitive or substitutable product clearly means that the
products are not "similarly taxed". Accordingly, the HFCS soft drink tax as applied to soft drinks and
syrups – both at the time of importation and on subsequent transfers – results in the type of dissimilar
taxation captured under GATT Article III:2, second sentence.
4.60 In addition, the distribution tax also results in dissimilar taxation of imported soft drinks and
syrups. Like the tax on internal transfers, the I EPS exemption for soft drinks and syrups sweetened
with cane sugar, also successfully excludes all regul ar soft drinks and syrups produced in Mexico
from payment of the distribution tax. Because virtually all regular soft drinks and syrups produced in
the United States are sweetened with HFCS, imported soft drinks and syrups do not enjoy the same
exemption. As a consequence, the distribution tax taxes the re presentation, brokerage, agency,
consignment and distribution of imported soft drinks and syrups but not the representation, brokerage,
agency, consignment and distribution of soft drinks and syrups produced in Mexico. A tax on the
representation, brokerage, agency, consignment and di stribution of a good, is in effect, a tax on the
good itself. Therefore, the distribution tax cons titutes a tax applied on imported soft drinks and
syrups that is not similarly applied to directly competitive or substitutable products produced in
Mexico.
The HFCS soft drink and distribution tax is a pplied so as to afford protection to domestic
production
4.61 As stated above, whether a measure is "applied so as to afford protection to domestic
production" is "an issue of how the measure in ques tion is applied." The IEPS – both its HFCS soft
drink tax and its distribution tax – is applied su ch that it affords protection to domestic production.
Under the IEPS, soft drinks and syrups sweetened with HFCS are taxed at 20 per cent (whether on
their importation, internal transfer or in connec tion with their representatio n, brokerage, agency,
consignment or distribution), whereas soft drinks an d syrups sweetened with cane sugar are not. As
discussed above, soft drinks and syrups sweetened w ith HFCS and soft drinks and syrups sweetened
with cane sugar are directly competitive or substitutable products. Moreover, as also explained above,
all regular soft drinks and syrups produced in Mexico are sweetened with cane sugar, whereas
virtually all soft drinks and syrups produced in the United States are sweetened with HFCS.
Therefore, the structure of the IEPS, is to apply a 20 per cent tax on soft drinks and syrups imported
from the United States and no tax on directly comp etitive or substitutable soft drinks and syrups
produced in Mexico.
4.62 The structure of the IEPS is precisely the ty pe of structure that has been found on prior
occasions to constitute persuasive evidence that a measure is applied "so as to afford protection."
Furthermore, if viewed on an order of magnitude basis the 20-percentage point difference in this
dispute far exceeds the tax differential examined in the other WTO alcoholic beverages disputes.
Moreover, the IEPS applies not only on the importati on and internal transfer(s) of soft drinks and
syrups themselves but also on their representation, brokerage, agency, consignment and distribution.

Thus, the tax differential is not just 20 per cent on the value of the soft drink or syrup but an
additional 20 per cent on the value of any repr esentation, brokerage, agency, consignment or
distribution used to effectuate that soft drink or syrup's transfer.
4.63 As a tax on imported soft drinks and syrups that is not similarly applied to directly
competitive or substitutable soft drinks and syrups produced in Mexico, the IEPS (HFCS soft drink
tax and distribution tax) is inc onsistent with Mexico's obligati ons under GATT Article III:2, second
sentence.
(d) The HFCS soft drink tax, distribution tax a nd reporting requirements applied on the use of
HFCS are inconsistent with GATT Article III:4
4.64 In examining a claim under GATT Article III:4, the Appellate Body has identified three
distinct elements required to establish a violation: (1) the imported and dom estic products are "like
products;" (2) the measure is a law, regulation, or requirement affecting the internal sale, offering for
sale, purchase, transportation, distribution, or u se of the imported and domestic like products; and (3)
the imported product is accorded less favourable treatment than the domestic like product. The IEPS
meets each of these criteria as a tax on the use of HF CS by (1) taxing the transfer of soft drinks and
syrups made with HFCS at 20 per cent (HFCS soft drink tax); (2) ta xing the representation,
brokerage, agency, consignment and distribution of soft drinks and syrups made with HFCS
(distribution tax); and (3) subjecting soft dri nks and syrups made with HFCS to numerous
bookkeeping and reporting requirements (reporting re quirements). These measures are not imposed
on cane sugar or soft drinks and syrups made only with cane sugar.
(i) HFCS and cane sugar are like products
4.65 As the details provided above reveal, HFCS and cane sugar compete head-to-head as
sweeteners for soft drinks and syrups. Indeed, as a sweetener in soft drinks and syrups, HFCS and
cane sugar are near perfect substitutes. This is de monstrated by the facts reviewed above and, in
particular, by the fact that prior to imposition of the IEPS, soft drink and syrup producers were, in
rapidly increasing amounts, actually substituting HFCS for cane sugar. These facts overwhelmingly
support a finding that HFCS and cane sugar are "dir ectly competitive or substitutable" products for
purposes of sweetening soft drinks and syrups within the meaning of GATT Article III:2. They are
also more than adequate to support a finding that HFCS and cane sugar are "like" products within the
meaning of GATT Article III:4.
4.66 First, the analysis provided with respect to the GATT Article III:2, second sentence claim
thoroughly establishes that, prior to the discriminator y tax, HFCS competed directly with cane sugar
as a sweetener for soft drinks and syrups in Me xico. Second, HFCS and cane sugar overlap in the
ways deemed relevant to the like product inquiry: (i) the physical properties of the products; (ii) the
extent to which the products are capable of serving th e same or similar end uses; (iii) the extent to
which consumers perceive and treat the products as alternative means of performing particular
functions in order to satisfy a particular want or demand; and (iv) the international classification of
the products for tariff purposes. Each of these elem ents was addressed in relation to the claim under
GATT Article III:2, second sentence, and support a determination that, for purposes of GATT
Article III:4, HFCS and cane sugar are "like" products as sweeteners for soft drinks and syrups.
(ii) IEPS is a law affecting the use of HFCS
4.67 The term "affecting" in GATT Article III:4 is broad in scope. This broad scope, as articulated
by several panels and affirmed by the Appellate Body, "cover[s] not only la ws and regulations which
directly govern the conditions of sale or purchase but also any laws or regulations which might
adversely modify the conditions of competition between domestic and imported products."

4.68 The IEPS "affects" the use of HFCS by conditi oning access to an advantage on use of the
domestic sweetener, cane sugar. Specifically, under the IEPS, soft drink and syrup producers who use
exclusively cane sugar to sweeten their products are wholly exempt from the HFCS soft drink tax, the
distribution tax and the reporting requirements. Soft drink and syrup producers who use HFCS to
sweeten their products do not enjoy the same advantag e. Instead, soft drink and syrup producers who
use HFCS to sweeten thei r products must (1) pay a 20 per cent ta x on the transfer of their products
(HFCS soft drink tax); (2) pay a 20 per cent tax on representation, brokerage, agency, consignment or
distribution of their products; and (3) track and report commercially sensitiv e information, including
their products' top 50 customers and suppliers, to the Mexican authorities (reporting requirements).
The added burdens imposed on the use of HFCS not only "influence" producers' choice of sweeteners
but, because of the prohibitive nature of the tax (four times the value of the sweetener itself),
economically compel producers to use domestically-produced cane sugar over HFCS. It is difficult to
imagine evidence more telling of this, than the fact after imposition of the IEPS every Mexican bottler
using HFCS reverted to a 100 per cent use of cane sugar. The IEPS is, thus, a law "affecting" the
"internal ... use" of HFCS.
(iii) IEPS accords less favourable treatment to HFCS
4.69 The IEPS undoubtedly affords "less favourable tr eatment" to imports than "accorded like
products of national origin." In Mexico cane suga r is almost exclusively a domestically-produced
sweetener. The IEPS bestows a real and substantiv e advantage on the use of cane sugar that is not
accorded to HFCS – a product which prior to appli cation of the IEPS to soft drinks and syrups
accounted for nearly 100 per cent of United States sweetener imports. While soft drinks and syrups
using exclusively cane sugar as a sweetener are w holly exempt from the IEPS, those sweetened, even
partially, with HFCS are subject by virtue of the IEPS to (1) a 20 per cent tax on their transfer (HFCS
soft drink tax); (2) a 20 per cent tax on their representation, brokerage, agency, consignment and
distribution (distribution tax); and (3) bookk eeping and reporting requirements concerning
commercially sensitive information (reporting requirement s). The first of these alone – as a tax four
times the value of the input – is sufficient to work as a prohibition on the use of HFCS. In sum, the
IEPS by virtue of its HFCS soft drink tax, distri bution tax and reporting requir ements is inconsistent
with GATT Article III:4 as a law affecting the inte rnal use of HFCS and affording imported HFCS
less favourable treatment than the like product of national origin.
3. Conclusion
4.70 For the reasons set out above, the United States r espectfully requests the Panel to find that the
IEPS is:
 – inconsistent with GATT Article III:2, firs t sentence, as a tax applied on imported soft
drinks and syrups "in excess of those app lied to like domestic products" (HFCS soft
drink tax);

 – inconsistent with GATT Article III:2, firs t sentence, as a tax applied on the agency,
representation, brokerage, consignment and distribution of soft drinks and syrups
sweetened with HFCS "in excess of t hose applied to like domestic products"
(distribution tax);

 – inconsistent with GATT Article III:2, second sentence, as a tax applied on imported
HFCS which is "directly competitive or substitutable" with Mexican cane sugar
which is "not similarly taxed" (HFCS soft drink tax);

 – inconsistent with GATT Article III:2, second sentence, as a tax applied on imported
soft drinks and syrups which are directly competitive or substitutable with domestic
soft drinks and syrups which are "not similarly taxed" (HFCS soft drink tax)14;

 – inconsistent with GATT Article III:2, second sentence, as a tax applied on the
agency, representation, brokerage, consignmen t and distribution of soft drinks and
syrups sweetened with HFCS which are di rectly competitive or substitutable with
domestic soft drinks and syrups which are "not similarly taxed" (distribution tax); and

 – inconsistent with GATT Article III:4 as a la w that affects the internal use of imported
HFCS and accords HFCS "treatment ... l ess favourable than that accorded to like
products of national origin" by:

(a) taxing soft drinks and syrups that use HFCS as a sweetener (HFCS soft drink
tax),

(b) taxing the agency, representation, brok erage, consignment and distribution of
soft drinks and syrups sweetened with HFCS (distribution tax), and

(c) subjecting soft drinks and syrups sweetened with HFCS to various
bookkeeping and reporting requirements (reporting requirements).
15

C. FIRST WRITTEN SUBMISSION OF MEXICO
1. Introduction
4.71 The United States' first submission presents an incomplete and one-sided account of the
factual context in which the Mexican fiscal measures at issue in this proceeding arose. Viewed in the
light of all relevant facts, this is a dispute ar ising under a regional free trade agreement and it would
be inappropriate for this Panel to hear it. Mexico maintains that the Panel should decline to exercise
its jurisdiction to resolve the present dispute and should recommend that the parties resort to the
NAFTA dispute settlement mechanism to resolve in an integral ma nner the broader sweeteners trade
dispute. Should the Panel elect to proceed with the examination of the merits of this dispute, it should
pay particular attention to certain novel issues concerning the legal rela tionship between the WTO
agreements and efforts to liberalize trade at the regional level.
4.72 Mexico and the United States negotiated unde r the NAFTA a balanced sweetener trade
regime that mainly includes sugar and HFCS, wh ich compete with each other in certain market
segments in both countries. The Mexican Congress introduced the tax in response to: (i) the United
States' continued refusal to address Mexico's repe atedly stated concern that the United States had
breached its NAFTA market access commitments regard ing trade in sugar, negotiated as part of the
NAFTA, while HFCS continued to enjoy prefer ential access to the Mexican market, severely

14 The IEPS is also inconsistent as a tax on HFCS with Article III:2, fi rst sentence, of GATT.
However, because the IEPS so clearly taxes a directly competitive or substitutable imported product in a manner
so as to afford protection to domestic production, the United States, in the interest of brevity, has chosen to
focus its submission on the second sentence.
15 The IEPS is also inconsistent with Article III:4 of GATT 1994 as a law that affects "the internal sale,
offering for sale, purchase, transportation, [and] distribution" of im ported soft drinks and syrups and accords
them "treatment ... less favourable than that accorded to like products of national origin" by taxing their agency,
representation, brokerage, co nsignment and distribution (distribution ta x). However, because the IEPS also so
plainly violates GATT Article III:2, the United States, in the interest of brevity, has focus this submission on
analysis under GATT Article III:2 with respect to the distribution tax as applied to soft drinks and syrups.

affecting the sugar sector in Mexico; (ii) the Un ited States' continued refusal to submit to NAFTA
dispute settlement to resolve the dispute; and (iii) the ineffectiveness of bilateral negotiations that the
parties have conducted over several years.
4.73 The United States' first submission has omitted al l reference to the complex history of the
bilateral sweetener dispute under the NAFTA. N onetheless, there does exist a genuine dispute
between the States over the meaning and scope of the NAFTA provisions governing the trade in
sweeteners, as recognized by the United States Department of Agriculture (USDA).
4.74 Mexico has duly submitted to the jurisdictio n of multiple international panels and
international tribunals convened at the behest of the United States or its nationals. Meanwhile, no
forum is presently available in which Mexico's grievance can be heard.
4.75 Accordingly, Mexico will request this Panel to decline to exercise its jurisdiction and
recommend to the parties that, as a matter of urgenc y, they submit their respective grievances to a
NAFTA Chapter Twenty Panel which can address the dispute as a whole.
4.76 If the Panel refuses Mexico's request that it declin e to exercise its jurisdiction, in view of the
fact that there are parallel international proceedings in which substantial monetary damages are being
claimed against it, Mexico will request the Panel to refrain from making certain findings that could
jeopardize its ability to mount a proper defence in such proceedings. Th is is of fundamental
importance.
2. Facts
(a) The importance of the Mexican sugar industry
4.77 The sugar sector spans 15 of Mexico's 32 stat es and is a key component of economic and
social development in many rural areas of the c ountry. The Mexican sugar industry is smaller and
more fragmented in comparison to in ternational standards and in particular to the United States' sugar
and HFCS industries. It is characterized by a relatively large number of small and medium-sized
sugar mills. However, it must be recognized that in addition to the fact that Mexico is a developing
country facing a significant and profound structural lag in comparison to the United States, the
existing Mexican sugar industry, in particular, is an emerging private industry rooted in an
agricultural system that has a peculiar land tenure regime that itself resulted from significant structural
changes made after the Mexican Revolution. Su ccessive governments' efforts to provide social
benefits and rural employment to some of Mexico's poorest citizens through this crop must also be
recognized. These characteristics of the sugarcane industry long pre-dated Mexico's accession to the
GATT as well as its accession to NAFTA.
(b) The NAFTA negotiations
4.78 During the NAFTA negotiations (1991-92), the th ree Parties initially sought to negotiate a
trilateral agriculture chapter. The Uruguay Round of Multilateral Trade Negotiations was then under
way and trade in agricultural products was being a ddressed there. Ultimately, the Parties recognized
that most agricultural issues would be addressed in the multilateral negotia tions. Accordingly, only
certain general rules were established at a trila teral level and the specific commitments were
established by means of bilateral negotiations.
4.79 In Section A of Annex 703.2 of the NAFTA, the United States and Mexico agreed on the
rules dealing with trade in sugar and sugar syrups.
16 They agreed to move towards a common

16 It does not include HFCS. See Section C of Annex 703.2.

regional market by establishing a common external ta riff and removing all tariffs and other barriers to
bilateral trade as between each other.
4.80 A key issue during the transition period was the definition of "net production surplus", which
was defined by Annex 703.2(26) to mean "the quantity by which a Party's domestic production of
sugar exceeds its total consumption of sugar during a marketing year…"
4.81 The effect of this agreement was that Mexi co would have a guaranteed minimum duty-free
access; above this minimum level it would be ab le to export its net production surpluses duty-free
within certain limits, until free trade was reache d in 2008. However, if Mexico achieved net
production surplus status for two consecutive marketi ng years, it would be able to export the total
amount of its net surplus to the United States.
4.82 Although HFCS is a sugar substitute in certain industrial applications, it was not addressed in
Annex 703.2. However, the parties were well awar e that sugar and HFCS were part of the same
market, the sweeteners market.
(i) The United States requests changes
4.83 The United States' sugar industry believed that the Mexican sugar industry's ability to export
its surpluses to the United States would put pressure on the domestic price of sugar and thereby
reduce its profitability. Therefore, it commenced strenuous lobbying efforts in Washington, D.C. in
opposition to the NAFTA.
4.84 There was a recognition that the Mexican soft dr ink industry had used sugar exclusively, but
that there was a potential for it to shift to lower-cos t HFCS and that a displacement of sugar by HFCS
could increase Mexico's net production surplus. Accordingly, the United States proposed the
exchange of letters.
4.85 The meeting resulted in two draft letters (in En glish and Spanish) that were initialled by the
lead negotiators from both countries, but not signe d by Ministers who were the intended signatories. 17
The United States submitted both letters to its Congress as part of the NAFTA implementing package.
4.86 Mexico advised the United States that the draft letters did not reflect the agreement reached.
In particular, Mexico stated that the drafts in cluded a phrase providing that paragraph 16 of Annex
703.2 – the paragraph of the NAFTA that provides th at Mexico had the right to export all of its
surpluses if it became a net surplus producer for two consecutive years – would not apply, and that
had not been part of the agreement.18
4.87 The United States responded that inclusion of th at phrase had been agreed and requested that
the exchange of letters be formalized. For that purpose, the United States attached a letter signed by
its Minister that reflected its understanding of the agreement. 19 Mexico replied with a letter signed by
its Minister that cont ained its own understanding. 20 In particular, it did not include the phrase that
provided that paragraph 16 of A nnex 703.2 would not apply. Thus, there was no meeting of the
minds. Mexico has maintained that the text of th e NAFTA as originally signed by the leaders of the
three countries prevails.

17 Exhibit MEX-11.
18 Exhibit MEX-12.
19 Exhibit MEX-13.
20 Exhibit MEX-14.

(ii) Subsequent developments
4.88 Mexico moved from being a net importer of sugar to being a surplus producer.
21 First, the
privatization of the sugar mills led to new invest ment in the mills' physical plant and consequent
improvements in productivity.22 Second, encouraged by new mill owners, the cane growers sought to
increase their own productivity and also in creased the number of hectares cultivated. 23 T h i r d ,
growing imports of United States-originating HFCS into Mexico began to undercut higher-priced
Mexican sugar and to displace it in certain market segments, particularly the soft drinks segment. 24
Fourth, there was a general expectation in the Mexican industry that it would be able to export the full
surpluses to the United States market. This did not occur because the United States applied its own
understanding of the sweetener agre ement, based on the English vers ion of the initialled draft letter
that it had submitted to the Congress on 4 November 1993.
4.89 The rapid emergence and growth of the sugar surplus exacerbated the financial condition of
the industry in Mexico. Even before the NAFTA entered into force, the government had found it
necessary to restructure the debt of the privatized mills and extend new credit to them. In such
circumstances, the terms of Mexico's negotiate d access to the United States' sugar market took on
particular significance.
(iii) Throughout this time, the United States recognized the existence of a genuine dispute
4.90 It is important to note that throughout this time, the USDA, an agency of the United States'
Executive Branch, repeatedly acknowledged in its pub lications that there was a dispute between the
two States over their bilateral trade in sweetene rs. In October 2000, the USDA commented in its
report entitled "Mexico: Sugar Semi-Annual 2000":
"According to NAFTA, the duty-free access quantity for sugar for MY 2000 will
increase. The United States and the Mexi can governments went through difficult
negotiations because of the confusion betw een the original NAFTA document and a
'side letter' allowing different quantities of Mexican sugar to be exported to the
United States As of the writing of this report, no agreement has been reached and
Mexico has already filed for a NAFTA dispute resolution panel under Chapter XX of
NAFTA. The Undersecretary of SECOFI, Luis de la Calle, stated that if the NAFTA
Agreement conditions are not respected there will be no other solution than to appeal
to the dispute resolution panel. On the other hand, the Mexican sugar producers have
repeatedly mentioned that if NAFTA is not respected, they will request the Mexican

21 From 1985 to 1988, Mexico had a sugar surplus. From 1989 to 1994 it had a deficit. Mexico has
generated production surpluses from 1995 until 2002. See " Resumen Anualizado de Balance Azucarero de
México", Evolución histórica por año calendario a partir de 1989. Exhibit MEX-15.
22 The USDA noted in 1996 that the industry was increasing its output due to better harvesting and
post-harvest technology as well as higher factory yiel ds. See USDA, "Mexican Sugar Output Forecast to
Decrease", September 17, 1996, p. 1. Exhibit MEX-16.
23 The USDA noted in its report entitled "Mexican Sugar Exports to Increase", April 10, 1998, p. 3, that
the cañeros (Mexican sugar cane growers) had been making technical improvements. Sugarcane yields per
hectare increased from an average of 68 MT/ha in 1990 to about 72 MT/ha in 1997 due to technical
improvements. Exhibit MEX-17.
24 The United States HFCS industry has, to use the USDA's words, "been plagued with excess
capacity" and the Mexican market was seen as an attractive nearby market in which to export excess production.
See USDA Economic Research Service, "United St ates Mexican Sweeteners Trade Mired in Dispute",
Agricultural Outlook, September 1999, p. 18. The USDA noted that although HFCS sales in the United States
increased by 13 per cent in the 1994-1997 period, the increase was not large enough to absorb the production
surplus. "As a result, the sector faced tough adjustments, with some smaller operations leaving the business and
others selling to or attracting investors from among larger companies." Exhibit MEX-18.

government to apply safeguards to close the border to United States HFCS. On
September 19, 2000, however, USDA a nnounced the Fiscal 2001 tariff-rate quotas
for sugar, where Mexico was allocated 10 5,788 MT of quota to comply with the
United States' NAFTA obligation. The Mexican government will have to wait for the
NAFTA dispute resolution panel decision. Mexico still believes it should have
complete access for all of its excess sugar, which it estimates at over 500,000 MT ."25
(emphasis added)
(iv) The United States' refusal to submit to dispute settlement
4.91 Mexico and the United States disagreed over th e letters exchanged in 1993. Mexico had
generated a surplus and believed that it had a right to export larger amounts of sugar to the United
States' market than the United Stat es was prepared to admit. Mexico therefore took steps during the
late 1990s to resolve the dispute through the NAFTA general dispute settlement mechanism stipulated
in Chapter XX. Unfortunately, the critical element of automaticity that differentiates the WTO's
dispute settlement process from that of the GA TT 1947 was not present in the NAFTA. Mexico
therefore requested that the United States give its consent for the establishment of an arbitral panel.
4.92 Mexico submitted a formal request for consultations, which took place but did not lead to a
resolution of the dispute. Mexico then requested a meeting of the Free Trade Commission, the second
step of the proceeding, which took place as well, but it too failed to resolve the dispute. Finally,
Mexico formally requested the establishment of an arbitral panel, but the United States refused its
establishment. To date, the United States has blocke d Mexico's efforts to resolve the dispute through
the NAFTA institutional mechanisms.
4.93 Mexico and the United States have also held c onsultations and negotiati ons at various times
over the past decade. However, they have been un able to reach an agreement through that channel
either. It warrants noting that it was in the interest s of certain parties to prolong the dispute. As long
as the Mexican market remained in a state of dise quilibrium, the Mexican industry would be subject
to greater financial stress and exits from the Mexica n sugar industry would be that much more likely.
This in turn could be expected to reduce Mexico's ability to generate a surplus. Thus, the longer it
would take to resolve this dispute, the better for certain United States interests.
(c) The decision to impose the IEPS on certain beverages
4.94 On 3 September 2001, the Government was confront ed with an urgent need to respond to the
prospect that, due to depressed market conditions, ma ny mills would be unable to finance the planting
of the next year's crop. The Government theref ore deemed it necessary to expropriate 27 of the
nation's 61 sugar mills.
4.95 Although the government intervention assisted in resolving some of the financial problems
caused by the domestic surplus, Mexico still faced the fact that HFCS was displacing Mexican sugar
from the soft drinks segment and Mexico was unabl e to export the displaced surplus sugar to the
United States.
4.96 The Congress' action therefore was intended to re balance the situation so that surplus sugar
that should have been exportable to the United States could be sold in the domestic market. The tax,
which is a temporary and proportionate measure, is intended to return the Mexican market to the
status quo ante pending a resolution of the dispute on the bilateral agreement governing trade in
sweeteners.

25 USDA, Mexico Sugar Semi-Annual 2000, 10 October 2000, p. 4. Exhibit MEX-20.

4.97 Mexico respectfully requests the Panel to bear these facts in mind as it considers the United
States' complaint.
3. Legal arguments
(a) This dispute arises out of a dispute under the NAFTA regarding bilateral trade in sweeteners
4.98 There is a genuine dispute concerning the volume of sugar that can be exported to the United
States duty-free. According to the NAFTA, Mexico has the right to dispose of its total net sugar
production surplus, which is particularly important given the displacement of sugar by HFCS in the
Mexican market.
4.99 Insofar as the United States' complaint about the IEPS tax is concerned, it is important for this
Panel to understand that the NAFTA's chapter on trad e in goods is derived from the GATT. Indeed,
the NAFTA obligation that deals with internal taxes is precisely Article III of the GATT 1994.
4.100 The United States claims that the measures adopt ed by Mexico violate only Article III of the
GATT 1994. This has been explicitly incorporated in the NAFTA's rules governing trade in goods.
4.101 There is, therefore, a forum available to hear all of the parties' claims together.
(b) Mexico requests a preliminary ruling: the Panel should decline to exercise its jurisdiction
4.102 Mexico recognizes that the Panel has prima faci e jurisdiction to hear and decide the United
States' claims even though they are inextricably linked to a larger dispute concerning compliance with
its own obligations under the NAFTA.
26 Mexico submits, however, that the Panel also has
jurisdiction to decide whether to exercise its substa ntive jurisdiction in the circumstances of a dispute
such as the instant case.
4.103 Like any other international court or tribunal, this Panel has certai n implied jurisdictional
powers that derive from its nature as an adjudicativ e body. This implied or incidental jurisdiction
includes the jurisdiction to decide whether it shoul d refrain from exercising substantive jurisdiction
that has been validly established.
4.104 The power to refrain from exercising jurisdicti on should be used sparingly and only in the
most extraordinary circumstances; but it can be employed when the underlying or predominant
elements of a dispute derive from rules of intern ational law under which claims cannot be judicially
enforced in the WTO, such as the NAFTA provisions. It warrants noting that in the GATT 1947
dispute on US – Sugar Quota , the United States argued against the Panel taking jurisdiction because
its measures concerning sugar imports from Nicaragua were only one aspect of a larger State-to-State
dispute. The United States stated that "it was neither invoking any exceptions under the provision of
the General Agreement nor intending to defend its ac tions in GATT terms". It also stressed that its
reduction in Nicaragua's sugar import quota "was fully justified in the context in which it was taken"
and concluded:
"The United States was of the view that attempting to discuss this issue in purely
trade terms within the GATT, divorced fro m the broader context of the dispute,
would be disingenuous. The resolution of that dispute was certainly desirable, and

26 Under NAFTA Article 2005, the Parties agreed th at, subject to certain conditions, " … disputes
regarding any matter arising under both this Agreement and the General Agreement on Tariffs and Trade , any
agreement negotiated thereunder, or any successor agreem ent (GATT), may be settled in either forum at the
discretion of the complaining Party".

would also result in the lifting of the ac tion which Nicaragua had challenged before
the Panel, but the United States did not believe that the review and resolution of that
broader dispute was within the ambit of the GATT."27
4.105 A WTO panel should also refrain from exercising its jurisdiction when one of the disputing
parties refuses to take the matter to the appropriate forum.
4.106 The history, prior procedures, and substantive content of the bilateral sweeteners trade dispute
demonstrate that the measures challenged by the Un ited States before the WTO are inseparable from
the non-WTO claims over which the Panel has no jurisd iction. There is a forum available that could
be seized with both disputing parties' claims and whic h could consider all the relevant facts. But this
Panel will only be presented with a slice of the facts and legal issues at dispute in the NAFTA context.
4.107 The United States would suffer no prejudice from having its GATT Article III claim heard as
NAFTA Article 301 claims. On the other hand, Mexico suffers prejudice from having its measure
examined by the Panel alone:
 – The United States is rewarded for its obstructionism which undermines the regional
free trade agreement's dispute settlement process and undermines the international
legal system;

– Mexico continues to be unable to have its legitimate grievance considered; and

– defences and exceptions that are available to Mexico in the other forum may not be
available to it here.

4.108 In these circumstances, addressing the United States' claims would be inconsistent with the
basic aim of WTO dispute settlement, namely, to "secure a positive solution to a dispute".
28 Since
this Panel cannot resolve all the matters at issue in this dispute, this important objective cannot be
achieved.
(c) Request for specific recommendation
4.109 If the Panel decides to take jurisdiction over this complaint, Mexico will request that it give
special consideration to the formulation of its r ecommendations. In particular, Mexico will request
that the Panel recommend that the parties take steps to resolve the sweeteners trade dispute within the
NAFTA framework.
4.110 Mexico would also request the Panel, in the c ourse of its deliberations, to give the fullest
weight to Mexico's status as a developing country and to the fact that agrarian reform entails a lengthy
process of adjustment, the social consequences of whic h are ignored by governments at their peril.
Although Mexico has made great progress over the l ast two decades, it remains a developing nation
and its long-standing structural problems of povert y in the rural economy cannot be brushed aside.
There are very real social consequences to this dispute for Mexico's agrarian society. The WTO
agreements contain principles and rules that are intended to accord more favourable treatment to
developing countries and the necessary latitude need ed to advance economically without provoking
social crises.

27 Panel report adopted on 13 March 1984, BISD 31S/67, paragraphs 3.10 and 3.11. In that dispute,
while the panel noted that the measures were only one as pect of a broader problem, it proceeded to examine the
claims of Nicaragua solely in the li ght of the GATT provisions. In Mexi co's view, this reflected a pre-WTO
approach to questions of international law that should be revisited.
28 Article 3.7 of the DSU.

4.111 Finally, Mexico also requests the Panel, if it takes jurisdiction, to employ particular care in
terms of how it formulates its findings and recomm endations. In particular , the Panel should take
special care to record that whatever the respective States' legal rights may be under applicable rules of
international law, its findings apply solely to the parties' respective rights and obligations under the
WTO agreements and cannot be taken to pre-judge such other legal rights.
(d) The measure was not intended to afford protection to domestic production within the meaning
of Article III of the GATT 1994
4.112 The parties are in agreement that the measures at issue are tax measures that apply to specific
goods. The parties also agree that they were impo sed to "stop the displacement of domestic cane
sugar by imported HFCS and soft drinks and syrups sweetened with HFCS".
29
4.113 Mexico concedes that HFCS and cane sugar are s ubstitutable products in certain applications.
It was because of their substitutability that Mexico s ought to protect its interests by ensuring that if
HFCS displaced sugar in a market segment such as the soft drinks segment, Mexico would be able to
export the displaced surplus sugar to the United Stat es, so as to avoid an adverse effect on its sugar
market. When the United States blocked this possib ility, Mexico took action to protect its interests
and to return to the status quo ante.
4.114 In assessing the matter before it, Mexico submits that the Panel must consider the legitimate
objective that the Mexican Congress was pursuing in introducing the tax at issue.
4.115 In light of the unique circumstances of this dispute and the arguments discussed above,
Mexico will not respond to the United States' claims that the measures at issue are inconsistent with
GATT 1994 Article III.
(e) In the event of any inconsistency, the measure is justifiable under Article XX(d)
4.116 Even if the IEPS tax were found prima facie to violate Article III, the measure is justifiable
under Article XX of GATT 1994, which provides:
"Subject to the requirement that such me asures are not applied in a manner which
would constitute a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prev ail, or a disguised restriction on
international trade, nothing in this Agre ement shall be construed to prevent the
adoption or enforcement by the contracting party of measures:

(d) necessary to secure compliance with laws or regulations
which are not inconsistent with the provisions of this Agreement … "
4.117 It is established that in order to demonstrate th at a measure is justified under Article XX, the
following sequence of steps applies: first, provisi onal justification by the characterization of the
measure as being covered under one of the paragraphs of GATT Article XX; and second, appraisal of
the measure under the chapeau of GATT Article XX. 30 Mexico will address each in turn. The
measures at issue can be justified under Article XX(d) for the following reasons.

29 Id., para. 3.
30 Report of the Appellate Body on US – Gasoline, p. 24, DSR 1996:1, 3, at 22.

4.118 The measures are "necessary to secure complianc e with laws and regulations which are not
inconsistent with the provisions" of the GATT 1994. In Korea – Various Measures on Beef, referring
to its Report on US – Gasoline, the Appellate Body set forth the following two elements for paragraph
(d) of Article XX:
"For a measure, otherwise inconsistent with GATT 1994, to be justified provisionally
under paragraph (d) of Article XX, two elemen ts must be shown. First, the measure
must be one designed to 'secure compliance' with laws or regulations that are not
themselves inconsistent with some provision of the GATT 1994. Second, the
measure must be 'necessary' to secure such compliance."
31
4.119 For the reasons set out in the factual section of this submission, the measures are "designed
to" secure the United States' compliance with the NAFTA. The NAFTA, an international agreement,
is a law that is not inconsistent with the provisions of the GATT 1994.
4.120 GATT Article XXIV expressly permits contracting parties to establish free trade areas and
customs unions. Far from being "inconsistent with the provisions" of the GATT 1994, agreements
that establish free trade areas are expressly contemplated and authorized by the GATT 1994.
4.121 Such agreements routinely include mechanisms to resolve disputes concerning the rights and
obligations provided for therein. The NAFTA contains detailed dispute settlement procedures.
4.122 The measure at issue was also 'necessary' to secure the United States' compliance with the
NAFTA. It is important to note that in order to be deemed 'necessary' within the meaning of
Article XX(d) of the GATT 1994, a measure need not be the only alternative available to attain a
Member's legitimate objective to secure complian ce with laws or regulations which are not
inconsistent with the provisions of the GATT. The Appellate Body made this clear in Korea –
Various Measures on Beef:
"We believe that, as used in the context of Article XX(d), the reach of the word
'necessary' is not limited to that which is 'i ndispensable' or 'of absolute necessity' or
'inevitable'. Measures which are indispensable or of absolute necessity or inevitable
to secure compliance certainly fulfil the requirements of Article XX(d). But other
measures, too, may fall within the ambit of this exception. As used in Article XX(d),
the term 'necessary' refers, in our view, to a range of degrees of necessity. At one end
of this continuum lies 'necessary' understood as 'indispensable'; at the other end, is
'necessary' taken to mean as 'making a contribution to'. We consider that a 'necessary'
measure is, in this continuum, located significantly closer to the pole of
'indispensable' than to the opposite pole of simply 'making a contribution to' taken to
mean as 'making a contribution to'.
In appraising the 'necessity' of a measure in these terms, it is useful to bear in mind
the context in which 'necessary' is found in Article XX(d). The measure at stake has
to be 'necessary to ensure compliance with laws and regulations … , including those
relating to customs enforcement, the enforcement of [lawful] monopolies … , the
protection of patents, trade marks and copyrights, and the prevention of deceptive
practices'. (Emphasis added) Clearly, Article XX(d) is susceptible of application in
respect of a wide variety of 'laws and regulations' to be enforced. It seems to us that a
treaty interpreter assessing a measure claime d to be necessary to secure compliance
of a WTO-consistent law or regulation may, in appropriate cases, take into account
the relative importance of the common interests or values that the law or regulation to

31 Report of the Appellate Body on Korea – Various Measures on Beef, para. 157.

be enforced is intended to protect. Th e more vital or important those common
interests or values are, the easier it would be to accept as 'necessary' a measure
designed as an enforcement instrument."
32
4.123 The measure at issue was "necessary" within th e meaning of the review conducted by the
Appellate Body.
(a) First, owing to the nature of the trade, it was deemed necessary that an internal tax be
imposed;
(b) Second, ensuring that NAFTA obligations be co rrectly interpreted and applied is a
vital interest of Mexico;
(c) Third, notwithstanding Mexico's repeated atte mpts to resolve its grievance, the
United States has refused to submit to di spute settlement in compliance with its
NAFTA obligations, and has preferred to drag on bilateral discussions that therefore
have not resulted in an alternative solution . At the same time, HFCS has enjoyed the
benefits of market access in Mexico, while the Mexican sugar industry is unable to
exercise what Mexico believes to be its right to export significant sugar surpluses to
the United States. The economic damage ca used by the United States' continued
refusal is manifest and, in the circumstances, it was necessary to take action to protect
Mexico's legal interests and secure the Un ited States' compliance, not only with its
market access commitments, but more importa ntly, with the institutional mechanisms
that are fundamental to the NAFTA's proper operation;
(d) Fourth, if the United States is able to succes sfully challenge Mexico's measures in
this proceeding, while simultaneously refusing to have its own measures examined by
a NAFTA Panel, an important object of the measures, i.e., creating a dynamic that has
the possibility of inducing the United Stat es to submit to NAFTA dispute settlement
or otherwise resolving the dispute, will be defeated.
4.124 In Mexico's view, therefore, even if the I EPS tax contravened Article III, it is necessary to
secure United States' compliance with its NAFTA oblig ations, in circumstances in which the ordinary
means to accomplish that are not available, precisel y because the United States has blocked recourse
to such means.
4.125 Mexico notes that the United States has long insisted on its legal right to take action when
another State impedes the operation of a treaty's dispute settlement mechanism:
"Wherever it could, the United States would challenge unfair practices under the
dispute settlement provisions of the Genera l Agreement or the Tokyo Round Codes,
but where other contracting parties prevented or impeded that process or blocked
efforts to ensure that their practices we re covered by multilateral disciplines, the
United States would act to protect its interests. If such action was considered
unilateral, it should be nevert heless recognized as perfectly justifiable, responsive
action necessitated by the failure of bila teral or multilateral efforts to address a
problem."33 (emphasis added)
4.126 Since the measure is provisionally justified unde r paragraph (d) of Article XX, Mexico will
now establish that it also meets the requirements of the chapeau of that provision.

32 Id., paras. 161-162.
33 GATT document C/163 of 16 March 1989, p. 4. Exhibit MEX-29.

(i) There was no "arbitrary or unjustifiable discri mination between countries where the same
conditions prevail"
4.127 The Mexican market for HFCS has been domin ated almost exclusively by HFCS imported
from the United States or produced domestically from corn imported from the United States. The
Appellate Body has had occasion to consider when the General Agreement will permit a Member to
take unilateral action that might otherwise be cont rary to the GATT under the chapeau of Article XX.
The Appellate Body's Report on US – Shrimp (Article 21.5 – Malaysia 34 ) concerned the United
States' attempt to justify otherwise GATT-inconsiste nt extra-territorial measures under Article XX of
the GATT 1994. The United States conditioned cert ain trade advantages to exporting developing
countries to the adoption of certain domestic polic ies and restrictions on imports of goods from
countries that did not adopt such policies.
4.128 US – Shrimp originally produced a decision against th e United States, but then, after changes
in United States' policy, the Appellate Body upheld th e United States' restrictions, ordinarily contrary
to GATT Article XI, on imports of shrimp imposed to save turtles.
4.129 The key issue before the Appellate Body, when considering the revised measure, was whether
the new United States' policy was applied in a manner that no longer constituted a means of "arbitrary
or unjustifiable discrimination" between "countries wh ere the same conditions prevail" in the sense of
the Article XX chapeau. The Appellate Body c onfirmed that unilateral measures may, in certain
circumstances, withstand scrutiny under Article XX.
4.130 In doing so, the Appellate Body rejected Mala ysia's argument that demonstrating serious,
good faith efforts to negotiate an international ag reement for the protection and conservation of sea
turtles was not sufficient to meet the requirements of the chapeau of Article XX. Malaysia maintained
that the chapeau actually required that such an international agreement be concluded. On this issue,
the Appellate Body stated:
"Under the chapeau of Article XX, an im porting Member may not treat its trading
partners in a manner that would constitute 'arbitrary or unjustifiable discrimination'.
With respect to this measure, the Unite d States could conceivably respect this
obligation, and the conclusion of an inte rnational agreement might nevertheless not
be possible despite the serious, good faith efforts of the United States . Requiring that
a multilateral agreement be concluded by the United States in order to avoid 'arbitrary
or unjustifiable discrimination' in applying its measure would mean that any country
party to the negotiations with the United States, whether a WTO Member or not,
would have, in effect, a veto over whethe r the United States could fulfil its WTO
obligations. Such a requirement would not be reas onable. For a variety of reasons, it
may be possible to conclude an agreem ent with one group of countries but not
another. The conclusion of a multilatera l agreement requires the cooperation and
commitment of many countries. In our view, the United States cannot be held to have
engaged in 'arbitrary or unjustifiable discr imination' under Article XX solely because
one international negotiation resulted in an agreement while another did not.
As we stated in US – Shrimp [the original dispute], 'the protection and conservation of
highly migratory species of sea turtles […] demands concerted and cooperative
efforts on the part of the many countries w hose waters are traversed in the course of
recurrent sea turtle migrations'. [Footnote omitted] Further, the 'need for, and the
appropriateness of, such efforts have been recognized in the WTO itself as well as in
a significant number of other international instruments and declarations'. [Footnote

34 US – Shrimp (Article 21.5 – Malaysia).

omitted] For example, Principle 12 of the Rio Declaration on Environment and
Development states, in part, that '[e]nvi ronmental measures addressing transboundary
or global environmental problems should, as far as possible, be based on international
consensus'. [Footnote omitted] Clearly, and 'as far as possible', a multilateral
approach is strongly preferred. Yet it is one thing to prefer a multilateral approach in
the application of a measure that is pr ovisionally justified under one of the
subparagraphs of Article XX of the GA TT 1994; it is another to require the
conclusion of a multilateral agreement as a condition of avoiding 'arbitrary or
unjustifiable discrimination' under the chapeau of Article XX. We see, in this case,
no such requirement."
35 (emphasis added)
4.131 The Appellate Body then upheld the Article 21. 5 panel's reliance on a non-WTO treaty, the
Inter-American Convention for the Protection and Conservation of Marine Turtles, as a factual
reference or point of comparison when deciding th at the new United States' policy was no longer
discriminatory in the sense of the chapeau of GATT Article XX:
"Thus, in the previous case, in examining the original measure, we relied on the Inter-
American Convention in two ways. First, we used the Inter-American Convention to
show that 'consensual and multilateral procedures are available and feasible for the
establishment of programmes for the conservation of sea turtles.' [Footnote omitted].
In other words, we saw the Inter-American Convention as evidence that an alternative
course of action based on cooperation a nd consensus was reasonably open to the
United States. Second, we used the Inter-American Convention to show the existence
of 'unjustifiable discrimination'. The In ter-American Convention was the result of
serious, good faith efforts to negotiate a regional agreement on the protection and
conservation of turtles, including efforts made by the United States. In the original
proceedings, we saw a clear contrast between the efforts made by the United States to
conclude the Inter-American Convention a nd the absence of serious efforts on the
part of the United States to negotiate other similar agreements with other WTO
Members. We concluded there that such a disparity in efforts to negotiate an
international agreement amounted to ' unjustifiable discrimination'. [Footnote
omitted.]
With this in mind, we examine what the Pane l did here. In its analysis of the Inter-
American Convention in the context of Malaysia's argument on 'unjustifiable
discrimination', the Panel relied on our original Report to state that 'the Inter-
American Convention is evidence that th e efforts made by the United States to
negotiate with the complainants before im posing the original measure were largely
insufficient'. [Footnote omitted.] The Panel went on to say that 'the Inter-American
Convention can reasonably be considered as a benchmark of what can be achieved
through multilateral negotiations in the fi eld of protection and conservation.'
[Footnote omitted.]
At no time in US – Shrimp did we refer to the Inter-American Convention as a
'benchmark'. The Panel might have cho sen another and better word – perhaps, as
suggested by Malaysia, 'example'. [Foot note omitted.] Yet it seems to us that the
Panel did all that it should have done with respect to the Inter-American Convention,
and did so consistently with our appro ach in United States – Shrimp. The Panel
compared the efforts of the United States to negotiate the Inter-American Convention
with one group of exporting WTO Members with the efforts made by the United
States to negotiate a similar agreement with another group of exporting WTO

35 US – Shrimp (Article 21.5 – Malaysia), paras. 123-124.

Members. The Panel rightly used th e Inter-American Convention as a factual
reference in this exercise of comparison. It was all the more relevant to do so given
that the Inter-American Convention was th e only international agreement that the
Panel could have used in such a comparison. As we read the Panel Report, it is clear
to us that the Panel attached a relative value to the Inter-American Convention in
making this comparison, but did not view the Inter-American Convention in any way
as an absolute standard. Thus, we disagree with Malaysia's submission that the Panel
raised the Inter-American Convention to the ra nk of a 'legal standard'. The mere use
by the Panel of the Inter-American Convention as a basis for a comparison did not
transform the Inter-American Convention into a 'legal standard'. Furthermore,
although the Panel could have chosen a more appropriate word than 'benchmark' to
express its views, Malaysia is mistaken in equating the mere use of the word
'benchmark', as it was used by the Panel, with the establishment of a legal standard".
36
4.132 The Appellate Body's analysis is of assistance in this proceeding. It examined actions taken
by the respondent in relation to a subject falling out side of the WTO Agreements. It did not require
the United States to conclude an international agreemen t in that subject area, but rather required it to
demonstrate that it had used serious, good faith effort s to do so. That was sufficient because if, for
reasons outside of the United States' control, such an agreement could not be reached, another State
would have a veto over the United States' compliance with its WTO obligations.
4.133 The parallels with the present case are obvious:
 – the United States made market access commitments for Mexican sugar in the
NAFTA, a subject that falls outside of the WTO agreements (although expressly
permitted by Article XXIV of the GATT 1994);

 – a disagreement arose as to th e nature of those commitments;

 – Mexico has constantly sought a resolution of the disagreement, including through its
request for the establishment of a NAFTA dispute settlement panel and numerous
efforts to achieve a negotiated solution;

 – the United States has refused to consent to submit to dispute settlement proceedings
and bilateral negotiations have proved fruitless; and

 – therefore, the United States has essentia lly vetoed Mexico's ability to have its
grievance resolved.

4.134 In such circumstances, Mexico exercised its in ternational law rights to rebalance the situation
in a proportionate fashion.
(ii) The measure is not a "disguised restriction on international trade"
4.135 As the United States' first submission repeatedly points out, the purpose of the measure has
been stated by members of Congress and analysed by the Supreme Court of Justice. The United
States omitted to inform this Panel of the long- standing bilateral dispute and Mexico's continued
efforts to resolve it, of its refusal to submit to dispute settlement under the NAFTA, and of the
ineffectiveness of bilateral negotiations. The Unite d States also failed to inform the Panel of the
social and economic context of sugar production in Mexico, the crisis that the industry underwent,
due, in large part, to a lopsided situation genera ted unilaterally by the United States, given the

36 Id., pp. 128-130.

Mexican industry's inability to export sugar surpluses to its market, while at the same time imports of
United States' HFCS and domestically produced HF CS from corn imported from the United States
contributed greatly to generate such surpluses.
4.136 Thus, the United States failed to explain precisely why the Congress acted as it did. There
has been no disguised restriction on trade. Mexi co's measures constitute a proportionate, legitimate,
and legally justified response to actions and omissions of the United States. The Panel should also not
lose sight that this is a particularly sensitive sect or, the social and economic implications of which
cannot be ignored, especially given Mexico's stat us as a developing nation, and thus the greater
difficulties that Mexico faces in addressing problems th at arise in ordinary circumstances, let alone in
the extraordinary circumstances arising out of the dispute concerning bilateral trade in sugar.
4.137 In Mexico's view, therefore, even if the I EPS tax contravened Article III, it is necessary to
secure the United States' compliance with its NAFTA obligations and does not constitute a "disguised
restriction on international trade".
4. Conclusion
4.138 Mexico respectfully requests the Panel to decline to exercise its jurisdiction for the reasons set
out in this Submission. In the event that the Pane l does decide to exercise its jurisdiction, Mexico
respectfully requests it to pay particular attention to the circumstances that gave rise to the measures
at issue in this case, in light of the complex social and economic problems of the sugar sector in
Mexico, which were aggravated precisely by acts and omissions of the United States. The Panel
should also accord particular weight to Mexico's status as a developing country, especially in the
context of the broader dispute concerning trade in sweeteners between Mexico and the United States,
and should take note of the singular importance that sugar production plays in supporting a significant
number of Mexican farmers and their families. Fina lly, the Panel should recognize the United States'
intransigence in resolving this matter of crucial im portance to Mexico. Mexico requests the Panel to
find that, in the extraordinary circumstances of th is case, where in the face of an acknowledged
dispute, the United States has refused to submit to NAFTA dispute settlement, having exhausted all
possibilities for third party dispute resolution, and where years of seeking a negotiated settlement have
been unsuccessful, the Mexican measures are justified under Article XX of the GATT 1994.
D. O
PENING STATEMENT OF THE UNITED STATES AT THE FIRST MEETING OF THE PANEL
4.139 This dispute is about a 20 per cent tax Mexi co enacted, effective 1 January 2002, on soft
drinks and syrups other than those sweetened excl usively with cane sugar. This tax – which is
embodied in the IEPS – was imposed to stop the di splacement of Mexican cane sugar by imported
HFCS in Mexican soft drink production. That is what the Mexican Supreme Court has said, and what
Mexico concedes in its first submission.37 This tax has had the desired effect. Today, despite the fact
that Mexico is the second largest consumer of soft drinks in the world, imports of HFCS for soft drink
use have ceased; total HFCS exports from the United States are just barely four per cent of their pre-
tax levels.
4.140 HFCS and cane sugar are directly competitiv e and substitutable products as sweeteners for
soft drink and syrup production: Mexico concedes this point in its first submission.38 Cane sugar and
HFCS are not similarly taxed: the tax is not impos ed on soft drinks and syrups sweetened only with
cane sugar, and it is prohibitively high, over four tim es the cost of the HFCS used in a typical soft
drink.39 Mexico's tax is inconsistent with Mexico's obligations under the second sentence of

38 Mexico's first written submission, paras. 5, 34, 112.
39 United States' first written submission, para. 45.

Article III:2 as a tax on HFCS and soft drinks and sy rups sweetened with HFCS. Similarly, Mexico's
tax discriminates in favour of Mexican soft drinks and syrups sweetened with cane sugar, and against
soft drinks and syrups sweetened with HFCS, in breach of the first sentence of Article III:2. In
addition, the tax rewards Mexican soft drink pro ducers for using domestic cane sugar and punishes
them for using HFCS, in breach of Article III:4.
4.141 The United States first submission presents a complete and documented prima facie case,
including evidence and argument sufficient to estab lish a presumption that Mexico has infringed its
Article III obligations. The United States has met its burden of proof.
4.142 In its first submission, rather than contesting the United States prima facie case under
Article III, Mexico attempts to change the subject by raising issues that are irrelevant or otherwise
outside the Panel's terms of reference – includi ng the economic importance of the Mexican sugar
industry, bilateral negotiations on sugar trade, a nd bilateral obligations under the NAFTA. The Panel
need not and should not engage itself on these issues . These issues are outside the Panel's terms of
reference.
4.143 In light of its extended discussion of issues i rrelevant to this dispute, Mexico's first
submission, while lengthy, appears actually to narrow the issues before the Panel. In fact, Mexico
affirmatively states that it "will not respond" to the United States' Article III claims. 40 That in effect
leaves Mexico's so-called request for a "preliminary ruling" and its Article XX(d) defence as the only
contested issues before the Panel today. For that reason, the United States will not repeat in its
statement the extensive arguments in its first subm ission detailing Mexico's breach of its obligations
under Articles III:2 and III:4 of the GATT 1994. Instead, having established a prima facie case, the
United States will operate on the assumption – as Mexico does in its first submission – that Mexico's
tax is in breach of Article III and proceed to addr ess Mexico's Article XX(d) defence of that breach
and its preliminary ruling request.
1. Article XX(d)
4.144 Turning first to Article XX(d), Mexico asserts that alleged United States non-compliance with
NAFTA obligations can justify action by Mexico in violation of its WTO obligations. There is
absolutely no basis in Article XX(d), the DSU, or elsewhere in the WTO Agreement for Mexico's
proposition. Simply nothing in those agreements supports the contention that a WTO Member may
violate its WTO obligations in order to punish anot her Member because it thinks that Member has not
complied with its obligations under another international agreement.
4.145 Accordingly, Mexico cannot possibly satisfy the burden of demonstrating that its tax satisfies
the conditions for justification under Article XX(d ). While Article XX(d) permits a Member to
maintain measures that are "necessary to secure comp liance with laws or regulations which are not
inconsistent" with the provisions of the GATT 19 94, NAFTA is not a "law or regulation," and
Mexico's tax is not "necessary to secure compliance."
4.146 In the first instance, international obligati ons owed Mexico by other countries under the
NAFTA and other international agreements are not "laws" or "regulations" within the meaning of
Article XX(d). Rather, Article XX(d) allows a Memb er, under certain conditions, to adopt or enforce
measures necessary to secure compliance with that Member's own laws and regulations – for
example, those laws and regulations Mexico may have in place to implement its own NAFTA
obligations. It does not, however, permit a Member to claim an Article XX(d) exception for measures
to secure compliance by another Member with its oblig ations under an international agreement. It
should go without saying that an "international agreement" is distinct from a "law" or "regulation."

40 Mexico's first written submission, para. 114.

4.147 For these reasons and others which the United States can elaborate further in subsequent
submissions, Mexico has wholly failed to meet its burden of establishing a prima facie basis for its
Article XX(d) defence. There is simply nothing in the WTO Agreement to support its claim.
2. Developing countries
4.148 Separately, Mexico asserts that the Panel must take into account that the "WTO Agreement
contains principles and provisions the purpose of wh ich is to grant more favourable treatment to
developing countries." While the covered agreements do in fact contain certain provisions that accord
special and differential treatment to developing co untries, Mexico has not identified any provision
that might permit Mexico to accord less favourable treatment to products of another WTO Member
than it accords to its own like products or to discrim inate against directly competitive or substitutable
products of another Member in favour of domestic production.
3. Recommendations
4.149 Mexico also asks the Panel to make a specific recommendation that "the parties in this dispute
take steps under NAFTA to resolve the entire dispute re lating to trade in sweeteners." It is unclear in
what context Mexico proposes the Panel make su ch a recommendation. As the DSU makes clear
under Article 19.1, a panel only makes a recommend ation after having found a Member's measure
inconsistent with that Member's WTO obligations and, even then , may only recommend that the
Member bring its WTO-inconsistent measure into conformity.
41 Panel suggestions under Article 19.1
are likewise limited to being directed at the Member whose measure was found to be WTO-
inconsistent. The Panel should reject Mexico's request.
4. Preliminary ruling request
4.150 Turning to Mexico's so-called "preliminary ruli ng" request, first this is not a request for a
"preliminary ruling." If anything, it is a request for a "non-ruling" and there would be nothing
"preliminary" about it. Mexico seeks to resolve the en tire dispute on a definitive basis in this manner.
It is not that Mexico questions the Panel's jurisdiction and seeks a preliminary ruling in order to
clarify that jurisdiction for purposes of this proceed ing. Rather, Mexico admits that the Panel has
jurisdiction to hear and decide the United States cl aims, but asks the Panel to refrain from exercising
that jurisdiction.
42 Let the United States present the situation plainly and clearly: Mexico admits that
it imposed the IEPS – a measure it does not contest is in breach of Article III – to stop the
displacement of Mexican cane sugar by imported HFCS. Mexico then claims that it has done so to
coerce its desired solution to a bilateral dispute. And now Mexico wishes the Panel to assist it in this
WTO-inconsistent action by denying the United States its right to WTO dispute settlement.
4.151 There is absolutely no basis for Mexico's request . In fact, the DSU and the Panel's terms of
reference in this dispute specifically preclude it. Article 7.2 of the DSU states that panels "shall
address the relevant provisions in any covered agreement or agreements cited by the parties" to a
dispute. The DSU further instructs panels in Artic le 11 to make an "objective assessment of the facts
of the case and the applicability of and confor mity with the relevant covered agreements."
43 In this
respect, the Dispute Settlement Body ("DSB") has de fined the Panel's terms of reference in this
dispute as follows:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the United States in document WT/DS308/4, the matter referred to the DSB by the

41 See DSU Articles 11, 19.1.
42 Mexico's first written submission, para. 93.
43 See also DSU Article 12.7.

United States in that document, and to ma ke such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those
agreements."
44
4.152 The "matter referred to the DSB by the United States" in its panel request covers Mexico's tax
on HFCS and soft drinks and syrups sweetened wi th HFCS, and the consistency of that tax with
Mexico's obligations under Article III of the GATT 1994. Given the explicit instructions set forth in
the DSU and the Panel's terms of reference, Mexico 's argument that the Panel should simply decline
to exercise jurisdiction over this dispute is untenable.
4.153 Mexico's attempt to liken its request for the Pane l to decline jurisdiction to past panels' use of
"judicial economy" is misplaced. 45 Judicial economy is a concept under which panels have declined
to address certain claims raised by a party when reso lution of such claims is not needed for the Panel
to resolve the matter at issue in the dispute. J udicial economy is typically used by panels when a
complaining party alleges that a measure breaches several provisions of the WTO Agreement, but a
finding of breach with respect to some, but not all, of the provisions is sufficient for the DSB to
recommend that the measure be brought in to conformity with the WTO Agreement.
46 I t i s n o t a
concept a panel may draw upon as a basis for declin ing to exercise jurisdiction over each and every
claim raised by the complaining party. For a pa nel to decline jurisdiction over each and every claim
raised would, of course, leave the DSB unable to make any recommendations or rulings with respect
to the matter. Such an outcome is clearly incompatible with the function of panels to "assist the DSB
in making the recommendations and . . . rulings pr ovided for in the covered agreements." As the
Appellate Body found in Australia – Salmon , under the DSU panels are obligated "to address those
claims on which a finding is necessary in order to enable the DSB to make sufficiently precise
recommendations and rulings so as to allow fo r prompt compliance by a Member with those
recommendations and rulings."47
4.154 Equally unsupported by the DSU is Mexico's argument that the Panel's exercise of
jurisdiction would be incompatible with the "aim of the dispute settlement mechanism to secure a
positive solution to a dispute." In Mexico's view , "a positive solution" to the dispute can only be
found before a NAFTA panel. However, this "d ispute" is a WTO dispute that has been brought
before this WTO dispute settlement Panel to reso lve a dispute over Mexico's obligations under the
covered agreements. Although Mexi co attempts to recast this di spute as involving United States'
obligations under the NAFTA, it is Mexico's WTO obligations that comprise the matter in dispute.
The NAFTA is not a covered agreement, nor is it within this Panel's terms of reference. Accordingly,
the United States has not cited to the NAFTA. The United States notes, however, that it has a
markedly different view than Mexico of the re levant NAFTA provisions and the series of events
transpiring under the NAFTA. And that is just the point – this Panel is not in a position to make
findings on those NAFTA issues, so there is no r eason to elaborate on the parties' differing positions
on those issues. Moreover, although not relevant to this dispute, the United States notes that neither
Mexico nor the United States have agreed in th e NAFTA to prejudice their WTO rights. Indeed,
under the NAFTA the parties begin by affirming their GATT rights and obligations.
4.155 Mexico also argues that although the Panel ha s prima facie jurisdiction over the present
dispute, the more "appropriate" forum fo r its resolution is before a NAFTA panel. 48 Again, Mexico's
proposition finds no basis in the DSU or elsewhere in the WTO Agreement. That WTO Members
may choose to settle disputes involving a mixtur e of WTO and non-WTO rules in other fora, as

44 WT/DS308/5/Rev.1.
45 Mexico's first written submission, para. 94.
46 See, e.g., Appellate Body Report on US – Wool Shirts and Blouses p. 17, DSR 1997:I, 323, at 339.
47 See, e.g., Appellate Body Report on Australia – Salmon, para 223.
48 Mexico's first written submission, para. 97.

Mexico observes, hardly justifies a WTO panel re fusing to exercise jurisdiction over the dispute for
which it was established.
4.156 One party's determination that another forum is more "appropriate" similarly does not justify
such a refusal to exercise jurisdiction.
49 In fact, in India – Quantitative Restrictions , the Appellate
Body dismissed India's arguments that the panel l acked jurisdiction to decide claims that India
thought more appropriately resolved before the WTO Balance of Payments Committee. The
Appellate Body stated:
"According to Article XXIII, any Member wh ich considers that a benefit accruing to
it directly or indirectly under the GATT 1994 is being nullified or impaired as a result
of the failure of another Member to carry ou t its obligations, may resort to the dispute
settlement procedures of Article XXIII. Th e United States considers that a benefit
accruing to it under GATT 1994 was nullified or impaired as a result of India's
alleged failure to carry out its obligations regarding balance of payments restrictions
under Article XVIII:B of the GATT 1994. Therefore, the United States was entitled
to have recourse to the dispute settlement procedures of Article XXIII with regard to
the dispute."
4.157 Likewise, the United States is entitled to have recourse to the dispute settlement procedures of
Article XXIII and the DSU with respect to Mexi co's failure to carry out its obligations under
Article III of the GATT. For this reason, and ot hers mentioned, the Panel should deny Mexico's
request for it to decline jurisdiction in this dispute.
E. O
PENING STATEMENT OF MEXICO AT THE FIRST MEETING OF THE PANEL
1. Introduction
4.158 The United States' claims raise a question of singular complexity and significance:
(a) Mexico and the United States established a particular regime for bilateral trade in
sweeteners, mainly sugar and HFCS.

 (b) These products are substitutes for each othe r in certain uses and, thus, compete in an
important segment of the Mexican market.

 (c) A dispute exists between the two countr ies with regard to the access of Mexican
sugar to the United States market. Mexico considers that, in accordance with
NAFTA, it has the right to export all of its sugar surpluses; the United States
considers that Mexico has the right to e xport a lesser amount and, since the United
States controls imports of Mexican sugar in to its market, it has limited the amount of
sugar that can gain access to that market through the allocation of import quotas.

 (d) Mexican sugar surpluses depend on sugar and HFCS production in Mexico as well as
Mexican HFCS imports from the United States, so with regard to the consumption of
both products, the generation of sugar surpluses is, in part, dependent on HFCS
production and importation.

49 Appellate Body Report on India – Quantitative Restrictions para. 84; see also Panel Report on
Turkey – Textiles, paras. 9.15-9.17.

 (e) Consequently, Mexican HFCS production and imports, in addition to the United
States' restrictions on imports of Mexican sugar, has had a significant economic
impact on Mexico's sugar industry.

 (f) The NAFTA establishes a mechanism for resolving disputes related to the
interpretation and application of the treaty or in circumstances in which one of the
Parties considers that a measure of the other Party is or could be inconsistent with the
Treaty's provisions.

 (g) Mexico activated the dispute settlement mechanism and request ed the establishment
of an arbitral panel to resolve the dis pute relating to Mexican sugar exports. The
United States has refused to submit to this mechanism.

 (h) Mexico has also been seeking a negotiate d solution of the dispute, but these efforts
have been fruitless as well.

4.159 Mexico considers that in these extraordinary circumstances it has the right to protect its
interests. Indeed, the Mexican measures at issue in this dispute cannot be understood without bearing
in mind that they were implemented in response to unilateral restrictions imposed by the United States
on Mexican sugar imports, in addition to its refu sal to submit to the NAFTA dispute settlement
mechanism, and the inability to achieve a solution through other means.
4.160 In submitting this claim in the framework of the WTO, the United States apparently believes
that a WTO Member must simply suffer the economic and social distress caused by another Member's
intransigence; this appears to constitute a depart ure from the United States' long-held position. As
discussed in Mexico's first written submission, the Un ited States has in the past claimed the right to
take unilateral action when anot her State impedes the operation of a treaty's dispute settlement
mechanism.
4.161 In the light of the United States' previously st ated position, let us consider what the United
States would have done if it was Mexico that ha d vetoed the United States' attempt to have a
legitimate NAFTA grievance resolved. Would it have stood idly by if its most important agricultural
sector experienced a crisis as a result of Mexico's re fusal to liberalize its import restrictions? It does
not seem likely. Likewise, Mexico could not afford not to respond to unilateral measures and simply
let its agriculture suffer the consequences of United States restrictions.
4.162 Mexico had to act to rebalance the situation, to return to the status quo ante.
4.163 Article 3.7 of the Dispute Settlement Understa nding (DSU) stresses two key points: "Before
bringing a case, a Member shall exercise its j udgement as to whether action under these procedures
would be fruitful ". In addition, the "aim of the dispute settlement mechanism is to secure a positive
solution to a dispute ". In Mexico's view, the United States' complaint clearly fails to meet both of
these requirements. It is obvious that by any objec tive standard, the United States' claim is aimed at
forcing all of the adjustments in NAFTA sweeteners trade onto Mexico. Now that the Panel is more
fully informed of the history of this dispute, it can see for itself that by presenting a "slice" of the
dispute to the WTO, it is evident that the United States has not exercised the judgement required by
Article 3.7 of the DSU.
4.164 Nor for that matter will this proceeding "secure a positive solution to the dispute". Mexico
attaches the greatest importance to the WTO and to the DSU, but it would like to state, with the
utmost respect that, whether or not the Panel de termines that the IEPS tax is inconsistent with
Article III of GATT 1994 or is not covered by the Article XX exceptions, there will be no positive

solution to this dispute, and there cannot be one until all the issues of importance to both sides are
comprehensively resolved.
4.165 It is for that reason that Mexico urges the Pane l to decline to exercise jurisdiction since there
is another forum available to both parties where the dispute can be heard in its entirety in light of all
of the facts and all of the relevant legal right s and obligations. Rather than seeking to avoid
submission to the settlement of the complaint file d by the United States, Mexico is looking for the
appropriate forum to resolve the existing disput e between the two countries in a comprehensive
manner.
4.166 Mexico also again invites the Panel to consider its status as a developing country and, since
the sugar industry is a key element of its rural ec onomy, to take into account the real economic and
social consequences of this dispute for the Mexican rural sector.
4.167 In this submission, Mexico will address four point s. First, it will begin by demonstrating that
the IEPS tax is part of, and inseparable from, a l ong-standing dispute arising under the NAFTA. This
is particularly important given that the United States' first written submission does not contain a single
word in this regard.
4.168 The United States has also ignored other crucial facts, including its own acts and omissions in
the events that gave rise to the m easures at issue and the adverse impact of its restrictions on imports
of Mexican sugar on a particularly sensitive sector of the Mexican economy. The serious problems of
the Mexican sugar industry are real and have been aggravated by the United States' unilateral decision
to limit Mexico's ability to export sugar surpluses to its market.
4.169 Mexico insists that the Panel must take these impor tant facts into consideration. In the light
of all the relevant facts, it is clear that Mexico enacted the IEPS tax as an absolutely last resort.
4.170 Second, Mexico will address the basis for its re quest that the Panel decline to exercise its
jurisdiction. Mexico recognizes that its request fo r a preliminary ruling is unusual, but submits that
this Panel has the authority to accept it, and should do so given the exceptional nature of this dispute.
4.171 Third, Mexico will refer to its arguments to th e effect that, if the Panel decides to make
findings on the merits of the dispute, it should find that the measures at issue are justified under
Article XX(d) of the GATT 1994.
4.172 Finally, Mexico will offer some brief preliminary remarks on certain issues raised by the
European Communities in its third party submission.
2. The origin of the IEPS tax and the importance for providing relief for the Mexican
sugar industry
4.173 Mexico describes the sugar industry's importance in paragraphs 15 to 26 of its first written
submission, where Mexico also explains that the viability of the sugar industry constitutes a political
and social imperative. The Mexican industry is characterized by certain structural problems which the
government cannot ignore. For example, sugarcane is grown on thousands of small plots and the
farmers depend on the proximity of a sugar mill to sell their crop. The sugar milling companies have
typically encountered financial problems as a resu lt of the substantial debts incurred when they
acquired the mills in Mexico's privatization process during the 1990s as well due to low sales
margins. This situation has forced the Mexican gov ernment to intervene in di fferent ways to prevent
bankruptcies which would have had immediate adver se consequences for the sugarcane growers that
supply the mills.

4.174 Simply put, it remains a great challenge for Mexico to ensure the viability of the sugar milling
companies and to promote a higher living standard for the sugarcane growers, one of the poorest
sectors in the country. For obvious reasons, the fina ncial situation of the sugar industry is a major
concern for the Mexican government.
4.175 Moreover, it is no secret that the world suga r industry is one of the most economically
distorted and that government intervention is widesp read in this sector. Governments frequently
intervene to support the prices of agricultural producers (i.e. of the producers of sugarcane or sugar
beet). This automatically makes substitute produc ts, for example HFCS, more competitive in certain
market segments.
4.176 Countries that are net importers of swee teners can support domestic prices by, inter alia ,
limiting imports. However, in the six years leading up to the imposition of the IEPS tax, Mexico was
a net surplus producer: the production of sugar exceeded its consumption.
4.177 Low world market prices, the surplus on the Me xican market aggravated by the displacement
of sugar by HFCS and the lack of access to the United States market have made things difficult for the
industry. While the Mexican Government has made great efforts to improve the situation, it has
encountered considerable difficulties.
4.178 In the recent final award made by the arbitral panel established under NAFTA Chapter Eleven
in GAMI Investments, Inc. v. The Go vernment of the United Mexican States
50 these facts were
discussed. The members of the tribunal were Jan Paulsson, Michael Reisman, and Julio Lacarte
Muró, whom the Panel will know for his long-standi ng and distinguished work in the GATT and the
WTO, including his membership of the Appellate Body. The award, dated 15 November 2004,
contains findings of fact as to the very serious market conditions faced by the sugar mills from the
mid-1990s through 2002.
4.179 When the Panel reviews the award, it will see that the tribunal accepted many of the facts that
Mexico has asserted in its first written submission in this proceeding: the special historical
significance of sugar growing in Mexico, the la rge number of Mexican people who depend upon the
industry, the distortions in the world market, Mexico's efforts to assist the industry in its distress, the
lack of access to the United States market, and Mexico's attempt to resolve the matter under NAFTA's
general dispute settlement procedur es (see in this regard, paragraphs 45-52, 67, 77, and 78). The
Panel will also see that the tribunal found that Mexico's rebalancing of market conditions dramatically
improved its sugar industry's situation.
4.180 There is no question that the fact that Mexico was prevented from exporting its surplus sugar
to the United States exacerbated the serious problems that the Mexican sugar industry faced
throughout the relevant period. The Government of Mexico could not ignore the substantial economic
damage caused as a result of the United States' failure to open up its market as expected.
4.181 In presenting its case, the United States also creates a false impression regarding the intent
behind Mexico's measures. It is important that the record be set straight. To cite just a few examples:
 – At the outset of its first written submission, the United States asserts that the Mexican
sugar industry and its supporte rs in Congress wished to prevent the displacement of
sugar by HFCS in its soft drink market a nd implies that they were motivated merely
by a protectionist intent. This gives th e impression that the Mexican government is
against the use of HFCS under any circumst ances, which is simply incorrect. The
Mexican government's real and urgent concer n is not that substantial quantities of

50 Exhibit MEX-30.

HFCS might displace Mexican sugar from a traditionally important segment of the
domestic sugar market; rather it is that su ch a displacement would greatly contribute
to the generation and growth of sugar surpluses in Mexico, as long as the United
States maintained restrictions on those surp luses' entry into its market to protect its
own industry, leaving the impact to be absorbed entirely by the Mexican sugar
market. It should not be forgotten that this was precisely the original concern of the
United States after the signature of the NAFTA and that motivated its request for
clarification through an exchange of letters between the two governments: the United
States' concern then was that HFCS imports from the United States would generate
surpluses which, if exported to the United States, would unbalance its market. The
enactment of the measure at issue was inte nded to restore equilibrium. Regarding the
United States' argument that the measure has a solely protectionist intent, Mexico will
refer the Panel to the statement by the United States Department of Agriculture
quoted in paragraph 61 of Mexico's first submission: "… Basically, the Mexican
sugar industry is not against United States HF CS imports into Mexico; what they
want is to gain access for more than the 25,000 MT of sugar currently allowed under
the TRQ for Mexico. With the high level s of imported HFCS and higher levels of
sugar production, the sugar industry claims there is a danger of closing of 15 to 20
mills, resulting in layoff of about 100,000 workers ." These are the words of the
United States, not Mexico.

 – The United States also implies in its wr itten submission that Mexico's decision to
impose the IEPS tax is permanent, motivated by a firm desire to stop imports of
HFCS and to terminate the use of HFCS in soft drinks and syrups. This is not so.
Mexico's measure is a temporary response to the acts and omissions of the United
States and, as Mexico has explained, the aim is to rebalance the situation between
Mexico and the United States pending a comprehensive resolution.

 – According to the United States, the purpose of the IEPS tax is simply to protect the
Mexican sugar producers from import competition. Again, this characterization is
also inaccurate because it ignores the leg itimate objective behind the measure at
issue. The United States knows perfectly well why the Mexican Congress acted as it
did.

4.182 Before turning to its legal arguments, Mexico urges the Panel not to lose sight of the great
difficulties that Mexico faces in addressing the problems of its sugar industry because of the
extraordinary circumstances resulting from the Unite d States' refusal to address Mexico's market
access complaints under the NAFTA. It would simply not be equitable to reward the United States
for actions that undermine the NAFTA's dispute settlement process.
3. Mexico's request for a preliminary ruling
4.183 Mexico set out the legal basis for its request th at the Panel decline to exercise its jurisdiction
in paragraphs 93 to 103 of its firs t written submission. In this stat ement, it will emphasize a few key
points.
4.184 First, Mexico wishes to make clear that it do es not contest that the Panel has prima facie
jurisdiction to examine the United States' claims under Ar ticle III of the GATT 1994. However, the
mere conclusion that the Panel has substantive ju risdiction to hear the case brought by the United
States does not exhaust all issues relevant to the Panel's competence in this dispute.
4.185 The reason is that even though the substantiv e jurisdiction of any international court or
tribunal may be granted explicitly by treaty, once su ch a forum has been seized of a specific matter, it

has certain implied jurisdictional powers that derive from its nature as an adjudicative body. Some
elements of this incidental jurisdiction include the power to:
 – Interpret the parties' submissions to "isola te the real issue in the case and to identify
the object of the claim"51;

 – determine whether it has substantive jurisd iction to settle a claim or any aspect of it
(this is sometimes referred to as the principle of jurisdiction over jurisdiction);

 – decide all matters linked to the exercise of substantive jurisdiction that are inherent in
the adjudicative function (i.e., decide cl aims under rules on the burden of proof, good
faith, estoppel, due process, treatment of confidential information, etc.);

 – apply the principle of "judicial economy", referred to by Mexico in its first written
submission;

 – and, crucially in this case, the power to decide whether it should refrain from
exercising its validly established substantive jurisdiction.

4.186 A review of WTO jurisprudence also indicates that WTO panels and the Appellate Body have
implied or incidental jurisdictional powers. For example, in US – 1916 Act , the Appellate Body
explicitly confirmed that a WTO panel can determine whether it has substantive jurisdiction to decide
a matter. Specifically, the Appellate Body re ferred to the "widely accepted rule that an international
tribunal is entitled to consider the issue of its own ju risdiction on its own initiative, and to satisfy
itself that it has jurisdiction in any case that comes before it".
52
4.187 In other instances, WTO panels have relied on the implied juri sdiction to rule on matters
inherent in the adjudicative function on which the DSU or other WTO covered agreements are silent.
In US – Wool Shirts and Blouses, the Appellate Body found that "the party who asserts a fact, whether
the claimant or the respondent, is responsible for providing proof thereof" and the "burden of proof
rests upon the party, whether complaining or defend ing, who asserts the affirmative of a particular
claim or defence".53 The Appellate Body did so largely b ecause these rules have been "generally and
consistently accepted and applied" by " various international tribunals , including the International
Court of Justice."54
4.188 Mexico recognizes that there is no WTO precedent in which a panel has declined to exercise
its jurisdiction over all of the claims made by a Me mber. Mexico is not arguing that the Panel could
decline to exercise its jurisdiction solely on the basis of the notion of "judicial economy", contrary to
what is suggested in the EC's third party submission.
4.189 In its first written submission, Mexico referred to the principle of "judicial economy" as an
example of situations where WTO panels have refrained from exercising validly established
substantive jurisdiction over certain claims brought before them. In Mexico's view, this example
illustrates that in spite of the apparent requirement of Article 7.2 of the DSU, which stipulates that
"[p]anels shall address the relevant provisions in any covered agreement or agreements cited by the
parties to the dispute", WTO panels can decide not to address certain claims. In the light of this
example and others already mentioned, there can be no question that WTO panels have an implicit or
inherent jurisdiction.

51 See Nuclear Tests (Australia v. France; New Zealand v. France), 1974 ICJ Reports 253, page 262.
52 Appellate Body Report on US – 1916 Act, para. 54 and footnote 30 (emphasis added).
53 Appellate Body Report on US – Wool Shirts and Blouses, p. 14, DSR 1997:I, 323, at 335.
54 Id. (emphasis added)

4.190 Mexico believes that such jurisdiction includes the power to decline to exercise jurisdiction in
the extraordinary circumstances of th is case since there is an availabl e forum for both parties to solve
the dispute in a comprehensive manner. Mexico's request is not simply that the Panel decline its
jurisdiction, but that it decline it in favour of that forum.
4.191 Mexico's request is compatible with the obj ective of the WTO dispute settlement mechanism
to "secure a positive solution to a dispute". In th is case, the underlying difference is broader than
submitted by the United States before the DSB.
4.192 As a final point. Mexico wishes to make clear that it is not arguing that the Panel's power to
refrain from exercising jurisdiction should be used liberally. However, this case presents exceptional
circumstances, that is to say, a broader dispute exists, as recognized by both parties, the United States
and Mexico, but the United States has frustrated the Mexican right to have recourse to the appropriate
dispute settlement mechanism in order to resolve its grievance.
4.193 In its submission, the European Communities pointed out that in the Argentina – Poultry Anti-
Dumping Duties case a WTO panel considered the dispute despite the fact that the same measures had
previously been the subject of dispute settlement under Mercosur. Nonetheless, in Mexico's view,
Argentina – Poultry Anti-Dumping Duties , differs from this case in various relevant respects and
cannot be used as a precedent.
4.194 In Mexico's opinion, it would be not appropriate under the circumstances of this case for the
Panel to exercise its substantive jurisdiction.
4. Mexico's defence under Article XX(d) of the GATT 1994
4.195 Should the Panel decide to exercise its jurisd iction and find that the measures at issue are
inconsistent with Article III:4 of the GATT 1994, Mexico believes that it should find them justified
under Article XX(d). In paragraphs 115 to 138 of its first written submission, Mexico explains that
the measures at issue meet all the requirements of Article XX(d).
4.196 Mexico will respond to the United States' argu ments concerning Article XX(d) in its second
written submission. At this point, Mexico would simply like to make a couple of observations.
4.197 In paragraph 38 of its submission, the European Communities points out that the reference to
"laws or regulations" must be to laws or regulations applicable in the internal legal order of the WTO
Member in question. The European Communitie s does not cite any previous GATT or WTO
jurisprudence in support of its contention. Indeed , it could not do so because the unusual facts of this
case have not previously been addressed in GATT or WTO dispute settlement proceedings.
4.198 While it is true that Article XX(d) contains an illustrative list of laws, compliance with which
could give rise to measures otherwise inconsistent with the GATT, the list is illustrative and not
exhaustive and it cannot be concluded that it excl udes international treaties. Neither can it be
concluded that GATT negotiators had the intention of excluding international treaties. There is no
reason in principle why the term "laws" should exclude international treaties.
4.199 Paragraph (d) of Article XX does not refer to measures "necessary to secure compliance with
internal laws or regulations" or "[measures] necessary to secure compliance with laws or regulations
of a Member's internal legal order " as suggested by the reading propo sed by the EC. The Panel will

observe that the rules of treaty interpretation "neith er require nor condone the imputation into a treaty
of words that are not there".55
4.200 Nothing in the text of the article compels the restrictive interpretation urged by the European
Communities. In light of the rapid development of international law and treaty-making in the last
decade, why in principle should international treaties be excluded?
4.201 Mexico has done no more than try to induce the United States to comply with its NAFTA
obligations and to submit to dispute settlement under the NAFTA. The reco rd demonstrates that
Mexico has at all times sought to resolve the dispute through consultation, negotiation, and dispute
settlement mechanisms. Nonetheless, there comes a ti me when it must be recognized that all avenues
for international cooperation have b een exhausted and a State may then resort to its own devices. It
was not until all other means had failed that Mexi co took the measures to which objection has now
been made. Mexico, nevertheless, has not cl osed the door against finding a solution through
cooperation, and even since adopting the measur e, it has continued with consultations and
negotiations, although these have failed to yield results.
4.202 As a matter of policy, if Mexico's defence we re accepted, there would be no risk of trade
restrictive measures that were not tied to bona fide efforts to resolve disputes being successfully
justified under Article XX(d).
5. Response to the European Communities' third party submission
4.203 Mexico has read the European Communities' third party submission with interest. Mexico
has already addressed various specific points made by the European Communities, and it would now
like to turn to certain other remarks made in that submission with which Mexico agrees:
 – In paragraph 20, the European Communities points out that the function of the Panel
is to make findings in the light of the provi sions of the covered agreements. It then
states that this does not mean that the Panel cannot take into account other provisions
of international law, when such provisions ar e relevant to the dispute before it. It
points out that the Appellate Body has confirmed that the WTO Agreements are not
to be read in "clinical isolation" from public international law. The European
Communities expresses its view that it is ther efore not excluded that applicable rules
of international law may also include b ilateral or multilateral agreements between
Members, when such rules are relevant for settling a dispute before a panel.

 Mexico agrees with the European Co mmunities' submission in this regard.

 – At paragraph 21, the European Comm unities notes that "Mexico has so far not
invoked any specific provision of NAFTA or ge neral rules of public international law
in its defence against the claims of the United States" and that the Panel "may
therefore not need to address the comple x question of the relationship between the
WTO agreements and other bilateral or multilateral agreements".

 This observation is correct.

 – Mexico should point out, however, that it considers that not only must the WTO
agreements be interpreted in accordance w ith the rules of customary international
law, but that these rules, in general, con tinue to operate within the context of the
WTO and other obligations under Members' regional trade agreements. When, due to

55 Report of the Appellate Body on India – Patents (US), para. 45.

a State's conduct, the dispute settlement me chanisms of such agreements fail to
operate as foreseen, the affected State must be allowed to take action under
customary international law.

 However, there are three reasons why Mexico has so far not referred to such rights:

4.204 The first reason is that Mexico considers that its measure is justifie d under Article XX(d) of
GATT 1994.
4.205 Secondly, Mexico also wishes to see the United States' response to its first submission. In
particular, Mexico would like to know whether th e United States continues to adhere to the view
expressed in the quotation in paragraph 126 of Mexico's first written submission:
"Wherever it could the United States would challenge unfair practices under the
dispute settlement provisions of the Genera l Agreement or the Tokyo Round Codes,
but where other contracting parties prevented or impeded that process or blocked
efforts to ensure that their practices we re covered by multilateral disciplines, the
United States would act to protect its inter ests. If such an action was considered
unilateral it should be nevertheless recogni zed as perfectly justifiable, responsive
action necessitated by the failure of bila teral or multilateral efforts to address a
problem."
56
4.206 Mexico's third concern about invoking its right s at general international law in this WTO
proceeding is that this Panel does not have before it all the facts and relevant legal issues. Mexico
recognizes that a WTO panel has jurisdiction only over the covered agreements; that it cannot take
jurisdiction over issues raised under the NAFTA. In such circumstances, given the prospect of
parallel international proceedings in which substantial monetary damages are being claimed against it,
Mexico cannot, without having all the relevant facts and obligations before it, run the risk of its
defence under international law being prejudiced in these other proceedings.
4.207 The Panel has only been presented with a "slice" of the dispute, that "slice" which the United
States considers might be to its advantage to present; this is why Mexico has lodged its preliminary
jurisdictional objection.
4.208 Mexico wishes to draw the attention of the Pa nel to one important point in this regard:
assuming arguendo that the United States demonstrated that th e tax at issue violated Article III of the
GATT, there is a real prospect that another intern ational tribunal might reach a contrary finding with
regard to the identical provision incorporated in NAFTA Article 301. Mexico believes that the United
States and the Panel should ponder how possible conf licting decisions on Article III could "secure a
positive solution" to the dispute.
4.209 However, Mexico believes that its measures are, in any event, justified under international
law.
6. Conclusions
4.210 For the reasons set out in Mexico's first written submission and those which it has put forward
in this occasion, Mexico requests the Panel to declin e to exercise its jurisdiction in these proceedings.
Should the Panel decide to reject Mexico's request for a preliminary ruling, Mexico requests that the
Panel find that Mexico's measures are justified under Article XX(d) of the GATT 1994.

56 GATT document C/163 of 16 March 1989, page 4. Exhibit MEX-29.

F. CLOSING STATEMENT OF THE UNITED STATES AT THE FIRST MEETING OF THE PANEL
4.211 As discussed in some detail, the United States has established a prima facie case that Mexico's
tax on HFCS and soft drinks and syrups sweetened with HFCS is inconsistent with Mexico's
obligations under Articles III:2 and III:4 of th e GATT 1994. In the opening session, Mexico
confirmed for the Panel that it has not rebutted that case, and does not intend to rebut that case in the
context of these proceedings. While the Panel must itself confirm that the legal requirements for a
breach of Article III exist, the United States is conf ident that the prima facie case established in its
written submission and confirmed by its remarks in the opening session will enable the Panel to do
that.
4.212 This is in stark contrast to the two bases on wh ich Mexico has decided to defend its breach of
Article III: its request for the Panel to decline juri sdiction and its Article XX(d) defence. Mexico has
not met its burden of proof with respect to either of these bases. Rather than reiterate the points
discussed in this regard in its opening statement, the United States will focus its closing remarks on a
couple of admissions made or clarified by Mexico's oral statement and responses to questions.
4.213 First, with regard to Mexico's request for the Panel to decline jurisdiction over this dispute,
Mexico admits that its request finds no basis in the text of the DSU or elsewhere in the WTO
Agreement. Instead, Mexico asserts that some undefi ned principle of international law which "is not
written down" overrides the explicit text of the DSU and the Panel's terms of reference. This is
simply not credible.
4.214 Second, with respect to Article XX(d), Mexico admi ts that it is not aware of any past panel or
Appellate Body report nor any statements in th e negotiating history to support its novel contention
that the words "laws or regulations" as used in Article XX(d) actually mean – as was framed in the
opening session by the Chairman of the Panel – "another Member's oblig ations under a non-WTO
agreement." This is in addition to the fact that Me xico is unable to point to any textual basis in the
GATT or elsewhere in the WTO Agreement to suppor t its contention. However, because Mexico as
the party asserting this defence bears the burden of proving it, it is up to Mexico to come forward with
the factual evidence and legal arguments in support of its claim. Such legal and factual support must
arise from something more than the mere absence of a prior WTO finding or any negotiating history
on the subject.
4.215 Having not established that another Member's obligations under an international agreement
are "laws or regulations" under Article XX(d), the Panel need not reach the issue of whether Mexico's
tax "secures compliance" or is "necessary." Neverthe less, the United States would point out Mexico's
rather flexible use of the word "secure" in its responses to questions posed by the Panel in the opening
session. Mexico repeatedly referred to the tax as aimed at "inducing" United States compliance with
its alleged NAFTA obligations. This suggests to the United States that Mexico also implicitly admits
that its tax cannot in fact secure United States co mpliance with alleged NAFTA obligations; the most
that it can hope is that its tax encourages Un ited States compliance with those obligations by
punishing the United States with a breach of the obl igations Mexico owes the United States under the
GATT.
4.216 In this connection, the United States also notes Mexico's candid response to the question
posed by the United States as to whether Mexico's tax applies to imports of HFCS from just the
United States or from other WTO Members as well. In that response, Mexico confirmed that the tax
applies to HFCS imports from any WTO Member. The United States finds it difficult that Mexico's
tax could be necessary to secure United States comp liance with the NAFTA when the tax penalizes
not just HFCS of United States origin, but HFCS from all other WTO Members.

4.217 Much more could be said about Mexico's incorre ct claims with respect to its Article XX(d)
defence as well as its request for the Panel to decline ju risdiction. However, in the interest of brevity,
the United States will defer those points to its second submission.
4.218 Before closing, however, the United States would like to comment more broadly on the
sweetener dispute with respect to the provisions of the NAFTA. The United States has made clear its
view that that other matter is not relevant to this cu rrent proceeding. It is the United States' firm view
that it has been acting in full conformity with its obligations regarding sugar under the NAFTA. It has
a dispute with Mexico over the precise terms of t hose NAFTA obligations. Mexico has described its
efforts to resolve that other matter and its frustra tion over the fact that, that issue has not been
resolved to date. The Panel should understand that the United States is equally dedicated to resolving
that other matter and shares Mexico's disappointment that it has not been able to reach a mutually
satisfactory resolution. As Mexico noted in its opening statement, dialogue and negotiations on the
NAFTA issue have continued, most recently among sweetener producers in both countries. The
United States is before the WTO to resolve a WT O dispute over HFCS, but it has no less interest in
resolving the NAFTA sugar issue in the appropriate forum.
4.219 Mexico has presented the Panel with a narrative that describes some of the complexities in the
sugar case. There are many more that could be presented and that would uphold the United States
view of the matter. The point is that this is not the place where that issue can be resolved. This
dispute is about Mexico's commitments to WTO Members under the covered agreements, and Mexico
has pointed to nothing in the text of those cove red agreements that bars the United States from
recourse under WTO dispute settlement.
G. C
LOSING STATEMENT OF MEXICO AT THE FIRST MEETING OF THE PANEL
4.220 Mexico would like to confine itself to the following subjects:
4.221 Firstly, on the subject of judicial economy, Mexi co referred in detail in its opening statement
to the basis for its request that the Panel decline to exercise its ju risdiction, and explained why the
Panel is entitled to do so. Unfortunately, the th ird parties presented their arguments during their
session with the Panel without having had the benefit of Mexico's arguments in that respect. Mexico
would therefore simply like to repeat that it is not asking the Panel to decline its jurisdiction for
reasons of judicial economy. This is merely an ex ample of the implied or incidental jurisdiction that
the Panel has. Mexico would like to refer the Pa nel to the arguments on the subject presented in
Mexico's opening statement.
4.222 Secondly, Mexico would like to refer to the issue of whether or not Article XX(d) of the
GATT 1994 excludes international treaties. In this connection, Mexico would like to refer the Panel
to the argument made by the Government of Gu atemala in the third party session concerning the
importance of regional trade agreements in the c ontext of the multilateral trading system, and the
fundamental role played by the dispute settlement mechanisms provided for under those agreements,
especially as regards the legal certainty that they bring to the multilateral trading system.
4.223 The United States confirmed that there was a disagreement between the two parties, Mexico
and the United States, regarding trade in sugar in the framework of the North American Free Trade
Agreement (NAFTA). The United States confirme d the validity of Mexico's request for the
establishment of a NAFTA Chapter XX Arbitral Pa nel, and confirmed that the dispute was still
pending – in spite of the fact that the United States Government, more specifically the Office of the
United States Trade Representative, removed it fro m its official website, oddly enough just before
bringing this dispute before the WTO. The United States also stated that it was unfortunate that to
date, more than four years after Mexico requested the establishment of an arbitral panel and more than
six years after the NAFTA Chapter XX Dispute Settlement Mechanism was activated, it had not been

possible to settle the dispute either through cons ultations and negotiations or through the dispute
settlement mechanism. This is because the United States has thus far blocked Mexico's request to
establish an arbitral panel. To date, the NAFTA arbitral panel has not been composed because the
United States has not appointed panellists, nor has it agreed on the appointment of a chairperson.
4.224 The United States contends that the Government acted in full conformity with the NAFTA
provisions. Mexico would simply like to point out th at this is no more than an affirmation by the
legal representative of the United States, but that the only evidence pertaining to this issue in the
record is the evidence that Mexico supplied. Th e only evidence of the in effectiveness of the NAFTA
dispute settlement mechanism, due to the United States' intransigence in refusing to appoint panellists,
is the evidence provided by Mexico. Indeed, not on ly did the United States fail to supply evidence to
refute Mexico's arguments in this respect, but it di d not even deny the evidence during the meeting.
Mexico responded to the United States' statement (i n reply to a question from the Panel) that a
NAFTA Chapter XX arbitral panel had been established, and to its attempt to convince the Panel that
the proceeding was under way. Mexico rejects the United States' assertion, pointing to a technical
difference between establishing an arbitral panel a nd composing that panel. It is an unquestionable
fact that today, more than four years after Me xico's request, the United States has not appointed
panellists and that there is no arbitral panel that can settle Mexico's grievances.
4.225 Mexico has met the burden of proof which, in the circumstances, satisfies all of the
requirements of Article XX(d) of the GATT 1994. It has supplied both the legal elements and the
evidence relating to the United States' measures.
H. SECOND WRITTEN SUBMISSION OF THE UNITED STATES
1. Introduction
4.226 In its first submission, the United States established a prima facie case that Mexico's tax
measures on HFCS and soft drinks and syrups sweetened with HFCS are inconsistent with
Articles III:2 and III:4 of the GATT 1994. Mexico has not rebutted that case and instead has
attempted to change the subject by asserting that the United States is in breach of its obligations under
the NAFTA and that this alleged breach justifies a request for the Panel to refuse to address the
Article III claims or, in the alternative, that this alleged breach justifies Mexico's tax measure under
Article XX(d) of the GATT 1994. The Panel has alread y rejected Mexico's request for it to decline to
address the United States Article III claims and the United States respectfully requests it to reject
likewise Mexico's Article XX(d) defence.
4.227 Mexico cannot, and does not, rely on the text of the GATT to support its Article XX(d)
defence. All Mexico is able to offer in support of its contentions that Ar ticle XX(d) covers another
Member's obligations under an international agreemen t is that neither a panel nor the Appellate Body
has ever rejected these specific contentions and that unspecified "principles of international law" exist
which override the ordinary meaning of the text of the WTO Agreement. There is no basis for this
argument, which is wholly contrary to the custom ary principles of treaty interpretation applicable
under Article 3.2 of the DSU.
4.228 United States obligations under the NAFTA are simply not an issue this Panel need ever reach
to resolve the matter before it; there is no basis for the Panel to conclude that "laws or regulations"
encompass another Member's obligations under an in ternational agreement. This conclusion can, and
should, be reached without ever considering th e meaning of various NAFTA provisions or the
obligations allegedly owed Mexico by the United States under the NAFTA.
4.229 Mexico's approach to this dispute has had the effect of narrowing the issues before the Panel
to (1) confirming that the United States has establishe d a prima facie case that Mexico's tax measures

are inconsistent with Articles III:2 and III:4 of the GATT 1994 and (2) examining the merits of
Mexico's contention that its tax measures are justified under Article XX(d) of the GATT 1994.
2. Mexico's tax measures are inconsistent with Article III of the GATT 1994
(a) Burden of proof
4.230 Mexico has indicated that the Panel should c onstrue its non-response to the United States
claims to mean that, once the Panel has satisfied itself that the United States has met its burden to
establish a prima facie case under Article III, Mexico does not object to the Panel proceeding on the
presumption that its tax measures are incompatible with Article III. The United States does not
disagree with this approach.
4.231 Confirmation that the United States has established a prima facie case of inconsistency in this
dispute should not be an arduous task. The Unite d States evidence is uncontested and in some
instances is confirmed by Mexico.
4.232 The Panel may find it useful to draw upon the panels' approach in US – Shrimp and Turkey –
Textiles, where the panels undertook a brief analysis c onfirming that the complaining party had made
its prima facie case and then proceeded to exam ine the defending party's affirmative defence.
Proceeding on the same basis in this dispute, the Panel should find the United States has met its
burden of proof and that Mexico's tax measures ar e in breach of its obligations under Articles III:2
and III:4 of the GATT 1994.
(b) Mexico's tax measures are inconsistent with Article III of the GATT 1994
4.233 As reviewed in the United States first submis sion, Mexico applies a 20 per cent tax on the
internal transfer and importation of soft drinks a nd syrups ("HFCS soft drink tax") and a 20 per cent
tax on the representation, brokerage, agency, consignm ent and distribution of soft drinks and syrups
("distribution tax"). Mexico further subjects the intern al transfer of soft drinks and syrups to certain
bookkeeping and reporting requirements ("reporting requirements"). Mexico exempts from these
taxes and reporting requirements transfers of soft drinks and syrups sweetened exclusively with cane
sugar. Thus, Mexico applies a 20 per cent tax on th e importation of soft drinks and syrups (regardless
of sweetener) and a 20 per cent tax on the internal transfer, as well as on the representation,
brokerage, agency, consignment and distribution, of soft drinks and syrups sweetened with any
sweetener other than cane sugar. Internal transfer s of soft drinks and syrups sweetened with any
sweetener other than cane sugar are further subject to the reporting requirements.
4.234 For the reasons outlined at greater length in pr evious submissions, Mexico's tax measures are
inconsistent with Article III of the GATT 1994. Fi rst, Mexico's HFCS soft drink and distribution
taxes are inconsistent with Article III:2 as a discriminatory tax on imported, non cane sugar
sweeteners for use in soft drinks and syrups. These non cane sugar sweeteners include HFCS, as
highlighted in the United States first submission, as well as beet sugar as addressed in more detail
below. The HFCS soft drink and distribution tax es are inconsistent with both the first and second
sentences of Article III:2. That said, the United States has focused its arguments under Article III:2
with respect to HFCS on the second sentence. As detailed below, the United States has focused its
arguments regarding beet sugar on the first sentence of Article III:2.
4.235 Second, Mexico's HFCS soft drink and distributi on taxes are inconsistent with Article III:2 of
the GATT 1994 as discriminatory taxes on imported soft drinks and syrups. When collected "at the
time or point of importation," Mexico's HFCS soft drink tax discriminates on its face against imports,
as only domestic transfers of soft drinks and syrups are subject to the cane sugar-only exemption.
When collected on subsequent internal transfers of imported soft drinks a nd syrups, Mexico's HFCS

soft drink and distribution taxes discriminate de facto against imported soft drinks and syrups made
with non-cane sugar sweeteners including HFCS and beet sugar.
4.236 Third, Mexico's HFCS soft drink and distributi on taxes are inconsistent with Article III:4 of
the GATT 1994 as a law affecting the internal sale and use of non cane sugar sweeteners including
HFCS and beet sugar. As discussed in the Unite d States responses to questions, to the extent a
measure that discriminates against imported product takes the form of dissimilar taxation affecting the
internal sale, offering for sale, purchase, transportation, distribution or use of the imported product,
that measure may breach both Articles III:2 and III:4 of the GATT 1994. This is the case with the
HFCS soft drink and distribution taxes as applied to non-cane sugar sweeteners.
4.237 Fourth, Mexico's reporting requirements are inc onsistent with Article III:4 of the GATT 1994
as requirements affecting the internal sale and use of non cane sugar sweeteners including HFCS and
beet sugar.
(i) Mexico's tax measures on non-cane sugar sweeteners are inconsistent with Article III:2 of the
GATT 1994
The United States has established a prima facie case that the HFCS soft drink and distribution
taxes are inconsistent with Article III:2, second sentence
4.238 The United States has met its prima facie burden of establishing that Mexico's HFCS soft
drink tax is inconsistent with the second sentence of Article III:2. Mexico's distribution tax is also
inconsistent with the second sentence of Article III:2 of the GATT 1994. The distribution tax
discriminates against HFCS for use in soft drinks and syrups in the same manner as the HFCS soft
drink tax.
4.239 Mexico has confirmed that HFCS and cane s ugar compete and are substitutes as sweeteners
for soft drinks and syrups. Mexico has also confirmed that it imposed the taxes to stop the
displacement of Mexican cane sugar by imported HFCS as a sweetener for soft drinks and syrups.
With respect to this latter admission and despite Mexi co's claim to the contrary, it is not possible to
reach any other conclusion than a measure designe d to stop the displacement of domestic production
by imported products is a measure to protect domest ic production. Because Mexico has not rebutted
the United States prima facie case, the United States r espectfully requests that th e Panel find that the
HFCS soft drink and distribution taxes as applied to HFCS for use in soft drinks and syrups are
inconsistent with Mexico's obligations under the second sentence of Article III:2 of the GATT 1994.
The HFCS soft drink and distribution taxes are inconsistent with Article III:2, first sentence,
with respect to beet sugar
4.240 Although the focus of United States argumentation in this dispute has been the discrimination
Mexico's tax measures impose on HFCS, and this rema ins the principal concern of the United States,
Mexico's HFCS soft drink and distribution taxes discriminate against all non-cane sugar sweeteners as
sweeteners for soft drinks and syrups. These non-ca ne sugar sweeteners in clude not only HFCS but
also beet sugar.
4.241 Beet and cane sugar are "like" products. In its first submission, the United States explained
that in their refined form (the form required to produce soft drinks and syrups) beet sugar is
"chemically and functionally identical" to cane sugar. Beet and cane sugar are both "a form of
sucrose" with the same molecular structure. In fact, cane and beet sugar are equally 99.95 per cent
sucrose with the remaining 0.05 per cent consisting of trace minerals and pr oteins. Cane and beet
sugar may be used for identical purposes, includi ng as a sweetener for soft drinks and syrups.
Because they are virtually identical with respect to physical properties and end-uses, they are

distributed in the same manner and consumers (in th is case, soft drink and syrup producers) use them
interchangeably. For example, as the EC mentioned in its third party statement to the Panel, European
soft drink producers sweeten their products with b eet sugar. Beet and cane sugar are equally
classified under HS heading 1701. Although "like" products need not be identical products, cane and
beet sugar are nearly that. Beet sugar is, thus, "like" cane sugar within the meaning of the first
sentence of Article III:2.
4.242 As was demonstrated for HFCS in the United Stat es first submission, the incidence of the tax
on beet sugar used as a sweetener for soft drinks a nd syrups is much greater than the nominal 20 per
cent tax on non-cane sugar sweetened soft drinks and syrups. With respect to beet sugar, the HFCS
soft drink and distributions taxes amount to nearly a 400 per cent tax on the use of beet sugar. A
nearly 400 per cent tax that is not applied to th e like domestic product is clearly a tax in "excess of"
within the meaning of GATT Article III:2, first sentence.
4.243 The application of the HFCS soft drink and distribution taxes to beet sugar – a nearly
identical product – highlights the truly protectionist purpose of Mexico's tax measures. In providing a
tax exemption for soft drinks and syrups sweetened only with cane sugar, which is almost exclusively
a domestic product in Mexico, but not for soft drinks and syrups sweetened with the nearly identical
sweetener, beet sugar, which is exclusively an im ported product, Mexico designed its tax measures to
protect domestic production.
4.244 Because beet and cane sugar are "like" products but only beet sugar when used as a sweetener
for soft drinks and syrups is subject to taxation, the HFCS soft drink and distribution taxes are
inconsistent with the first sentence of Article III:2 of the GATT 1994 as taxes applied on imports in
excess of those applied to like domestic products . Accordingly, the United States respectfully
requests that the Panel find the HFCS soft drink and distribution taxes inconsistent with Article III:2.
(ii) Mexico's tax measures on soft drinks and syrups are inconsistent with Article III:2 of the
GATT 1994
The United States has established a prima facie case that the HFCS soft drink and distribution
taxes with respect to soft drinks and syrups are inconsistent with Article III:2, first sentence
4.245 The United States has also established a prima f acie case that Mexico's HFCS soft drink and
distribution taxes are inconsistent with the first sen tence, or in the alterna tive, the second sentence of
Article III:2 of the GATT 1994 with respect to soft drinks and syrups sweetened with HFCS. The
United States has demonstrated that soft drinks and syrups sweetened with HFCS are "like" (or, with
respect to the second sentence clai m, "directly competitive or substitu table" with) soft drinks and
syrups sweetened with Mexican cane sugar. Th e United States has also demonstrated that by
providing an exemption from the HFCS soft drink and distribution taxes only for the internal transfer
of soft drinks and syrups sweetened exclusively with cane sugar, Mexico applies a tax to imported
soft drinks and syrups – which are nearly all sw eetened with non-cane sugar sweeteners – in "excess
of" that applied to the like domestic product. Based on these demonstrations, the United States has
established a prima facie case that Mexico's HFCS so ft drink and distribution taxes are inconsistent
with the first sentence of Article III:2.
4.246 The United States has further demonstrated that Mexico's taxation of soft drinks and syrups
made with non-cane sugar sweeteners is applied so as to afford protection to Mexican production of
soft drinks and syrups, which even before im position of Mexico's tax measures were largely
sweetened with cane sugar. Therefore, the Unite d States has also established a prima facie case of
inconsistency with the second sentence of Article III: 2 with respect to imported soft drinks and
syrups. Mexico has not rebutted this case nor the case with respect to soft drinks and syrups under the
first sentence of Article III:2. Accordingly, on the basis of th e United States prima facie case, the

United States respectfully requests that the Panel find the HFCS soft drink and distribution taxes with
respect to soft drinks and syrups are inconsistent with the first sentence, or in the alternative, the
second sentence, of Article III:2 of the GATT 1994.
The HFCS soft drink and distribution taxes are inconsistent with Article III:2, first sentence,
with respect to soft drinks and syrups sweetened with beet sugar
4.247 Mexico's soft drink and distribution taxes di scriminate against all non-cane sugar-sweetened
soft drinks and syrups. These non-cane sugar-sweetened soft drinks and syrups include not only soft
drinks and syrups sweetened with HFCS, but also those sweetened with beet sugar.
4.248 The discrimination against soft drinks and syrups sweetened with beet sugar, coupled with the
fact that these soft drinks and syrups are "like" those sweetened with cane sugar, renders the HFCS
soft drink and distribution taxes inconsistent with the first sentence of Article III:2 of the GATT 1994
with respect to beet sugar-sweetened soft drinks a nd syrups, just as it does for soft drinks and syrups
sweetened with HFCS.
4.249 As noted above, the United States explained in its first submission that beet and cane sugar
are "chemically and functionally identical" and may be used interchangeably as a sweetener for soft
drinks and syrups. As beet and cane sugar are virtually identical, it follows that soft drinks and syrups
sweetened with them are as well and, therefore, that soft drinks and syrups sweetened with beet sugar
are "like" those sweetened with cane sugar.
4.250 In addition, soft drinks and syrups sweetened with beet sugar are "like" soft drinks and syrups
sweetened with cane suga r because they share the same physical properties, end-uses, consumer
preferences and tariff classification. Specifically, each of the physical characteristics described in the
United States first submission with respect to HFCS- and cane sugar-sweetened soft drinks and syrups
equally apply with respect to soft drinks and syru ps sweetened with beet sugar. With respect to
chemical composition, as stated above, cane and b eet sugar are 99.95 per cent the same chemical
compound. The identity of the chemical make-up of soft drinks and syrups sweetened with cane
versus beet sugar is, therefore, even greater. To be exact, that would make beet sugar- and cane
sugar-sweetened soft drinks 99.99 per cent identical . Moreover, as noted in the United States first
submission, the ingredient label on a can of soda reads the same (both in Mexico and the United
States, as well as in Europe) regardless of whethe r it is sweetened with HFCS, beet sugar or cane
sugar.
4.251 Furthermore, although in the United States most regular soft drinks and syrups are sweetened
with HFCS and in Mexico with cane sugar, in the EC (as the EC mentioned in its third party
submission and statement to the Panel) soft drinks and syrups are sweetened with beet sugar. There is
no indication that consumers in Europe use soft dri nks and syrups sweetened with beet sugar for end-
uses that in any way differ from the end-uses for soft drinks and syrups in the United States or
Mexico. As discussed in the United States first submission, Coca-Cola, the world largest soft drink
producer attests that "[b]ecause th ere is no noticeable taste difference, bottlers have the option of
using either high fructose corn syrup (HFCS), beet sugar or cane sugar, depending on availability and
cost." Also as discussed in the United States first submission, United States soft drink and syrup
producers generically refer to the sweetener compone nt as "sugar", not cane or beet sugar or HFCS.
With respect to tariff classification, there is no separ ate classification for soft drinks and syrups based
on the type of sweetener used, as Mexico confirmed in its responses to the Panel's questions.
4.252 Although soft drinks and syrups sweetened with beet sugar are "like" soft drinks and syrups
sweetened with cane sugar, only the former is subject to a 20 per cent tax on its importation and
internal transfer (the HFCS soft drink tax) as well as on its distribution, representation, brokerage,
agency, and consignment (the distribution tax). As explained in the United States first submission, as

well as above, in Mexico soft drinks and syrups are largely sweetened with cane sugar. This was true
even before imposition of Mexico's discriminatory ta xes. Soft drinks and syrups produced in the
United States and elsewhere, however, are sweetened largely with non-cane sugar sweeteners. A 20
per cent tax applied to beet sugar-sweetened soft dri nks and syrups that is not applied to "like" cane
sugar-sweetened soft drinks is, therefore, a tax applied on imports from the United States and
elsewhere "in excess of" that applied to the like domestic product.
4.253 Because beet- and cane sugar-sweetened soft dr inks and syrups are "like" products, but only
beet sugar-sweetened soft drinks and syrups ar e subject to taxation, the HFCS soft drink and
distribution taxes are also inconsistent with th e first sentence of Article III:2 of the GATT 1994 as
taxes applied on imported beet sugar-sweetened soft drinks and syrups in excess of those applied to
like domestic soft drinks and syrups sweetened with cane sugar.
4.254 The United States notes that, in its responses to the Panel's questions, Mexico raised for the
first time that, due to an amendment made to th e IEPS during the Panel proceedings effective January
1, 2005, the HFCS soft drink tax allows the same tax exemption for importations of cane sugar-only
soft drinks and syrups as it does for their internal transfer. This fact, however, should not change the
Panel's analysis in this dispute. The 1 January 2 005 amendment to the HFCS soft drink tax is outside
the Panel's terms of reference. The Panel should, therefore, not take into account the 1 January 2005
amendment to the IEPS in evaluating the United States claims that Mexico's tax measures as
described in its request for a panel are inconsistent with Mexico's obligations under Article III of the
GATT 1994.
4.255 In any event, the amendm ent does not change the de facto discrimination that exists with
respect to the internal transfer and distribution of imported soft drinks and syrups sweetened with non-
cane sugar sweeteners. The 1 January 2005 amendmen t only affects importations of soft drinks and
syrups and, therefore, does not change the de facto discrimination that exists with respect to the
internal transfer and distribution of imported soft drinks and syrups sweetened with non-cane sugar
sweeteners.
The United States has established a prima facie ca se that Mexico's tax measures affecting the
use of HFCS are inconsistent with Article III:4 of the GATT 1994
4.256 In addition to being inconsistent with Article III:2, first and second sentences, of the GATT
1994, the United States has also established a prima facie case that Mexico's tax measures (HFCS soft
drink tax, distribution tax and re porting requirements) are inconsistent with Article III:4 as measures
affecting the use of HFCS as a sweetener for soft drinks and syrups. Mexico has not rebutted this
case. Therefore, on the basis of the United Stat es prima facie case, the United States respectfully
requests the Panel to find the HFCS soft drink an d distribution taxes and reporting requirements on
HFCS for soft drink and syrup use to be inconsistent with Article III:4 of the GATT 1994.
4.257 Mexico's HFCS soft drink and distributi on taxes and reporting requirements are also
inconsistent with Article III:4 of the GATT 1994 as a pplied to beet sugar. As stated above, cane and
beet sugar are "like" products within the meaning of the first sentence of Arti cle III:2. Indeed, beet
and cane sugar are nearly identical products. Furt her, the discrimination imposed on beet sugar by
Mexico's tax measures discriminate against beet s ugar just as they do HFCS by offering an advantage
on the use of cane sugar (which is almost exclus ively a domestic product) that it does not equally
offer on beet sugar (which is exclusively an im ported product). Specifically, Mexico's tax measures
provide a complete tax exemption for use of th e domestic product, cane sugar, while denying that
same exception to like imported products, whether HFCS or beet sugar. Mexico's HFCS soft drink
and distribution taxes and reporting re quirements are, therefore, also inconsistent with Article III:4 as
applied to beet sugar.

3. Mexico's tax measures are not justified under Article XX(d) of the GATT 1994
4.258 Mexico asserts that, even if its tax measures are inconsistent with Article III, they are
nevertheless justified as "necessary to secure compli ance" with United States obligations under the
NAFTA. Mexico contends that Article XX(d) of the GATT 1994 provides an exception for such
measures. Mexico is incorrect. Article XX(d) provides an exception for measures necessary to secure
compliance with "laws or regulations." It does not provide an exception for measures to secure
compliance with obligations under an international agreement. In arguing to the contrary, Mexico
attempts to construct an entirely new Article XX exception. This new exception would offer WTO
Members a free pass from their WTO obligations an y time a Member believes obligations owed it
under the WTO Agreement or any other international agreement have not been fulfilled. Such an
exception would fundamentally undermine the dis pute settlement system established in the WTO
Agreement and should be rejected.
4.259 The party who invokes Article XX(d) as an affi rmative defence bears the burden of proof
with respect to each element of that defence. T hus, in this dispute Mexico must establish and prove
that it has met each of the elements required for invocation of an Article XX(d) defence.
4.260 The elements required to invoke Article XX(d) are that the measure at issue must: (1) concern
compliance with "laws or regulations" which are not inconsistent with the GATT; (2) be designed to
"secure compliance" with such laws or regulations; and (3) be "necessary" to secure such compliance.
If these elements are met, the measure will be provi sionally justified under paragraph (d). However,
for an Article XX defence to be successful, the a pplication of the measure in question must also
comply with the chapeau to Article XX. Whet her the measure is provisionally justified under
paragraph (d) should be examined prior to consid ering whether the application of the measure is
consistent with the chapeau.
4.261 Mexico's tax measures do not qualify for an Article XX(d) defence. They are not
provisionally justified under paragraph (d) nor are they consistent with the requirements of the
chapeau. The failure of Mexico's Article XX(d) defen ce begins with the first step of the analysis as
its tax measures do not concern compliance with "l aws or regulations." The Panel may reject
Mexico's Article XX(d) defence on this basis alone and, for this reason, it need not examine further
whether Mexico's tax measures are "necessary to secur e compliance" or in keeping with the chapeau.
That said, for the sake of completeness, the Unite d States has provided an analysis of each of the
elements required to justify a measure under Article XX(d), including the elements of the chapeau.
(a) United States' obligations under the NAFTA are not "laws or regulations"
4.262 Mexico's argument that Article XX(d) provides a legal justification for the HFCS tax depends
on reading the phrase "laws or regulations" in Article XX(d) to include obligations under international
agreements. Such a reading would be contrary to th e text of Article XX(d), read in its context and in
light of the object and purpose of the GATT 1994.
4.263 As explained in the United States responses to the Panel's questions, the ordinary meaning of
"laws or regulations" is the domestic laws or regulations of a government. The phrase "laws or
regulations" is not defined as in cluding obligations under an intern ational agreement, which have a
different meaning.
4.264 This interpretation of the ordinary meaning of "laws or regulations" is supported by the
context in which the phrase "laws or regulations " appears – namely, Article XX of the GATT and
more broadly the GATT and the WTO Agreement as a whole. In particular, Article XX itself
distinguishes between "laws" and "regulations " on the one hand and "obligations" under an
international agreement on the other. Thus, wh ile Article XX(d) provides a defence for measures

necessary to secure compliance with "laws or regul ations," Article XX(h) provides a defence for
measures "undertaken in pursuance of obliga tions under any intergovernmental commodity
agreement." There would be no reason for the diffe rent phrasing had the drafters intended "law or
regulations" to mean the same thing as "obligatio ns under" an international agreement. Indeed,
reading "laws or regulations" to include obliga tions under "international agreements" would render
Article XX(h) redundant.
4.265 Other provisions of the GATT further suppor t the distinction between "laws" and
"regulations" on the one hand and "agreements" an d "obligations" on the other hand. The United
States cited several examples in its responses to th e Panel's questions. The United States emphasizes
that none of those examples supports Mexico's c ontention that the phrase "laws or regulations" in
Article XX(d) includes obligations under an intern ational agreement. To the contrary, the cited
examples reinforce that "laws or regulations" in th e context of Article XX(d) mean the domestic laws
and regulations of a government.
4.266 Further, variations on the phrase "laws or [and] regulations" appear many times in a number
of the WTO agreements, each time referring to domestic laws and regulations, not treaties. For
instance, Article XVI:4 of the Marrakesh Agreem ent Establishing the WTO provides that "[e]ach
Member shall ensure the conformity of its laws, regulations and administrative procedures with its
obligations as provided in the annexed Agreements."
4.267 Moreover, Article 23 of the DSU provides "[w]hen Members seek the redress of a violation of
obligations... under the covered agreem ents ... they shall have recourse to, and abide by, the rules and
procedures of this Understanding." Since the WT O Agreement is an international agreement,
Mexico's reading of Article XX(d) would author ize unilateral action by any Member to secure
compliance with another Member's obligations unde r the WTO Agreement. Such a result, however,
would be in clear conflict with Article 23, not to mention render it meaningless. Mexico's reading of
Article XX(d) would also render redundant Article 22 of the DSU, which prescribes rules for the
suspension of concessions, including seeking author ization to do so from the DSB. Mexico's
interpretation of Article XX(d), however, woul d permit suspension of concessions without DSB
authorization and without any requirement to adhere to the rules established in Article 22 of the DSU.
4.268 Mexico's reading of "laws or regulations" is not only incompatible with the ordinary meaning
of the term based on the customary rules of treaty interpretation, but has other far-reaching
consequences as well. The threat presented by Me xico's concept of Article XX(d) can best be
understood by exploring where such a use of Articl e XX(d) would lead. If "laws or regulations" are
read to include international agreements, then an y Member can invoke Article XX(d) as justification
for actions depriving others of their rights unde r the GATT to the exte nt needed to "secure
compliance" with any other international agreemen t. For example, Mexico's reading would also
authorize trade measures by any Member to coerce compliance by another Member with treaty-based
boundary claims or other international agreements.
4.269 Against the above, Mexico has offered little in support of its proposition that "laws or
regulations" may include obligations owed it under th e NAFTA or any other international agreement.
Mexico's point that "there are no GATT or WTO preced ents that reject Mexico's interpretation" only
highlights the fact that not a single WTO Member or GATT 1947 contracting party has advocated
such a position before a dispute settlement panel. In fact, every GATT or WTO dispute settlement
proceeding in which Article XX(d) has been invoke d, other than Mexico's in this dispute, has
involved a domestic law enforcing another domestic regime. In US – Shrimp , on which Mexico
repeatedly relies (including for its contention that Article XX(d) encompasses obligations under an
international agreement), the United States did not argue that its import ban was necessary to secure
enforcement of the Inter-American Convention on the Protection and Conservation of Sea Turtles.
Instead, it raised its Article XX defence under th e exception "relating to the conservation of

exhaustible natural resources," citing the Inter-A merican Convention as evidence that sea turtles
constituted an exhaustible natural resource and that its import ban was not arbitrary or unjustifiable
discrimination.
4.270 Moreover, Mexico appears to argue, on the one hand, that Article XX(d) must be "interpreted
in accordance with the customary rules of international law" but, on the other hand, must be
interpreted "with a view to the change[] in the international legal milieu that have occurred since
Article XX was drafted in 1947." The customary ru les of interpretation applicable in WTO dispute
settlement provide that the terms of a treaty are to be interpreted based on their ordinary meaning in
their context and in light of the treaty's object and purpose. Mexico makes no effort to interpret
Article XX(d) by reference to this fundamental ru le, and does not explain how or why its vague and
unsupported references to "changes in the international milieu" should affect the analysis under this
rule. Indeed, there is no basis for concluding that they should.
4.271 Mexico also offers that "laws or regulations " encompass obligations under an international
agreement because the Statute of the International C ourt of Justice "defines" "international law" to
include "international conventions." Mexico's reas oning is circular. Mexico has not established that
phrase "laws or regulations" as used in Article XX (d) means or includes "international law." As
explained above, "laws or regulations" mean the domestic laws or regula tions of a government. It is,
therefore, irrelevant whether international c onventions are included in the "definition" of
"international law." Moreover, there is a clear te xtual difference between "laws or regulations" and
"international law." For starters, one uses the singul ar "law" while the other uses the plural "laws."
While one may speak of international "law" in th e same sense as one speaks about "common law" or
the "law of the sea," international law is not ordinari ly used in the plural. For example, Article 3.2 of
the DSU provides that the dispute settlement system serves to clarify the provisions of the covered
agreements "in accordance with the customary rules of interpretation of public international law."
The difference in usage of "laws" versus "law" in the Spanish and French texts is even more striking.
4.272 Moreover, the fact that the United States may re fer to arguments raised in the context of
NAFTA proceedings as "legal" arguments does not make United States obligations under the NAFTA
"laws or regulations" under Article XX(d). Mexi co's argument merely assumes the conclusion that
"laws or regulations" include international agre ements, simply because international agreements
provide international legal obligations. The argument does not address the point, however, of whether
obligations – legal or otherwise – under an interna tional agreement are included "laws or regulations"
within the meaning of Article XX(d).
4.273 Finally, the United States is compelled to point out that, contrary to Mexico's suggestion in
response to question No. 25 of the Panel, the Unite d States has not conceded that NAFTA is a law.
Rather, as explained in the United States opening statement, while a Member may adopt domestic
laws in order to implement the terms of an inte rnational agreement, such as the NAFTA, obligations
owed that Member by another Member under the te rms of that agreement do not constitute "laws or
regulations" within the meaning of Article XX(d).
(b) Mexico's tax measures are not designed to "secure compliance"
4.274 Even if one could read "laws or regulations" to mean obligations owed another Member under
an international agreement, Mexico's tax measures are not designed to "secure compliance" within the
meaning of Article XX(d) of the GATT 1994.
4.275 Although Mexico claims to have imposed its ta x measures to secure or induce United States
compliance with the NAFTA, Mexico's position pr esupposes that the United States is not in
compliance with its NAFTA obligations. This positi on, however, is Mexico's own determination. To
be clear, it is the firm view of the United St ates that it is in full compliance with its NAFTA

obligations on market access for Mexican cane suga r. That Mexico disagrees on this point does not
convert its allegation that the United States has not complie d with its NAFTA obligations into a
breach of that agreement. Mexico's tax measure s cannot be designed to secure "compliance" with
obligations the United States does not have or with obligations it has already fulfilled.
4.276 Furthermore, as Mexico itself has confirmed, its tax measures apply to soft drinks and syrups
and non-cane sugar swee teners imported from any WTO Member, not just those from the United
States. At no point, however, has Mexico explained how taxing soft drinks and syrups in this manner
in any way contributes to United States complian ce with the NAFTA. Rather, regardless of the
source of the soft drinks and syrups or non-cane sugar sweeteners, a tax on their transfer or use
protects Mexico's own cane sugar industry.
(c) Mexico's tax measures are not "necessary"
4.277 Even assuming arguendo that Mexico's tax measures somehow contributed to NAFTA
compliance, they are not "necessary" to secure such compliance as required by Article XX(d).
4.278 In determining the necessity of a measure, the Appellate Body has characterized
Article XX(d) as involving a "process of weighing and balancing a series of factors which
prominently include [1] the contribution made by the compliance measure to the enforcement of the
law or regulation at issue, [2] the importance of th e common interests or values protected by that law
or regulation, and [3] the accompanying impact of the law or regulation on imports or exports."
Mexico's tax measures come up considerably short in this balance.
4.279 First, as reviewed above, Mexico's tax measu res do not contribute to enforcement of the
NAFTA and have done nothing to contribute to the resolution of the dispute the United States and
Mexico have over their obligations under NAFTA. S econd, with respect to the "common interests or
values" that Mexico's tax measures are designed to protect, these are nothing more than the interests
of Mexican sugar producers to be protected from competition from imported HFCS and other non-
cane sugar sweeteners. The protection of a domest ic industry from imports cannot be an "important"
interest in the context of Article XX.
4.280 Third, Mexico's tax measures have had a dev astating effect on imports. The first United
States submission explained, for example, that Mexi co's tax measures have so severely penalized the
use of imported HFCS, that since their enactment, Mexican imports of HFCS have fallen to less than
6 per cent of their pre-tax level and use of importe d HFCS as a sweetener soft drinks and syrups has
ceased. It is difficult to understand how this ha rm imposed on HFCS and soft drinks and syrups
sweetened with HFCS is designe d to "secure compliance" with unrelated provisions under the
NAFTA on market access for sugar.
4.281 In analysing the extent to which a measure is "necessary," prior panels have also considered
whether an alternative measure that is not incons istent with the GATT is reasonably available.
Mexico had any number of alternative measures re asonably available to it – short of breaching its
national treatment obligations – to assist its domestic cane sugar industry and/or resolve its
disagreement with the United States over the exac t terms of the NAFTA. As the party invoking
Article XX(d), Mexico bears the burden of demonstra ting that this was not in fact the case. Mexico
has not done so. For example, Mexico has yet to explain why it is necessary to breach its national
treatment obligations owed to all WTO Members to resolve a bilateral trade dispute with the United
States.
4.282 Mexico's suggestion that no alternative meas ures were available to it because the "United
States has refused to submit to dispute settlement" under the NAFTA and "has preferred to drag on
bilateral discussions" is misplaced on several levels. In the first instance, the United States has not

"refused" to submit to dispute settlement under the NAFTA. In fact, the United States has engaged in
and completed two of the NAFTA's three "stages" of dispute settlement. The United States is
currently engaged in the third stage. Mexico's suggestion that the United States is somehow
"blocking" the process in breach of its obligations under the NAFTA is, again, based on Mexico's own
interpretation of the NAFTA and its own determination as to whether the United States is acting in
accordance those obligations. For th e record, the United States does not view any of its actions as
being inconsistent with the provisions of the NAFTA's dispute settlement mechanism.
4.283 For this reason and the others stated above, Me xico has failed to demonstrate that its tax
measures are provisionally justified under Article XX(d) as measures "necessary to secure compliance
with laws or regulations." The United States respectfu lly requests that the Panel find to this effect, in
which case it would not be necessary to further c onsider Mexico's arguments with respect to the
chapeau of Article XX. If a measure does not meet the requirements of one of the paragraphs of
Article XX(d), it is not relevant whether it meets the elements of the chapeau.
(d) Mexico's tax measures are incompatible with the chapeau to Article XX
4.284 Should the Panel, nonetheless, continue its analysis, it should also find that Mexico has failed
to demonstrate that its tax measures meet the re quirements of the chapeau to Article XX because
Mexico's application of its tax measures amounts to a disguised restriction on international trade.
4.285 The chapeau generally works to prevent the abuse of the exceptions of Article XX by
providing that measures falling within one of its para graphs must not be applied in a manner that
constitutes "a means of arbitrary or unjustifiable discrimination between countries" or a "disguised
restriction on trade." "[D]isguised restrictions" embrace "restrictions amounting to arbitrary or
unjustifiable discrimination in international trade taken under the guise of a measure formally within
the terms of an exception listed in Article XX." Because Mexico's tax measures do not meet the
elements of paragraph (d), Mexico cannot possibly demonstrate that application of its tax measures
are "formally within the terms of an exception liste d in Article XX" and applied in a manner that does
not constitute arbitrary or unjustifiable discrimination or a disguised restriction on trade.
4.286 Further, Mexico has openly stated that its ta x measures are designed to protect its cane sugar
industry. Yet, in asserting its Article XX(d) excep tion, Mexico contends that its tax measures are
designed to secure United States compliance with the NAFTA. In other words, Mexico claims its tax
measures are, for purposes of asserting its Article XX(d) defence, measures to secure United States
compliance with NAFTA. But this asserted purpose of its tax measures does not match with the
repeated statements by the Mexican Government and Supreme Court, as documented in the United
States first submission, that its tax measures ar e designed to protect Mexican production of cane
sugar. Accordingly, Mexico's tax measures are not in fact a legitimate Article XX(d) measure, but
rather are nothing more than disguised restrictions on trade – namely, measures to protect its domestic
cane sugar industry from imported HFCS.
4.287 Mexico's references to US – Shrimp in this respect are essentially irrelevant. Mexico has
referred to US – Shrimp to argue that an attempt to negotiate an agreement is sufficient to authorize a
WTO Member to breach its WTO obligations. Mexico 's argument does not reflect a correct reading
of the report in that dispute. In US – Shrimp , the measure at issue had already been found to be
provisionally justified under Article XX(g) as a m easure relating to the conservation of a natural
resource. As stated above, Mexico cannot provision ally justify its tax measures under Article XX(d).
Moreover, US – Shrimp
 does not stand for the proposition that once a Member attempts to negotiate a
solution to a "dispute," it is then free to breach its WTO obligations.
4.288 In sum, Mexico's tax measures are not provisi onally justified under Article XX(d), nor are
they applied in a manner consistent with its chap eau. There is no Article XX exception for measures

designed to secure a Member's compliance with obligations owed another Member under an
international agreement – whether that agreement is the WTO Agreement, the NAFTA or any other
international agreement. The Panel should reject Mexico's Article XX(d) defence accordingly.
4.289 Mexico makes other general assertions about "i nternational law" and its importance. Leaving
aside the fact that Mexico has not identified what principles of "i nternational law" these may be, the
rights and obligations of WTO Members are found in the text of the WTO Agreement, and with
respect to whether Mexico is entitled to an excepti on for its tax measures under Article XX(d), in the
text of Article XX(d).
4. Conclusion
4.290 For the reasons set out above, the United States respectfully requests the Panel to find that
Mexico's tax measures are:
 With respect to sweeteners:

(1) inconsistent with GATT Article III:2, second sentence, as a tax applied on imported
HFCS which is "directly competitive or substitutable" with Mexican cane sugar which
is "not similarly taxed" (HFCS soft drink tax);

(2) inconsistent with GATT Article III:2, second sentence, as a tax applied on the
agency, representation, brokerage, consignm ent and distribution of HFCS which is
"directly competitive or substitutable" w ith Mexican cane sugar which is "not
similarly taxed" (distribution tax);

(3) inconsistent with GATT Article III:2, firs t sentence, as a tax applied on imported beet
sugar which is "like" Mexican cane sugar and is taxed "in excess of" Mexican cane
sugar (HFCS soft drink tax);

(4) inconsistent with GATT Article III:2, fi rst sentence, as a tax applied on the agency,
representation, brokerage, cons ignment and distribution of beet sugar "in excess of
those applied to like domestic products" (distribution tax);

(5) inconsistent with GATT Article III:4 as a la w that affects the internal use of imported
HFCS and imported beet sugar and accords HFCS and beet sugar "treatment ... less
favourable than that accorded to like products of national origin" by:

(a) taxing soft drinks and syrups that use HFCS or beet sugar as a sweetener
(HFCS soft drink tax),

(b) taxing the agency, representation, brok erage, consignment and distribution of
soft drinks and syrups sweetened with HFCS or beet sugar (distribution tax),
and

(c) subjecting soft drinks and syrups sw eetened with HFCS or beet sugar to
various bookkeeping and reporting requirements (reporting requirements);

 With respect to soft drinks and syrups:

(6) inconsistent with GATT Article III:2, firs t sentence, as a tax applied on imported soft
drinks and syrups sweetened inter alia with HFCS and beet sugar," in excess of those
applied to like domestic products" (HFCS soft drink tax);

(7) inconsistent with GATT Article III:2, fi rst sentence, as a tax applied on the agency,
representation, brokerage, consignment and distribution of soft drinks and syrups
sweetened inter alia with HFCS and beet sugar, "in excess of those applied to like
domestic products" (distribution tax);

(8) inconsistent with GATT Article III:2, second sentence, as a tax applied on imported
soft drinks and syrups sweetened with HFCS, which are directly competitive or
substitutable with domestic soft drinks and syrups which are "not similarly taxed"
(HFCS soft drink tax); and

(9) inconsistent with GATT Article III:2, sec ond sentence, as a tax applied on the agency,
representation, brokerage, consignment and distribution of soft drinks and syrups
sweetened with HFCS, which are directly competitive or substitutable with domestic
soft drinks and syrups which are "not similarly taxed" (distribution tax).

I. S
ECOND WRITTEN SUBMISSION OF MEXICO
1. Introduction
4.291 Mexico received the Panel's decision to refuse to decline its jurisdiction with disappointment,
particularly since, as the Panel will see, the se cond round of written submissi ons allows Mexico to
elaborate upon its earlier submissions in light of certain admissions made by the United States.
4.292 The key facts have been established, particularly in light of certain admissions made by the
United States. They raise legal issues of fundament al importance in terms of the GATT's interaction
with the institutions and rules of a regional free trade agreement authorized by its Article XXIV.
4.293 The question presented for this Panel, is how should it respond to this dispute which has
arisen under a free trade agreement authorized by GATT Article XXIV. The parties are agreed that
this Panel does not have jurisdiction over the NAFTA or disputes arising thereunder.
4.294 The Panel should find that it would be both artific ial and highly prejudicial to Mexico to treat
the United States' complaint as anything other than an attempt to present to its advantage a narrow
slice of a larger dispute that plainly falls outside of the WTO's jurisdiction. Equity is in Mexico's
favour:
 – Treating the dispute as purely a WTO dispute rewards the United States for engaging
in forum shopping while it continues to bloc k Mexico's good faith attempts to resolve
its long-standing grievance.

 – It is entirely possible – indeed likely – that if this Panel were to make the rulings
requested by the United States, its findings w ould directly contradict those made by a
NAFTA Panel presented with the same facts.

 – A side effect of the United States' complaint that would cause additional harm is the
possibility of collateral findings of fact being made by this Panel which could be used
by the NAFTA Chapter Eleven claims agains t Mexico. This Panel is being asked to
determine legal issues in a narrower le gal context (the GATT 1994) that may
prejudge the resolution of the same and additional issues under a different, broader
set of treaty rules (the NAFTA).

4.295 In short, accepting the United States' arguments will not "secure a positive solution" to the
dispute, which is the very aim of the WTO dispute settlement mechanism. It is likely to exacerbate
the dispute.
2. Review of the facts
4.296 The United States has tried to characterize some of the facts in a way that reflects less poorly
on its intransigence; but, other than to deny a NAFTA breach
57, it has not contradicted any Mexican
factual assertion as to its conduct in the events gi ving rise to this dispute or as to the serious
consequences of the limited access to the United States' market for the Mexican sugar industry and the
millions of people who depend upon it.58
3. The United States' response
(a) The United States' characterization of the NAFTA dispute
4.297 The United States accuses Mexico of failing to obtain a panel finding of breach of the
NAFTA when it has entirely blocked Mexico's effort s to establish the Panel. The United States goes
further to argue that the Panel must not take th e United States' own conduct in creating this impasse
into account.
(b) General comment on the United States' position
4.298 International law, of which WTO law is a part , does not support the United States' claim. As
the Permanent Court of International Justice observed in the Chorzów Factory (Merits) Case:
"[O]ne party cannot avail himself of the fact that the other has not fulfilled some
obligation, or has not had recourse to some means of redress, if the former party has,
by some illegal act, prevented the latter fro m fulfilling the obligation in question, or
from having recourse to the tribunal which would have been open to him."59
4.299 This is a recognized general principle of international law. 60 The United States' conduct is
highly relevant to the Pa nel's consideration of wh ether, through the measure at issue, Mexico is
justifiably seeking to secure the United States' compliance with the NAFTA.
4.300 The United States appears to contend that, pursuan t to its terms of reference, the Panel cannot
examine rules of international law other than those set out in the WTO "covered agreements".
4.301 WTO jurisprudence confirms that WTO panels and the Appellate Body can fall back on, and
even apply, principles of customary international law in WTO disputes.
4.302 WTO panels are also to interpret the WTO ag reements in accordance with the customary
rules of interpretation in international law. The Vienna Convention on the Law of Treaties, which has
repeatedly been held to codify such rules, provi des in Article 31(3) that, in interpreting a treaty,
account shall be taken not only of the treaty itself (i.e., GATT 1994), but also of "any relevant rules of
international law applicable in the relations between the parties".

57 Closing statement of the United States, first meeting of the Panel, para. 9.
58 For example, it has not denied that it instructed the United States' Section of the NAFTA Secretariat
not to appoint panelists after it was requested to do so by Mexico.
59 PCIJ. Ser. A, No. 17, p. 29.
60 Brownlie refers to this as an example of the International Court employing a general principle of law.
See Brownlie, Principles of Public International Law , (Oxford University Press, 6 th ed. ) p. 17. Exhibit
MEX-35.

(c) The United States cannot specify what other avenues were open to Mexico
4.303 Although it says that Mexico should have taken other action to protect its interests, the United
States does not specify what such action should have been. The United States ignores the fact that
Mexico exhausted all diplomatic a nd other efforts before adopting the measure. In the meantime, its
industry faced a severe financial crisis that threatened to become a social one.
4.304 Moreover, the United States has implicitly conceded that it continues to adhere to its view
that a State has the right to take unilateral action to protect its interests, as a perfectly justified
response, given the failure of bilateral efforts to resolve the problem, due to the intransigence of
another State in blocking resort to and th e operation of a non-WTO treaty dispute settlement
mechanism. Thus, the United States has not ruled out taking the same sort of action as Mexico did.
(d) The United States' practice under the NAFTA
4.305 Since NAFTA's entry into force, the United States has also taken rebalancing action.
4.306 After NAFTA's entry into force, Canada raised its tariffs on certain agricultural products on
an MFN basis when implementing the Uruguay Round results. Canada applied its new agricultural
tariffs on imports of United States-originating agri cultural products. The United States argued this
was contrary to NAFTA's Article 302, which prohi bits a Party from increasing any existing customs
duty on an originating good.
4.307 In addition to initiating NAFTA's Chapter Twen ty dispute settlement proceedings (to which
Canada submitted), the United States took the same action as the Canadian action of which it
complained; that is, it rebalanced the situation in view of Canada's action.
4.308 This United States action is inconsistent with the position now taken in the United States'
response to Panel question No. 30, but consistent w ith United States' practice in other contexts: for
example, in response to a measure taken by Fran ce under a bilateral civil aviation agreement which
severely limited United States' carriers from changing th e gauge of aircraft for flights into Paris, the
United States imposed substantial restrictions on Ai r France's ability to fly into the United States in
order to induce France to submit the dispute to arb itration under the treaty. The arbitral tribunal later
upheld the United States' measures as a lawful a nd generally proportionate measure intended to
induce France to submit to dispute settlement.61
(e) The United States' statements before the WTO on taking unilateral action outside of the WTO
4.309 The Panel will be aware of the Eu ropean Communities' complaint in US – Section 301 Trade
Act.62 The European Communities challenged the WTO- consistency of a United States statute that
conferred certain retaliatory powers on the Executiv e Branch, contending that the statute mandated
action inconsistent with United States' obligations under the WTO Agreements, specifically the DSU.
4.310 Paragraphs 4.133-4.136 of the Panel Report reco rd the United States' explanation that it
distinguished between retaliating against a WTO trading partner for matters governed by the WTO (in
which case it would invoke DSU procedures before imposing retaliatory measures) and imposing
measures on a WTO trading partner for matters fa lling within a non-WTO agreement (in which case,

61 United States response to Panel questions, para. 71. For an example of the United States taking
measures in advance of a dispute panel ruling, see the Air Services Agreement of 27 March 1946 Arbitration
(United States v. France), RIAA XVIII, p. 146 (1979). Exhibit MEX-37.
62 Report of the Panel on US – Section 301 Trade Act.

it considered itself free to impose sanctions where another State blocked the operation of a dispute
settlement mechanism).
4.311 The United States plainly reserved its right to take unilateral action against another WTO
Member in relation to non-WTO covered agreements such as NAFTA.
4.312 The Panel concluded that, having regard to th e statutory scheme and to representations made
to it by the United States during the course of the proceeding, section 304 could be applied
consistently with United States' WTO obligations. However, it is plain from the structure of the
United States law, the Statement of Administrative Ac tion, the United States' statements to the Panel,
and from the Panel Report itself
63, that these all related solely to the situation where the United States
considered that another WTO Member had violated a WTO covered agreement. The United States
did not repudiate its legal right to take action wher e, for example, a State blocked the operation of a
non-WTO trade agreement's dispute settlement mechanism.
4. Legal submissions
(a) This Panel's powers under the applicable "covere d agreements" are broader and more flexible
than the United States contends
4.313 The United States has contended that the Panel " cannot resolve the matter in dispute"
(emphasis added) – i.e., the United States claims that Mexico's tax measures are inconsistent with
Article III of the GATT – unless it issues findings of breach.
64 This argument attempts to constrain
the Panel more tightly than the actual text of GATT 1994 or the DSU either provides or requires.
4.314 It warrants noting that, having directed the Panel to Articles 11 and 7 of the DSU, the United
States does not take the crucial next step of turni ng to what the applicable covered agreement, GATT
1994, actually requires a panel to do. Since the DS U refers to the GATT 1947 in this regard, Mexico
will focus on that agreement.65
4.315 Article XXII did not require a panel to make a ruling of breach; rather, it mandated the
Contracting Parties "to consult with any contracting party or parties in respect of any matter for which
it has not been possible to find a satisfactory so lution through consultati on under paragraph 1."
(emphasis added) The article's reference to parties in the plural indicates that its purpose was to assist
disputing parties in finding satisfactory solutions to their differences, precisely what Mexico is asking
this Panel to do.
4.316 Similarly, Article XXIII:2 provided for the referral of a matter (including an alleged failure of
a Contracting Party to carry out its obligations under the GATT or a Contracting Party's application of
a measure which conflicts with the provisions of the GATT) to the CONTRACTING PARTIES.
4.317 Three points warrant noting: First, Arti cles XXII and XXIII conferred discretion upon the
CONTRACTING PARTIES (and panels acting at their behest). Second, neither set limits on a panel's
power to shape its recommendations or make a "ruli ng in the matter" in response to the facts peculiar

63 The Panel noted at para 7.13, that it was not its "task to examine any asp ects of Sections 301-310
outside the EC claims. We are, in particular, not ca lled upon to examine the WTO compatibility of US actions
taken in individual cases in which Sections 301-310 have been applied. Likewise, we have not been asked to
address the WTO consistency of those provisions in Section 301-310 relating to determinations and actions
taken by the USTR that do not concern the enforcement of US rights under the WTO Agreement , including the
provisions authorizing the USTR to make a determination as to whether or not a matter falls outside the scope of
the WTO Agreements." (emphasis added)
64 United States response to Panel questions, para. 3.r
65 See Article 3(1) of the DSU.

to a particular case. To the contrary, they are to determine what is appropriate in the circumstances.
Finally, these remedies were available to the CONTRACTING PARTIES in situations where a breach
of the GATT was alleged.
4.318 GATT's dispute settlement procedures evolved, but when it came to creating the WTO's
dispute settlement system in the early 1990s, the drafters did not amend GATT Articles XXII and
XXIII when GATT 1947 became GATT 1994.
4.319 This affirmation of the flexibility expr essly reserved by and to the CONTRACTING
PARTIES some 47 years after GATT 1947's entry into force shows that the WTO Members sought to
retain a measure of flexibility in dispute settlement proceedings involving GATT 1994.
4.320 The flexibility that GATT's drafters established is preserved in the DSU: "In the absence of a
mutually agreed solution, the first objectiv e of the dispute settlement mechanism is usually to secure
the withdrawal of the measures concerned if these are found to be inconsistent with the provisions of
any of the covered agreements … " (emphasis added)
4.321 Article 11 of the DSU contemplates other possib ilities that the United States has chosen to
ignore. Thus, it would be within the Panel's discretion, based on an objective assessment of the matter
before it, to recommend what steps the parties sh ould take to "secure a positive solution to the
dispute".
(b) Mexico's measures can be justified under Article XX(d)
(i) The United States' position on Article XX(d) is internally inconsistent
4.322 The United States' suggestion that an intern ational treaty cannot be a "law" within the
meaning of Article XX(d) is contradicted by paragraph 54 of the United States' response to the Panel's
questions, where it is stated:
"Article XX(d) of the GATT does not justify measures adopted by one Member to
secure compliance by another Member with international obligations arising from a
treaty which is not part of the WTO 'covered agreements.'"(emphasis added)
4.323 This contemplates that Article XX(d) justifi es GATT-inconsistent measures adopted by one
WTO Member to secure another Member's comp liance with obligations under a WTO covered
agreement. Nothing in the GATT suggests that th e term "laws" encompasses only the WTO "covered
agreements", but not other international treaties that are not only not inconsistent with the provisions
of GATT 1994 but are expressly authorized by Article XXIV.
4.324 The United States reviews the wording of va rious GATT 1994 provisions to point out that
different words (laws, regulations, obligations, etc.) are used in different places.
4.325 On the United States' reading of the GATT, it has obligations under the NAFTA, but those
obligations are not to be confused with "law". Ther efore, it says that Article XX(d) is not available to
Mexico to justify a measure designed to secure United States' compliance with its admitted
obligations that exist only by virtue of an interna tional legal instrument enforceable (theoretically, at
least66) by law.

66 The NAFTA Parties intended and considered them to be enforceable until the United States refused
to participate in NAFTA dispute settlement.

4.326 Mexico observed that international law is no less law than domestic law. In fact, the United
States concedes that it entered into international legal obligations vis-à-vis Mexico. The definition of
"international agreement" cited by the United St ates supports this view: "treaties and other
agreements of a contractual character be tween different countries … creating legal
 rights and
obligations".67
4.327 The United States argues that the drafters of Ar ticle XX(d) precluded the justification offered
by Mexico because, rather than using "obligations", they used the word "law s". Yet this ignores the
fact that laws by definition encompass obligatio ns. In other words, the term "laws" includes
obligations under international treaties. 68 Accordingly, the relevant question regarding the meaning
of "laws or regulations" in these proceedings is whether these terms include international law.
4.328 In short, if, as the United States contends, measures taken to enforce the WTO covered
agreements can be justified unde r Article XX(d) as "necessary to secure compliance with laws …
which are not inconsistent with the provisions of this Agreement", the text can equally support other
laws such as Article XXIV free trade agreements whic h, as Mexico pointed out, are "not inconsistent
with the provisions of" GATT 1994.
(ii) Article XX(d) of the GATT 1994 can justify measures necessary to secure compliance with
laws or regulations applicable outside the terr itorial jurisdiction of the Member taking the
measure
4.329 As discussed in Mexico's response to qu estion No. 25 from the Panel, GATT and WTO
jurisprudence interpreting Article XX of the GAT T confirms that other paragraphs of the GATT
General Exceptions clause are capable of be ing interpreted to encompass otherwise GATT
inconsistent measures relating to measures of other States or to activities occurring outside of the
territory of the State invoking Article XX. For example, in paragraphs 5.15 and 5.16 of its Report, the
GATT Panel US – Tuna (EEC) stated as follows:
"The Panel noted that two previous panels have considered Article XX(g) to be
applicable to policies related to migratory species of fish, and had made no distinction
between fish caught within or outside the territorial jurisdiction of the contracting
party that had invoked this provision."
The Panel then observed that measures providi ng different treatment to products of
different origins could in principle be taken under other paragraphs of Article XX and
other Articles of the General Agreement with respect to things located, or actions
occurring, outside the territorial jurisdic tion of the party taking the measure. An
example was the provision in Article XX(e) relating to products of prison labour. It
could not therefore be said that the Gen eral Agreement proscribed in an absolute
manner measures that related to things or actions outside the territorial jurisdiction
of the party taking the measure."69 (emphasis added)
4.330 In its second submission to the WTO panel in US – Shrimp , the United States argued
strenuously that the US – Tuna (EEC) panel had rejected Thailand's argument that Article XX
implicitly contained a territorial jurisdiction limitation.70

67 United States response to Panel's questions, para. 71.
68 Article 38 of the Statute of the International Court of Justice.
69 GATT Panel Report on US – Tuna (EEC) (unadopted), paras. 5.15-5.16.
70 US – Shrimp, second submission of the United States, July 28, 1997, paras. 74-76. Exhibit MEX-41.

4.331 The Appellate Body found that there was no va lid reason for supporting the conclusion that
either Article XX(b) or (g) apply only to policies in respect of things located or actions occurring
within the territorial jurisdiction of the Member taking the measure. Against this background, a
territorial jurisdiction limitation equally need not be read into Article XX(d). In Mexico's view,
paragraph (d) of Article XX can encompass measures necessary to secure compliance with laws that
bind the two (or more) States concerned.
(iii) The United States' distinction is not borne out in NAFTA itself
4.332 The United States' very strict dualist separati on between international and domestic law is
overstated when United States treaty practice is taken into account.71
4.333 The United States has viewed th e NAFTA as creating obligations that redound to the benefit
of private parties and while it does not confer a ri ght of action upon private parties, its domestic law
provides a mechanism for interested persons to secure another Party's compliance with NAFTA by
petitioning the United States government to take acti on against that Party. Mexico understands that,
under United States law, the Office of the United St ates Trade Representative is legally obliged to
fully investigate such a complaint and to take actio n against the other Party if it concludes that the
other Party may be in breach of the Treaty.
(c) The nature of the Mexican measures
4.334 In its response to questions, the United States makes much of its effort to protect the
multilateral system. 72 It is true that Mexico's measures do not distinguish between HFCS imports
from the United States and other WTO Members. Indeed, they do not distinguish between imported
fructose and domestically produced fructose. This is because of the nature of the trade.

71 In Article 2021 of the NAFTA, the Parties found it necessary to prohibit any of them from creating a
domestic cause of action that would allow private parties to sue in the domestic courts of a Party in order to
secure another NAFTA Party's compliance with its NAFTA obligations. Article 2021 provides that: "No Party
may provide for a right of action under its domestic law against any other Party on the ground that a measure of
another Party is inconsistent with this Agreement." Canada provided in its North American Free Trade
Agreement Implementation Act: 6(1) No person has any cause of action a nd no proceedings in any kind shall
be taken, without the consent of the Attorney General of Canada, to enforce or determine any right or obligation
is claimed or rises solely under or by virtue of Part 1 [Implementation of Agreement Generally] or any other
order or regulation made under Part 1. See exhibit MEX-42. The Unite d States provided likewise in
Section 102(c) of the North American Fr ee Trade Agreement Implementation Act: " No person other than the
United States … shall have any cause of action or defence under … the [NAFTA] or by virtue of Congressional
approval thereof …. " It was unnecessary for Mexico to enact a similar provision because the NAFTA has direct
effect under Mexican constitutional law and therefore Ar ticle 2021, like the rest of NAFTA, had immediate
effect without further implementing action. It would have been unnecessary to prohibit a domestic cause of
action if the NAFTA could never have the effect of a law in the internal legal order of a Party. Removing the
possibility of a private right of action did not constrain any of the Parties themselves from taking action to
secure another Party's compliance with the NAFTA thro ugh executive or legislativ e measures. Indeed, the
United States retained a domestic right of petition in section 301 of its Trade Act of 1974, which permitted a
private party to petition the USTR to secure complia nce with the NAFTA by an other NAFTA Party. See
Exhibit MEX-43.
72 "[T]he United States has difficulty understanding how a breach of Mexico's WTO obligations
contributes to these goals" [para. 78], " the United States finds it difficult to understand how, in seeking to
enforce the alleged obligations of the United States under the NAFTA, it is necessary to breach the national
treatment obligations Mexico has undertaken with respect to every other WTO Member " [para. 79], and " no
matter what Mexico's complaint might be, Mexico c ould have sought NAFTA complia nce through any number
of means - diplomatic or otherwise – short of breaching its WTO obligations" [para. 80].

4.335 The measures related virtually exclusively to the United States, not to other WTO Members.
Mexico appreciates that other Members have a systemic interest in the matter, but the fact is that the
trade was overwhelmingly one that arose under the NAFTA and was supplied by the United States.
The measures are a response to its persistent refusal to respond to Mexico's repeated efforts to resolve
the dispute.
73
(d) The measures at issue meet the necessity test under Article XX(d) of the GATT 1994
4.336 The United States argues that Mexico's ta x measures cannot be necessary to secure
compliance with the NAFTA. 74 It maintains its position that none of the Mexican or United States
concerns about the dispute over bilateral trade in sw eeteners has been resolved. In short, the United
States suggests that because the measures at issue ha ve so far not succeeded in securing United States
compliance with the NAFTA, they cannot be necessary within the meaning of Article XX.
4.337 Mexico has three responses to this argument:
 – First, in Korea – Various Measures on Beef, the Appellate Body did not rule that only
measures that actually secure compliance with the law or regulation at issue can be
deemed "necessary" within the meaning of Article XX(d). Rather, it stated that "[t]he
greater the contribution [to the realization of the end pursued], the more easily a
measure might be considered to be 'necessary'".
75 Measures that make a lesser
contribution to securing compliance with a law or regulation may also be "necessary".

 – Second, from Mexico's perspective, the measures at issue actually greatly contribute
to the end pursued by Mexico, that is, the securing of United States compliance with
the NAFTA. The record evidence reveals that the adoption of the tax initially created
the desired dynamic to secure the United Stat es' compliance or otherwise arrive at a
mutually satisfactory resolution. This in terest dissipated when the United States
launched this WTO proceeding, but the pro ceeding itself is further evidence that the
Mexican measures had their intended effect of attracting United States attention with
a view to resolving the dispute over its compliance with NAFTA. Mexico believes
that if this Panel upholds Mexico's position, the measures will induce the United
States to finally resolve the entire dispute.

 – Third, conversely, if the Panel accedes to the United States' arguments, it will damage
Mexico's prospects for securing United St ates' compliance with the NAFTA. The
Panel will have assisted the United States in continuing to block any resolution of
Mexico's grievance. This would be plainly unfair.

73 As the International Law Commission noted in its commentary on counter-measures, " [a] second
essential element of countermeasures is that they 'm ust be directed against' a State which has committed an
internationally wrongful act …" " This does not mean that countermeasures may not incidentally affect the
position of third States or indeed other third parties. ... Similarly if, as a consequence of suspension of a trade
agreement, trade with the responsible State is affected and one or more companies lose business or even go
bankrupt. Such indirect or collateral effects cannot be entirely avoided. " See James Crawford, " The
International Law Commission's Articles on State Responsibility: Introduction, Text and Commentaries ",
(Cambridge University Press 2002) p. 285.
74 United States response to Panel questions, paras. 75-80.
75 Appellate Body Report on Korea – Various Measures on Beef, para. 163.

5. The United States has not responded to Mexico 's arguments that the measures meet the
requirements of the chapeau of Article XX of the GATT 1994
4.338 In its previous submission, Mexico established prima facie that the measures at issue meet the
requirements of the chapeau of Article XX of the GA TT 1994. In this regard, Mexico notes that the
United States has not responded to the substance of its arguments. Accordingly, should the Panel
determine that the measures are provisionally justified under paragraph (d), it should also find that the
measures are not applied in a manner that creates arbitrary or unjustifiable discrimination between
countries where the same conditions prevail or a disguised restriction on international trade.
4.339 Mexico's good faith efforts to resolve this long-standing dispute clearly meet the requirements
set out by the Appellate Body in US – Shrimp.
6. Conclusion
4.340 Mexico reiterates its request that this Panel take particular care in formulating its findings and
recommendations so as not to suggest that it is defi nitively interpreting the parties' respective rights
and obligations under the NAFTA. Mexico nevertheless requests that in applying Article XX of the
GATT 1994 and in deciding as to the scope and content of any recommendations that it may issue, the
Panel consider the undisputed facts of the United States' admission of the existence of a NAFTA
dispute and its failure to rebut Mexico's allegations that it has refused to submit to the NAFTA dispute
settlement procedure.
4.341 For the foregoing reasons and those set out in Mexico's prior submissions, Mexico reiterates
its request that the United States' complaint be rejected.
J. O
PENING STATEMENT OF THE UNITED STATES AT THE SECOND MEETING OF THE PANEL
1. Introduction
4.342 This statement will briefly review the status of this dispute, and will principally focus on
responding to the arguments presented by Mexico concerning Article XX(d) in its second submission.
2. Status of this dispute
4.343 This dispute, as the Panel is well aware, and despite Mexico's repeated attempts to argue
otherwise, concerns Mexico's obligations under the WTO Agreement and cer tain tax measures that
Mexico imposes on non-cane sugar sweeteners and soft drinks and syrups. Mexico readily admits
that it imposed these tax measures to stop the disp lacement of Mexican cane sugar by imports of
HFCS from the United States.
4.344 The United States first and second submissions and responses to Panel questions have
presented all of the facts and argument necessary to establish a prima facie case that Mexico's tax
measures on soft drinks and syrups – contained in the IEPS – are in breach of its obligations under
Articles III:2 and III:4 of the GATT 1994. Mexico has not contested any of those facts or arguments.
Accordingly, the United States will focus here on Me xico's alleged defence under Article XX(d) of
the GATT 1994.
3. Article XX(d) – "laws or regulations"
4.345 Under this defence, Mexico contends that its tax measures are necessary to secure United
States compliance with the NAFTA and, therefor e, justified as an exception to WTO rules under

Article XX(d). As the party asserting it, Mexico b ears the burden of proof on this defence. Mexico
has not met that burden and, therefore, cannot justify its tax measures under Article XX(d).
4.346 The fundamental flaw in Mexico's defence is that Article XX(d) pertains to "laws or
regulations," not obligations owed Mexico under th e NAFTA or any other international agreement.
Thus, the energy Mexico has expended attempting to convince the Panel that its tax measures are
"necessary" or "justifiable," because Mexico has "exha usted" efforts to find a solution to the NAFTA
sugar dispute, are simply efforts to distract attenti on from the fact that Mexico is unable to sustain its
assertion that "laws or regulations" means or includes obligations under an international agreement.
4.347 As the United States explained in its second submission and in response to the Panel's
questions, the phrase "laws or regulations" means rule s promulgated by a government such as statutes
or administrative rules – in other words, the domestic laws or regulations of the Member applying the
measure at issue. This is the interpretati on of the phrase "laws or regulations" derived from
application of the Vienna Convention rules of tr eaty interpretation. These rules direct the treaty
interpreter to the ordinary meaning of the terms of the treaty in their context and in light of the treaty's
object and purpose.
76 As demonstrated in the United States responses to questions and second
submission, the ordinary meaning of "laws or regula tions" is the domestic laws or regulations of the
Member claiming the Article XX(d) exception. Th is meaning is supported by (1) the dictionary
definition of the words "laws" and "regulations"; (2 ) the use of the words "laws" and "regulations" as
opposed to the words "obligations" or "agreements" used in Article XX and elsewhere in the GATT
1994 and the WTO Agreement 77; and (3) the effect on the WTO Agreement of reading the phrase
"laws or regulations" to include obligat ions under international agreements. 78 The United States has
already detailed each of these points in previous submissions. The United States emphasizes here that
acceptance of Mexico's interpretation of "laws or regulations" to include obligations owed Mexico
under the NAFTA would open the door for any Memb er to claim that a breach of the WTO
Agreement, or some other treaty, by another Memb er meant that the Member was free to breach any
of its WTO obligations. Such a reading of Article XX(d) would nullify Article 23 of the DSU, render
Article 22 of the DSU meaningless, and significantly undermine the effective functioning of the WTO
dispute settlement system.
4.348 Such a reading would also mean that WTO pa nels and the Appellate Body would be called
upon to examine any treaty that was the subject of such a claim of breach to determine if the trade
measures adopted were "necessary to secure compliance" with that treaty. To do so would require
WTO panels or the Appellate Body to determine if there was, in fact, a breach of the underlying
agreement. In other words, WTO dispute settle ment would become a forum of general dispute
resolution for all international agreements, and all su ch agreements would be in effect incorporated
into, and enforced by, the WTO Agreement by virtue of Article XX(d). This cannot possibly be what
Mexico, let alone other WTO Members, intends. Ironically, it would also mean that with each
additional international agreement a Member enters into, the more it diminishes the benefits secured
under the WTO Agreement: the Member's WTO right s would be subject to being infringement by
any party with whom it had entered into an intern ational agreement so long as the party claimed the
WTO breach was to secure compliance with the non-WTO Agreement.
4.349 Despite the serious, even astounding, implications of what Mexico argues, it is surprising how
little Mexico has provided in support of its cont ention that United States obligations under the
NAFTA constitute "laws or regulations" within the meaning of Article XX(d). Other than the mere

76 Vienna Convention on the Law of Treaties, Art. 31(1).
77 United States responses to Panel questions, paras. 72-74; United States' second written submission,
paras. 44-46.
78 United States second submission, paras. 47-48.

assertion that "laws" as used in Article XX(d) includes international agreements 79, the only support
Mexico offers is that Article 38 of the Intern ational Court of Justice (ICJ) Statute includes
"international conventions" as a source of "international law" 80, that "treaties" like "laws" create legal
obligations81, and that paragraphs (b) and (g) of Article XX are not limited to measures relating to
"policies in respect of things located or actions occurring within the territorial jurisdiction of the
Member taking the measure."82 The latter of these arguments is essentially irrelevant. The question is
not whether the measure at issue relates to actions occurring outside the territorial jurisdiction of the
Member taking the measure. In the disputes cited by Mexico 83, the measure at issue was a domestic
law applied within the jurisdiction of the Member taking the measure, and none of these disputes, of
course, was interpreting "laws or regulations" under Article XX(d). Rather, the question is whether
Article XX(d) applies to obligations owed by anothe r Member under an international agreement. It
does not. The reference to the ICJ Statute likewise misses the point and for the same reason. Mexico
has yet to demonstrate that the phrase "laws or regulations" means or includes "international law" or
that the creation of "legal obligations" is synonymous with the word "laws."
4.350 In particular, whatever is included in the sc ope of "international law," there is a textual
difference between the words "international law" and the word "laws" which, of course, is the actual
word used in Article XX(d). In Article XX(d) and throughout the WTO Agreement, the word "laws"
is used to refer to domestic laws.
84 By contrast, in the two instances where the WTO Agreement
references the words "international law" – in Ar ticle 3.2 of the DSU and Article 17.6 of the
Antidumping Agreement – the word "law" appears in the singular and is proceeded by the word
"international." As noted in the United States second submission, the Spanish and French texts of the
Agreement use entirely different words to refer to "i nternational law" as contained in Articles 3.2 and
17.6, than they do to refer to "laws" as contained in Article XX(d). 85 To borrow a quote from
Mexico's second submission and Mexico's opening statement at this meeting: "[A] treaty interpreter is
not entitled to assume that the use of different words in a treaty was merely inadvertent or
'accidental.'"86
4.351 Moreover, "laws" as it appears in Article XX( d) is used in conjunction with the word
"regulations." As the United States has explained, "regulations" are defined as instruments "issued by
various governmental departments to carry out the intent of the law." 87 Thus, a reading of the phrase
"laws or regulations" to mean the domestic laws or regulations of the Member applying the measure
at issue attributes the same scope to the word "law s" as it does to the word "regulations." Mexico's
reading, on the other hand, creates an asymmetry be tween the scope of the word "laws" and the word

79 Mexico's first written submission, para. 118; Mexico's second written submission, para. 71.
80 Mexico's responses to Panel questions, p. 13 (WTO translation); see also Mexico's second written
submission, para. 71 (citing Article 38 of the ICJ Statute).
81 Mexico's second written submission, paras. 69-72 , 77-78; Mexico's responses to Panel questions,
p. 13 (WTO translation).
82 Mexico's second written submission, paras. 74-76 ; Mexico responses to Panel questions, p. 13-14
(WTO translation).
83 Mexico's second written submission, paras. 74-76 (citing US – Shrimp); Mexico's responses to Panel
questions, p. 13-14 (WTO translation) (citing US – Shrimp).
84 See, e.g., Marrakesh Agreement Establishing the WTO, Art. XVI:4 ; GATT Arts. VII:1, VIII:3 and
X:1; General Agreement on Trade in Services (GATS) Arts. V:3, VI:3, XXVIII(k) and Annex on
Telecommunications, para. 3(d); Agreement on Import Licensing Procedures, Art. 8.2; Agreement on the
Implementation of Article VII of the General Agreement on Tariffs and Trade 1994, Ar t. 3.2; AD Agreement,
Art. 18.5; Agreement on Rules of Origin, passim; Agreem ent on Trade-Related Aspects of Intellectual Property
Rights (TRIPS), preamble, Arts. 3.2, 8.1, 40.2, 63.1,63.2, and 65.3; Agreement on Preshipment Inspection,
passim.
85 United States' second written submission, note 72.
86 Mexico's second written submission, para. 50 (citing the Appellate Body in EC – Hormones).
87 United States responses to Panel questions, para. 71.

"regulations" as used in Article XX(d). Under Mexico's reading, only the former captures instruments
that are not solely domestic in scope.
4.352 Mexico's argument that international agreements create "legal obligations" is likewise without
merit.
88 The mere fact that international agreements create "obligations" between States, that are
referred to as "legal," does not address the ques tion of whether obligations under an international
agreement – whether legal or otherwise – fall within the scope of the phrase "laws or regulations" in
Article XX(d). Mexico has not demonstrated th at "legal obligations" assumed by the United States
under the NAFTA constitute "laws" within the meani ng of Article XX(d). In this regard, the United
States points out that in the United States, interna tional trade agreements, such as the NAFTA and the
WTO Agreement, are not laws and are not enforceable in United States courts. 89 That interested
parties in the United States may ask the United States Trade Representative to seek our trading
partners' compliance with those agreemen ts, contrary to Mexico's suggestion 90, does not make those
agreements "laws."
4.353 Rather than demonstrate that the phrase "laws or regulations" means or includes "international
law" or international agreements, Mexico, instead , argues that the United States "must explain why
the term 'laws' as used in Article XX (d) cannot include international law." 91 Mexico forgets its
burden of proof. It is Mexico's burden, as the pa rty asserting the defence, to establish that its tax
measures qualify as measures "necessary to secure compliance with laws or regulations" within the
meaning of Article XX(d). Throughout these proc eedings, however, Mexico has been unable to
demonstrate that obligations owed Mexico under an international agreement constitute "laws or
regulations." Without such a demonstration, Me xico cannot justify its tax measures by way of
Article XX(d).
4. Article XX(d) – "necessary to secure compliance"
4.354 Despite being unable to demonstrate that "law s or regulations" actually means or includes
international agreements, Mexico makes much of its allegedly exhaustive efforts to resolve the
dispute it has with the United States over mark et access for cane sugar under the NAFTA. On the
basis of these efforts, Mexico insists that its tax measures are "necessary to secure compliance" and in
keeping with the chapeau to Article XX. As the United States explained in its second submission and
responses to questions, these efforts do not render Mexico's tax measures "necessary" or designed to
"secure compliance" within the meaning of paragra ph (d); they also do not mean that Mexico's tax
measures are applied in a manner that is consistent with the chapeau to Article XX. Rather than
repeat what was said in our earlier submissions, th e United States will focus on two points regarding
Mexico's second submission.
4.355 The first relates to Mexico's insistence that its tax measures "relate[] virtually exclusively to
the United States" and are "direct ed against the United States."
92 To support this assertion, Mexico
explains that most imports of HFCS and soft dri nks come from the United States and "arose under the
NAFTA."93 Mexico then concludes that its tax measu res are, therefore, a response to the United
States "refusal" to resolve the NAFTA sugar dis pute. The United States presumes Mexico included
this point in response to the United States point that breaching obligations owed WTO Members other
than the United States cannot be necessary to secu re United States compliance with the NAFTA. 94

88 Mexico's second written submission, paras. 69-72, 77-78.
89 Corus Staal BV v. United States, CAFC Slip Op. No.04-1107 (Jan. 21, 2005) at 9.
90 Mexico's second written submission, para. 78.
91 Mexico's second written submission, paras. 71, 73.
92 Mexico's second written submission, paras. 3, 81.
93 Mexico's second written submission, para. 81.
94 See United States' second written submission, paras. 59, 65.

Mexico's response, however, incorrectly assumes th at a measure may avoid a breach of Article III
simply because it affects only a small amount of trade. To quote the Appellate Body:
"Article III obliges Members of the WTO to provide equality of competitive
conditions for imported products in relation to domestic products. ... [I]t is irrelevant
that 'the trade effects' of the tax diffe rential 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."
95
Regardless of the share of Mexican HFCS imports formerly accounted for by products of Members
other than the United States, Mexico's tax measure s would still treat the products of those other
Members less favourably than the products of Mexi co, in violation of Article III of the GATT.
Therefore, Mexico still has not answered the question why such less favourable treatment of other
Members' products is necessary to secure United States compliance with the NAFTA.

4.356 In pointing out that its tax measures are targeted "virtually exclusively" at the United States,
Mexico appears to state that its tax measures also discriminate de facto against imports from the
United States vis-à-vis imports from other countries. Apparently Mexico is conceding a breach of
Article I of the GATT 1994, as well as Article III in this dispute, although Article I is not within this
Panel's terms of reference.
96
4.357 The second point is that Mexico continues to be unable to explain why the discrimination
imposed on imported HFCS as a result of Mexico's ta x measures is necessary to secure United States
compliance with the NAFTA. This owes to the fa ct that Mexico cannot explain why stopping the
displacement of Mexican cane sugar by imported HFCS is anything more than a means to protect its
cane sugar industry. In other words, while Mexico attributes much harm to its cane sugar industry
because of the displacement of cane sugar by imported HFCS, Mexico has yet to explain how
stopping this displacement through its discriminatory tax measures would result in United States
compliance with alleged NAFTA obligations. Even greater opportunities to export "displaced"
Mexican cane sugar are merely another means to aid Mexico's cane sugar industry; they are not means
to secure United States compliance with alleged NAFTA obligations. In short, Mexico has explained
why it believes helping its cane suga r industry is necessary. It has also explained how measures
which stop or counteract the displacement of can e sugar may contribute to this. Yet, neither
explanation addresses why Mexico's tax measures co nstitute measures to secure compliance with the
NAFTA, much less necessary ones.
4.358 The closest Mexico comes to stating why it be lieves its tax measures are "necessary to secure
compliance" with the NAFTA, is its contention th at, by hurting United States exports of HFCS
through its discriminatory tax measures, Mexico will "induce" sweetener producers to come to the
"negotiating table."
97 Even if Mexico's contention were correct, inducing sweetener producers to
engage in negotiations is not the same thing as securing United States compliance with the NAFTA.
4.359 Moreover, the United States points out that Mexico 's tax measures could not have even been
"necessary" to stop the displacement of Mexi can cane sugar by imported HFCS as a result of
"preferential access" for HFCS under the NAFTA. 98 This is because Mexico did not provide such
preferential access at the time it imposed its tax me asures. Rather, from 1997 through May of 2002,
Mexico imposed WTO- and NAFTA-inconsistent anti-dumping duties on HFCS from the United

95 Appellate Body Report on Japan – Alcoholic Beverages II, p. 16, DSR 1996:1, 97, at 109.
96 GATT Art. I:1.
97 Mexico's second written submission, para. 83.
98 Mexico's first written submission, paras. 5-6, 124.

States.
99 In other words, Mexico has already adversel y altered the balance of rights and obligations
under the NAFTA, which was negotiated as a set of mutual concessions. Now Mexico is withdrawing
concessions under the WTO, concessions which we re never negotiated on the basis of other
concessions granted under the NAFTA.
5. Issues relating to Mexico's "preliminary ruling" request
4.360 Aside from its Article XX(d) defence, Mexico raises a number of other issues in the course of
these proceedings that are simply not relevant to r esolution of this dispute. In its second submission,
for example, Mexico continues to argue points only rele vant – if at all – to its already-rejected request
for a preliminary ruling. These points include Mexi co's assertions that "this is a NAFTA dispute 100,"
that a finding of WTO-inconsistency will pr ejudice on-going or future NAFTA proceedings 101, that
the Panel need not issue findings on the consistenc y of Mexico's tax measures with Mexico's WTO
obligations102, and that the United States does not have the right, or does not deserve, to bring this
dispute before the WTO. 103 The Panel has already considered these issues in rejecting Mexico's
request for a preliminary ruling and in concluding that the Panel "does not have the discretion, as
argued by Mexico, to decide not to exercise its ju risdiction in a case that has been properly brought
before it." 104 These issues also do not bear on whether Mexico's tax measures are consistent with
Article III or justified under Article XX(d). They ar e, therefore, not issues that this Panel needs to
consider further.
6. "General principles of international law"
4.361 Mexico has also attempted to justify its tax measures under "general principles of
international law." The matter in dispute, howev er, concerns the consistency of Mexico's tax
measures with Mexico's obligations under the WTO Agreement – namely, whether Mexico's tax
measures are consistent with Article III and, if not, whether they are justified under Article XX(d).
Issues Mexico raises concerning justifications fo r its tax measures under "general principles of
international law" are, therefore, not issues this Panel need, or should, resolve.
4.362 That said, Mexico's suggestion that its tax measures are somehow justified as a matter of
"general principles of international law" – although still irrelevant to the consistency of Mexico's tax
measures with Mexico's WTO obligations – does raise some concerns which merit a couple of brief
remarks.
4.363 First, the WTO dispute settlement system exists to resolve WTO disputes, that is, disputes
over Members' rights and obligatio ns under the covered agreements.
105 Accordingly, when a WTO
panel is established, it is established to examine the relevant provisions of the covered agreements and
"to make such findings as will assist the DSB in making the recommendations or in giving the rulings
provided for in those agreements."106 A WTO panel's mandate simply does not extend to determining
the rights and obligations of countries under general principles of international law. Thus, in this
dispute, the Panel's mandate is limited to determin ing the consistency of Mexico's tax measures with
Mexico's obligations under the c overed agreements. Just as the Panel's mandate does not extend to

99 See United States first written submission para. 14-18.
100 See, e.g., Mexico's second written submission, paras. 4, 7.
101 See, e.g., Mexico's second written submission, paras. 6, 8.
102 Mexico's second written submission, paras. 48-57.
103 See, e.g., Mexico's second written submission, paras. 8.
104 Letter from the Chairman of the Panel to Representatives of the Parties (18 January 2005) at 2.
105 DSU Arts. 1.1, 3.2 and 3.4.
106 DSU Art. 7.1(emphasis added); see also DSU Art. 11.

examining United States obligations under the NAFTA 107, it does not extend to examining Mexico's
rights under general principles of international law.
4.364 Second, exceptions to WTO rules are expressly st ated in the text of the WTO Agreement.
Yet, nothing in the text of the WTO Agreement provides that a measure that is otherwise WTO-
inconsistent might be justified under the WTO Agreement so long as it comports with some
(unspecified) general principles of international law. Moreover, there is no basis for a panel to graft
general principles of international law onto the rights and obligations agreed upon by WTO Members
and expressed in the text of the WTO Agreement. In fact, the Appellate Body has already rejected the
notion that a principle of international law – whether recognized or not – might be used as grounds for
justifying measures that are otherwise inconsiste nt with a Member's obligations under the WTO
Agreement.108
4.365 Mexico's reliance on the Appellate Body reports in EC – Bananas III, US – Wool Shirts and
Blouses, India – Patents (US) and Canada – Aircraft in this regard are inapposite. Although the
Appellate Body did refer in those reports to non- WTO tribunals' practice regarding certain procedural
issues, it did not rely on that practice as the basis fo r its findings. Instead, in each of the reports cited
by Mexico 109, the Appellate Body concluded that the te xt of the DSU and other provisions of the
WTO Agreement supported the panel's findings with resp ect to the relevant procedural issue, noting,
in addition, that non-WTO tribunals had similarly viewed the issue. 110 These reports do not support
Mexico's contention that its tax measures – which are inconsistent with Article III and not excepted
under Article XX – are nevertheless justified under the WTO Agreement due to a "recognized general
principle of international law."
4.366 Mexico's contention likewise does not find support in its out-of-context citations to statements
made by the United States in connection with the Air Services Agreement of 1946 111, the GATT
1947112, the NAFTA 113, or another WTO dispute settlement proceeding. 114 Whatever statements the
United States may or may not have made in these contexts – over half of which pre-date United States
obligations under the WTO Agreement – such stat ements cannot be used as grounds to create new
exceptions to WTO rules.
4.367 In addition to its defence under Article XX(d) and assertion of a "right to take unilateral
action" under general principles of international law, Mexico contends – in what appears to be an
argument recycled from its failed request for a prel iminary ruling – that the Panel need not limit its
recommendations in this dispute to a request that Mexico bring its WTO-inconsistent tax measures

107 United States responses to Panel questions, para. 12.
108 Appellate Body Report on EC – Hormones, paras. 120-125.
109 Mexico's second written submission, para. 17.
110 Appellate Body Report on EC – Bananas III , paras. 10, 132-138 (considering representation by
private counsel and standing and referring to DSU Article 3.7 and GATT Article XXIII); Appellate Body Report
on US – Wool Shirts and Blouses , pp. 14-17, DSR 1997:I, 323, at 335, (considering the burden of proof and
referring to DSU Article 3.8 and GATT Ar ticle XXIII); Appellate Body Report on India – Patents (US) ,
paras. 64-71 (considering the ability to review municipal law and referring to the panel’s "task in determining
whether India's [measures] were in conformity with I ndia's obligations under Article 70.8(a) of the TRIPS
Agreement"); Appellate Body Report on Canada – Aircraft, paras. 197-206 (considering adverse inferences and
referring to the panel’s mandate, DSU Article 11 and SCM Agreement Article 4).
111 Mexico's second written submission, para. 32 (regar ding a 1978 dispute over the right to operate a
West Coast to Paris flight via London).
112 Mexico's second written submission, para. 23, 37-38 (regarding a 1989 statement in connection with
a dispute over hormone-treated beef).
113 Mexico's second written submission, para. 33-35 (regarding a 1994 memorandum of
understanding); id. paras. 28-30 (regarding a 1996 dispute over agricultural products).
114 Mexico's second written submission, paras. 40-45 (regarding US – Section 301 Trade Act).

into compliance.
115 Mexico is incorrect. 116 Panel recommendations are limited to recommendations
that WTO-inconsistent measures be brought into conformity with the covered agreements. 117 T h i s
limitation is explicitly provided for in Article 19. 1 of the DSU which provides: "Where a panel ...
concludes that a measure is inc onsistent with a covered agreement, it shall recommend that the
Member concerned bring the measure into conformity with that agreement."
7. Conclusion
4.368 Therefore, in this dispute, for the reasons al ready stated and in its prior submissions, the
United States respectfully requests the Panel to find that Mexico's tax measures are inconsistent with
Articles III:2 and III:4 of the GATT 1994 and not jus tified under Article XX(d), and recommend that
Mexico bring its WTO-inconsistent tax measures into conformity with its obligations under the GATT
1994.
K. OPENING STATEMENT OF MEXICO AT THE SECOND MEETING OF THE PANEL
1. Introduction
4.369 Mexico will focus on the essence of the disput e as it has developed through the parties'
written and oral submissions and their responses to the questions posed by the Panel. At the heart of
this case lies the following question:
"What can a WTO Member that seeks to secure compliance with a free trade
agreement do when another Party blocks dispute settlement under the said agreement
even while it acknowledges the existence of a legitimate dispute?"
4.370 Mexico's response is that in such extraordinary circumstances, international law, including the
WTO Agreement, does not preclude a WTO Member from taking measures to secure the other
Member's compliance with its treaty obligations an d to rebalance the situation under the free trade
agreement.
4.371 The United States' position in this case has been ambiguous. When it is the complainant , its
position is clear: it claims a legal right not only to take counter-measures, but to do so prior to
submitting the matter to dispute settlement.
4.372 In this case, however, the United States finds itself in the position of being the obstructing
respondent and does not wish to admit that its long-standing view as to the rights of the obstructed
complainant State must apply equally when it is the recalcitrant party. Yet it is obvious that, if the
United States has this right as the obstructed compla inant, it cannot logically contend that it does not
accrue to another State that is obstructed by the United States.
4.373 This is why the United States avoided answering the question that Mexico put to it at the end
of the first substantive meeting with the Panel. The obvious conclusion is that the United States
agrees with Mexico's view that a NAFTA party has the legal right to take action to protect its interests
when another Party has obstructed NAFTA's dis pute settlement process. But the United States does
not want to admit to that in writing.
4.374 Nevertheless, as Mexico show ed in its second written submissi on, there is evidence from the
NAFTA that confirms that this is the United St ates position. Mexico reviewed that evidence at

115 Mexico's second written submission, paras. 62-64.
116 See also United States opening statement at the first meeting of the Panel, para. 12.
117 DSU Art. 19.1.

paragraphs 27 to 36 of its second submission. Me xico directs the Panel both to the United States
tariffs imposed in response to Canada 's tariffs in the NAFTA dispute on Tariffs Applied by Canada to
Certain US-Origin Agricultural Products and to the Memorandum of Understanding signed by two
United States cabinet secretaries who undertook not to "take countermeasures inconsistent with the
NAFTA or the GATT" during a 12-month period. That evidence is fully cons istent with the United
States statement to the GATT Council to which Mexi co referred in its first written submission
(paragraph 126).
4.375 The measure at issue resulted from Mexico's complaint in the context of NAFTA that:
 – the United States failed to comply with its NAFTA market access commitments for
sugar from Mexico;

 – the United States' refusal to admit Mexi can sugar into its market caused a serious
sugar surplus in the Mexican market that le d to severe financial stress in the Mexican
sugar industry;

 – US-originating HFCS made substantial in roads into the Mexican sweeteners market,
displacing sugar from important sectors and further contributing to increasing the
sugar surplus;

 – Mexico was forced to take other measures at considerable public expense to alleviate
the impact of the surplus in its market;

 – throughout this time, Mexico pressed for a resolution of the dispute concerning its
NAFTA rights by all means, including recourse to the specific dispute settlement
mechanism and to negotiations and bilateral consultations;

 – the United States steadfastly refused to permit the NAFTA dispute settlement system
to discharge its function of assisting the disputing parties in achieving a mutually
satisfactory solution to the dispute.

4.376 After exhausting all alternative means, the Mexican Congress adopted the measure challenged
by the United States in this proceeding.
4.377 The United States has been forced to admit that there is a genuine dispute between the parties
that has not been resolved, but insists that this is not relevant to the issues before the Panel. In the
face of all of the evidence and the fact that it has been almost five years si nce Mexico requested the
establishment of an arbitral panel under NAFTA Ch apter Twenty – which request is still pending –
the United States now claims that it has not impeded the operation of this dispute settlement
mechanism. It contends that Mexico has simply "a ttempted to change the subject" by informing the
Panel of the existence and relevance of the larg er dispute within the NAFTA (United States second
written submission, paragraph 1).
4.378 These contentions are not borne out by the reco rd. Mexico submits that the NAFTA dispute
is highly relevant to the issues before this Panel.
4.379 Indeed, the United States goes even further. In its most recent written submission, the United
States affirms that there is no link between its HFCS case and Mexico's claim with regard to the
market access commitments for Me xican sugar. For example, in paragraph 64 of its second written
submission, the United States notes:

"It is difficult to understand how this ha rm imposed on HFCS and soft drinks and
syrups sweetened with HFCS is designed to 'secure compliance' with unrelated
provisions under the NAFTA on market access for sugar."
4.380 With all due respect, this is an absurd statem ent. As Mexico showed in its first written
submission, the United States Trade Representative himself, Michael Kantor, established the link
between HFCS and sugar in 1993, when he proposed negotiating the exchange of letters. Paragraphs
37 to 51 of Mexico's first written submission refer to that and Mexi co submitted the letter in which
that link is established in this proceeding:
" ...
I propose that we exchange side letters to clarify that, in determining a party's
'net production surplus' status, sugar w ill be considered to include raw or
refined sugar derived directly or indir ectly from sugar cane or sugar beets,
liquid refined sugar, and high fructose corn sweetener … ".
118
4.381 Moreover, the United States claim is based entir ely in the full substitutability of HFCS for
sugar in certain industrial uses. The United Stat es Department of Agriculture's market studies
corroborate this:
" ...
The Mexican sugar industry wants the US sugar quota to be higher, in agreement with
the higher Mexican sugar production. Basi cally, the Mexican sugar industry is not
against US HFCS imports into Mexico; wh at they want is to gain access for more
than the 25,000 MT of sugar currently a llowed under the TRQ for Mexico. With the
high levels of imported HFCS and higher levels of sugar pr oduction, the sugar
industry claims there is danger of a closing of 15 to 20 mills, resulting in layoff of
about 100,000 workers."
119
4.382 In Mexico's opinion, it is an affront to this Panel to deny the link between HFCS and sugar,
when the United States was the first to establish it.
4.383 In this submission, Mexico will elaborate upon these issues. It will also respond to the main
arguments that are invoked by the United States in its rebuttal submission against Mexico's defence
under Article XX(d) of the GATT 1994.
2. The relevance and status of the NAFTA dispute
4.384 Mexico proposes to start by making a few point s about the approach taken by the United
States in this case, with particular reference to its rebuttal submission.
4.385 First, the United States continues to wrongly argue that the adoption of the measures by
Mexico was to protect the domestic production of cane sugar. 120 Mexico insists, and it should now be
perfectly clear, that the intent behind Mexico's me asures was to secure the United States' compliance
with its NAFTA obligations while it rebalanced its market. But for the United States' refusal to
resolve the dispute through the NAFTA mechanism, the Mexican measures would never have been
necessary.

118 Mexico's first written submission, para. 41.
119 Mexico's first written submission, para. 61.
120 United States second written submission, para. 16.

4.386 The Panel should be aware that this was not in a situation where, with no treaty-based
expectation of being able to export sugar surplu ses to the United States market, Mexico generated a
surplus. Quite the contrary: the bilateral trade regime negotiated in the NAFTA foresaw the Mexican
sugar industry's modernization (after the priva tization that was taking place while the NAFTA was
being negotiated) and expressly contemplated that any surpluses generated c ould be exported to the
United States market. Both parties were fully c onscious of the competition between sugar and HFCS,
and that HFCS access to the Mexican market would contribute to generating surpluses. The regime
established in NAFTA Annex 703.2 regarding trade in sugar and syrups deals exclusively with the
sugar surplus exports during the transition period.
4.387 The United States subsequently refused to allow the agreed access to Mexican sugar, in order
to protect its own sugar industry from competing with Mexican sugar, yet nevertheless sought to
ensure that HFCS, either US-originating or loca lly produced from United States corn, had free access
to the Mexican market, without regard to the consequences for the Mexican sugar industry.
4.388 Mexico submitted the matter to the NAFTA dis pute settlement mechanism, but the United
States obstructed its operation by refusing to appoin t panellists and even fo rbade the United States
Section of the NAFTA Secretariat – in charge of administering the proceedings – to do so when
Mexico requested the appointment of panellists. Th e United States now seeks to convince this Panel
that it has not obstructed the operation of dispute settlement proceedings and that it is seemingly
normal that some five years later the proceedings are still in the panellist appointment stage. Under
such circumstances the best answer it can offer to this Panel is that all of this is simply irrelevant to
the claim it has submitted under the DSU.
4.389 The Panel should be aware of the fact that during the years before the Mexican Congress
adopted this tax over 3 million tons of HFCS were sold into the Mexican market, thereby exacerbating
the effect of the NAFTA-induced surplus on the Mexican industry and cane sugar sector. What
segment of the Mexican market has HFCS taken? The soft drinks segment.
4.390 The IEPS tax on soft drinks sweetened with sweeteners other than cane sugar constitutes a
temporary response to the United States action aime d at a rebalancing of the situation pending a
resolution of the bilateral sweeteners trade dis pute. When the facts surrounding the measures'
enactment are taken into account, it cannot reasonably be maintained that the purpose of the IEPS tax
is simply to protect the Mexican sugar producers from import competition.
4.391 The United States did not bring this factual context to the Panel's attention. Mexico urges the
Panel to re-read the United States' first written s ubmission and see just how much now undisputed
factual context was omitted when it brought this case forward.
4.392 Once it was confronted with all the facts, the United States simply made superficial assertions
about the rightness of its position under the NAFTA while simultaneously urging the Panel not to
look at the underlying wider dispute.
4.393 Mexico requests the Panel to take note of th e extensive documentary evidence that it has
adduced in this proceeding. Mexico's first wr itten submission contains 29 annexes which include
contemporaneous letters regarding the establishm ent of the NAFTA arbitral panel. Mexico
meticulously sought to demonstrate through contemporaneous documents how the dispute arose, what
steps Mexico took to resolve the dispute in acco rdance with the procedures set out in the NAFTA,
how the United States blocked Mexico's efforts through its acts and omissions, and the serious
consequences of the United States' obstructionism for the Mexican productive sectors.
4.394 None of that documentary evidence was contested, still less rejected, by the United States.

4.395 Mexico's first written submission set out Mexico's efforts to resolve the underlying dispute in
great detail and in a carefully documented fashion. Mexico does not have to rehearse them here.
4.396 When it was finally cornered on its steadfast re fusal to subject itself to the NAFTA dispute
settlement mechanism, the Unite d States weakly claimed that the NAFTA parties are presently
"engaged in the third stage" of the dispute settle ment process, namely, the panellist selection stage.
121
This is simply not true. After having forbidden its NAFTA Secretariat Sec tion to appoint panellists,
the United States took no further action. Yet now the United States cannot bring itself to admit that it
has obstructed a dispute settlement mechanism in precisely the manner for which it has criticized so
many other States.
4.397 Mexico has been placed in an extraordinar ily difficult situation by the United States
manipulation of the dispute settle ment mechanisms of the NAFTA and WTO. But the Panel must
recognize that Mexico submitted to its jurisdicti on, and has presented its legal arguments in good
faith. Further, Mexico has been scrupulous in presenting the underlying facts to the Panel. The
United States has not disputed those underlying f acts, and has not submitted any evidence to refute
Mexico's evidence.
4.398 So Mexico is greatly troubled when during th e first substantive meeting and in its second
written submission the United States makes statemen ts such as "The United States is currently
engaged in the third stage" of the NAFTA dispute se ttlement procedure. The uncontradicted evidence
is that it has been almost five years since Mexico requested the formation of an arbitral panel under
NAFTA Chapter Twenty and that the United States re fused to cooperate in naming arbitrators. The
United States even gave instructions to its NA FTA Secretariat Section to abstain from appointing
them. For the United States now to argue that the dispute settlement proceeding is still ongoing, and
that it has complied with its NAFTA dispute settlement obligations, is not only false but demeaning to
the integrity of this arbitration proceeding.
4.399 The Panel should reject the United States' attemp t to argue that it is, in good faith, actually
trying to allow the NAFTA panel to discharge its duty. The Panel should also reject the United States'
arguments that its own conduct is irrelevant to asserting its legal rights in this forum. It should reject
its request to ignore the circumstances of the wi der dispute arising under the NAFTA and its own
actions in this regard. It should also reject th e suggestion that there is no link between sugar and
HFCS and that the measure at issue did not have the purpose of securing United States' compliance
with the NAFTA. Lastly, the United States' hope that this Panel will dignify and indeed reward its
intransigence and obstructive conduct in the context of international cooperation should be rejected.
4.400 Mexico agrees that this Panel has no jurisdic tion to decide whether the United States has
failed to comply with its market access commitm ents or indeed whether Mexico's rebalancing
measures are justified under the NAFTA. Mexico has not asked this Panel to decide the NAFTA
dispute. The point is simple: it is one thing to say that a WTO panel cannot decide a dispute under a
treaty different from the "covered agreements" and is quite another thing to say that a WTO panel
cannot consider the facts of a dispute arising under another treaty that has also given rise to the
dispute before it. Mexico submits that the Pane l can and must consider the totality of the facts
relating to the measure that is the subject of this dispute. These facts explain the history of the dispute
between the two parties, Mexico's good faith efforts to resolve it, and the failure of those efforts
owing to the United States' acts and omissions. The United States has not and cannot take issue with
the facts as a whole. The Panel to take these facts into consideration for a variety of reasons:
 – to explain the intent of the measures;

121 United States second written submission, para. 66.

 – to explain the serious prejudice that Mexico is suffering as a result of United States
forum shopping while continuing to obstruct the resolution of Mexico's grievance in
the NAFTA forum;

 – to explain that Mexico has a bona fide position that the measures can be justified
under the NAFTA and that the entire dispute could be resolved there;

 – to support Mexico's position that th e measures can be justified under GATT 1994
Article XX(d); and

 – because all the facts should be taken in to consideration by the Panel when it
formulates recommendations for the resolution of this portion of the dispute.

4.401 As Mexico has stated, the United States' c onduct is highly relevant to the Panel's
consideration of whether, through the measures at i ssue, Mexico is justifiably seeking to secure the
United States' compliance with the NAFTA. In evalua ting that issue, the Panel can consider the rules
of customary international law and general principles of law even if they are not expressly set out in
the WTO "covered agreements".
4.402 Pursuant to Article 31(3) of the Vienna Conven tion on the Law of Treaties, in interpreting the
WTO "covered agreements" (including the GATT 1994) , this Panel must take into account "any
relevant rules of international law applicable in the relations between the parties". Clearly, the
NAFTA sets out such rules for the relations between Mexico and the United States which are relevant
to the present dispute. Consequently, the Pane l is entitled to take notice of evidence supporting
Mexico's arguments.
4.403 For the reasons set out above, Mexico re quests the Panel to make the following
determinations of fact – which it will address furthe r below – whatever its resolution on the merits of
this dispute may be:
 – Mexico and the United States negotiated the sweeteners bilateral preferential trade
regime which includes HFCS and sugar, pr oducts that compete in certain market
segments;

 – a legitimate broader dispute exists betw een Mexico and the United States regarding
access of Mexican sugar to the United States market;

 – Mexico has exhausted all efforts to resolv e that dispute through diplomatic channels,
bilateral consultations and negotiations , and through NAFTA's Chapter Twenty
dispute settlement mechanism;

 – notwithstanding the fact that Mexico requested the establishment of a NAFTA
arbitral panel in 2000, to date the United States has not appointed panellists and has
thus frustrated Mexico's attempt to resolve its grievances under the NAFTA;

 – the tax measure at issue is a response to the United States' refusal to submit to
NAFTA dispute settlement, one which seeks to induce the United States to do so as
well as to rebalance Mexico's market which has been affected by the sugar production
surplus resulting in part from United States HFCS imports and HFCS production
from corn imported from the United States; and

 – the United States has stated that under international law it can validly adopt counter-
measures when another State refuses to submit to dispute settlement mechanisms.

4.404 Lastly, in considering the applicability of th e provisions of the GATT 1994 in this dispute
pursuant to Article 11 of the DSU, Mexico urges the Panel to bear in mind the following general
principle of international law enunciated by the Permanent Court of International Justice:
"[O]ne party cannot avail himself of the fact that the other has not fulfilled some
obligation, or has not had recourse to some means of redress, if the former party has,
by some illegal act, prevented the latter from fulfilling the obligation in question, or
from having recourse to the tribunal which would have been open to him."122
4.405 The United States has violated its commitment to submit to NAFTA dispute settlement and
thereby prevented Mexico from having its sugar market access rights clarified. It has then criticized
Mexico for unilaterally determining that the Un ited States has violated the NAFTA without having
first obtained a panel report in its favour.
4.406 The United States has also attempted to draw a line between this slice of the dispute and the
larger NAFTA dispute. It says that whatever has occurred under the NAFTA is entirely separate from
the matter before this Panel. It suggests that con sequently this Panel has no right even to take those
facts into consideration here. The United States' position is plainly wrong.
4.407 Mexico would ask the Panel to refer to th e opening paragraph of NAFTA Article 2005 which
permits a complainant to settle "disput es regarding any matter arising under both this Agreement",
i.e., NAFTA, "and the General Agreement on Tariffs and Trade … in either forum". Thus, the text of
the NAFTA makes it clear that disputes like th is one arise under both agreements, not one or the
other. The dispute is not separable from the NAFTA. Nor is it one which arises exclusively under the
WTO.
4.408 Mexico has already pointed out that the only WT O provision at issue in this case, Article III
of the GATT 1994, is expressly incorporated into the NAFTA by Article 301. In that sense, Mexico
is thus speaking of precisely the same obligation incorporated in two agreements, the GATT 1994 and
a free trade agreement signed pursuant to Article XXIV thereof.
4.409 Mexico recognizes that this Panel cannot resolv e the NAFTA dispute, but insists that the
Panel can take notice of it. Ignoring these facts would reward the United States for persistently
obstructing the operation of the NAFTA dispute settle ment mechanism by frustrating the attempt to
resolve a legitimate dispute which it acknowledges to exist between the parties, by forum shopping,
and it will not contribute to achieving the main obj ective of the DSU's dispute settlement mechanism
– that of finding a positive solution to the dispute – but rather will preserve the inequity of the United
States conduct and the obvious prejudice suffered by Mexico.
3. The Panel has greater flexibility to formulat e recommendations than the United States
admits
4.410 In its second written submission, Mexico point ed out that under the DSU the Panel has
greater flexibility to formulate recommendations than the United States is prepared to recognize. The
United States simply asks the Panel to ignore its ow n actions, to find that there was a breach of the
GATT, and to recommend that Mexico bring the measure into compliance with the GATT 1994.
4.411 The United States devotes much time and atten tion to Article 11 of the DSU and the Panel's
terms of reference, but does not address what th e GATT 1994 – the applicable covered agreement –

122 Chorzów Factory (Merits) Case, PCIJ. Ser. A, No. 17, p. 29. (Emphasis added).

actually requires a panel to do. As Mexico noted, Articles XXII and XXIII of the GATT 1947 do not
support the conclusion asserted by the United States.
4.412 Article XXII did not require a panel to make a ruling of breach as claimed by the United
States; rather, it mandated the Contracting Pa rties "to consult with any contracting party or parties in
respect of any matter for which it has not been possible to find a satisfactory solution through
consultation under paragraph 1". (Emphasis added).
4.413 Similarly, Article XXIII:2 provided for the referral of a matter (including an alleged failure of
a Contracting Party to carry out its obligations under the GATT or a Contracting Party's application of
a measure which conflicts with the provisions of the GATT) to the CONTRACTING PARTIES.
Upon such referral, the CONTRACTING PARTIES:123
"[S]hall promptly investigate any matter so referred to them and shall make
appropriate recommendations to the contracting parties which they consider to be
concerned, or give a ruling on the matter, as appropriate." (emphasis added)
4.414 The GATT's drafters thus contemplated either the making of "appropr iate recommendations
to the contracting parties … concerned" or a "ruling on the matter", again, "as appropriate". Thus:
(i) one remedy available to the CONTRACTING PARTIES was recommendatory; and (ii) the other,
the possibility of a ruling, was itself made conditional upon its appropriateness.
4.415 Three points warrant noting: First, Arti cles XXII and XXIII conferred discretion upon the
CONTRACTING PARTIES (and panels ac ting at their behest). Second, neither Article sets limits on
the CONTRACTING PARTIES (or a panel's) power to shape its recommendations or make a "ruling
in the matter" in response to the facts peculiar to a pa rticular case. To the contrary, they (or a panel)
are to determine what is appropriate in the circumstances. Third, these remedies were available to the
CONTRACTING PARTIES in situations where breach of the GATT was alleged.
4.416 The flexibility that the GATT's drafters establishe d is preserved in the DSU: "In the absence
of a mutually agreed solution, the first obj ective of the dispute settlement mechanism is usually to
secure the withdrawal of the measures concerned if these are found to be inconsistent with the
provisions of any of the covered agreements" (Emphasis added.) The inclusion of the qualifying word
"usually" was intentional. The DSU's dr afters could have used the mandatory " shall be to secure the
withdrawal …" or have amended GATT Articl es XXII and XXIII when the GATT 1947 became the
GATT 1994, but chose not to.
4.417 In short, it is not correct to maintain that the only "rulings" provided for in the GATT are
findings of breach followed by a recommendation to withdraw the measures at issue. It is open to
panels to make other findings in order to secure a positive solution to a dispute.
4.418 This is confirmed by the terms of reference that established this Panel:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the United States in document WT/DS308/4, the matter referred to the DSB by the
United States in that document, and to ma ke such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those
agreements." (emphasis added)

123 As practice evolved, this function was exercised by panels established by the CONTRACTING
PARTIES.

4.419 Article 11 of the DSU contemplates possibilities th at the United States has chosen to ignore.
Thus, it would be within the Panel's discretion, based on an objective assessment of the matter, to
recommend what steps the parties should take to "s ecure a positive solution to [the] dispute". Since
the United States claims that it shares Mexico's disa ppointment at the parties' inability to resolve the
larger dispute, it should welcome the recommendation that Mexico is requesting from the Panel.
4. The two Article III obligations at issue
4.420 Mexico wishes to comment briefly on the Unite d States argument that the same measures
may breach both Article III:2 and Article III:4 of the GATT 1994.
124 As a matter of WTO law,
Mexico doubts that this is possible. Indeed , the excerpt of the Appellate Body Report in EC –
Asbestos quoted by the United States does not support the proposition that there is an overlap in the
scope of coverage of these two di stinct paragraphs of Article III. On the contrary, it suggests that
fiscal regulation is covered by a specific provision, namely, Article III:2, while non-fiscal regulation
is covered by another provi sion, namely Article III:4. To be sure, in the paragraph quoted by the
United States, the Appellate Body was not even di scussing the question of whether the same measure
could be examined under both Article III:2 and Article III:4. It was examining a totally different legal
issue, that is, the meaning of the term "like" in both provisions.
4.421 In its responses to the questions of the Panel, Mexico also noted that WTO jurisprudence
actually suggests that measures taking the form of "internal taxes or other charges" should be
examined under Article III:2.
125 The Panel should note that the brief comment on this legal point does
not qualify Mexico's intention as regards addressi ng the United States' arguments under Article III of
the GATT 1994, but is made simply because, like all other WTO Members, Mexico has a systemic
interest in the correct interpretation of that provision.
5. Mexico's defence under Article XX(d) of the GATT 1994
4.422 As previously explained, irrespective of whethe r the measures at issue are inconsistent with
Article III of the GATT 1994, Mexico believes that they are justified under Article XX(d). The
allegations made by the United States against Mexico's defence warrant a response.
4.423 At paragraph 39 of the United States' second wr itten submission, it is contended that "Mexico
must establish and prove that it has met each of the elements required for invocation of an
Article XX(d) defence". Mexico acknowledges th at as the party who has invoked an affirmative
defence, it has the initial burden of proof on th is issue. However, the United States is
mischaracterizing the applicable rules on the allocati on of the burden of proof by suggesting that the
burden of proving that its measures are saved by Article XX(d) rests solely on Mexico's shoulders.
4.424 Simply put, pursuant to the well-known rules governing the allocation of the burden of proof,
the onus is on Mexico to raise a presumption that wh at it claims is true. In other words, Mexico's
burden is to make out a prima facie case that its measures are justified under Article XX(d) of the
GATT 1994. Once it has done so, the burden then shifts to the United States to rebut that prima facie
case.
4.425 Mexico has put forward sufficient evidence a nd legal arguments to establish a prima facie
case that its measures are justified under Article XX(d), and maintains that the United States has
failed to rebut its arguments and evidence.

124 United States second written submission, para. 12.
125 Mexico's responses to Panel questions, p. 8.

4.426 The United States' primary argument is that Mexi co attempts to construct a new Article XX
exception by claiming that the NAFTA constitutes "laws or regulations" within the meaning of
paragraph (d) of that provision, and that such an exception would "fundamentally undermine the
dispute settlement system established in the WTO Agreement". 126 This doomsday scenario does not
withstand scrutiny.
4.427 It is wrong to say that Mexico's interpretation would offer WTO Members carte blanche to
breach from their WTO obligations whenever a Member claims that obligations owed to it under any
international agreement have not been fulfilled. This is not Mexico's position nor is it in accordance
with the facts of this case.
4.428 Mexico does not contend that the mere claim of a WTO Member that another Member has
breached an international treaty is enough to ju stify the adoption of measures that could be
inconsistent with WTO provisions. The Panel shou ld be aware that there is a legitimate dispute
between the parties, as recognized by the Un ited States, regarding its NAFTA market access
commitments and that Mexico considers that th e United States has breached those NAFTA market
access obligations. Nevertheless, the measure a dopted by the Mexican Congress is not simply a
response to this claim raised by Mexico.
4.429 Nor does Mexico request that this Panel issue a finding that the United States has breached its
NAFTA market access commitments in order to c onclude that the measure is justified under
GATT 1994 Article XX(d).
4.430 The United States trivializes Mexico's position.
4.431 There should be no doubt for this Panel that the United States has impeded Mexico's access to
the NAFTA dispute settlement mechanism and, therefore, that it has made it impossible for Mexico to
obtain a resolution of its grievance with regard to the market access conditions under that Treaty.
There should be no doubt that Mexico has also e xhausted diplomatic channels, bilateral negotiations,
and international cooperation without success. No r should this Panel have any doubt as to the
prejudice that the Mexican industry has suffered.
4.432 The measure adopted by the Mexican Congress occurred only after all other efforts had failed.
It is not about a mere claim that the United States has breached its market access obligations. Mexico
has plainly demonstrated that the United States has prevented it from gaining access to the dispute
settlement mechanism. This is not a mere allegati on and, naturally, it is not a question that can be
resolved by a NAFTA arbitral panel. This is a question of fact that this Panel can clearly decide based
on the evidence filed in this proceeding.
4.433 Mexico's position is that, in such circumstanc es, the tax measure at issue is justified under
Article XX(d) of GATT 1994.
4.434 The United States' argument further trivializes th e application of Article XX(d), because such
application is subject to a number of requirements. In the first place, as in all matters affecting the
WTO, a Member's invocation of an exception is subject to the dispute settlement mechanism.
Second, contrary to the United States' assertion, Artic le XX(d), by its own terms, is restricted to
measures necessary to secure compliance with those la ws or regulations which are not inconsistent
with the provisions of the GATT 1994.
4.435 The mere confirmation that the terms "laws and regulations" in Article XX(d) include
international law would not mean that all measures related to the enforcement of international law

126 United States second written submission, para. 37.

would ipso facto be justified under that provision. Demonstrating that the measures for which the
exception is claimed are related to "laws and regulations" which are not inconsistent with the GATT is
only the first element that needs to be established.
4.436 In addition, as the Appellate Body clarified in Korea – Various Measures on Beef , (1) the
measures must be designed to "secure compliance" with such "laws or regulations"; (2) they must be
"necessary" to secure such compliance; and (3) they must also comply with the requirements of the
chapeau to Article XX. In short, for an Article XX(d) defence to be successful, it does not suffice to
allege that the measures at issue are related to the enforcement of "laws or regulations". Article XX is
structured and has always been interpreted so as to avoid any abuse by WTO Members.
4.437 Were any other WTO Member to seek to justif y a measure related to the enforcement of an
international treaty under Article XX, it would be subject to the same strict process of justification and
review.
4.438 Moreover, Mexico is not arguing that Article XX (d) would be available to justify measures
aimed at securing Members' compliance with obligations owed under the WTO Agreement. Nor does
Mexico's reading of Article XX(d) mean that unilate ral action to counter a breach of the provisions of
the WTO Agreement would be authorized.
127 This is yet another example of a non-existent systemic
concern that the United States incorrectly believ es would arise should Mexico's interpretation be
upheld by this Panel. Mexico recognizes that Article 23 of the DSU prevents a WTO Member from
seeking redress of a violation of WTO obligations other than by having recourse to the rules and
procedures of the DSU. But Article 23 of the DS U says nothing about measures aimed at securing
compliance with other international agreements that are not inconsistent with the GATT. At most,
Article 23 can only exclude measures aimed at secu ring compliance with obligations under the WTO
Agreement from the scope of measures potentially authorized by Article XX(d) of the GATT 1994.
4.439 For these reasons, Mexico's interpretation could not render Article 23 meaningless. Mexico's
measures are not about securing United States comp liance with the WTO "covered agreements", but
with other
 international agreements which are not inc onsistent with the GATT 1994, in this case an
agreement authorized by Article XXIV. Mexico maintains that Article XX(d) of the GATT and
Article 23 of the DSU can still be read harmonious ly and there is no conflict between those two
provisions. A WTO Member may very well implement measures to secure compliance with
obligations under an international agreement without breaching its ob ligations under Article 23 of the
DSU.
4.440 The United States also argues that reading "law s and regulations" to include international
treaties would render Article XX(h) of the GATT 1994 redundant.
128 Again, this is incorrect.
4.441 Article XX(h) provides a specific exception fo r measures "undertaken in pursuance of any
intergovernmental commodity agreement". In or der to invoke Article XX(h), a WTO Member does
not have to establish that the agreement in questio n is not inconsistent with the provisions of the
GATT 1994, nor does it have to demonstrate that the me asure is "necessary". It has only to show that
a measure was "undertaken in pursuance" of obl igations under an intergovernmental commodity
agreement. Article XX(h) sets out a distinct righ t, applicable to a special subset of "laws or
regulations" or international agreements: the "intergovernmental commodity agreement[s]".
Arguably, it is easier to justify a measure under Ar ticle XX(h), but the wording of that provision does
not imply that "intergovernmental commodity agreem ent[s]" or obligations un der other international
agreements cannot also be "laws or regulations" within the meaning of Article XX(d).

127 United States second written submission, para. 47.
128 Id., para. 44.

4.442 Turning to the United States argument that the terms "laws and regulations" exclude
international treaties, Mexico reite rates that nothing in the text, the context, or the object and purpose
of Article XX(d) compels the restrictive interpreta tion that the United States urges. For the reasons
set out at paragraphs 70 to 73 of Mexico's second written submission, the terms "laws and
regulations" do not exclude them.
4.443 Mexico also notes that the United States keeps r eading the word "domestic" into the text of
Article XX(d). As Mexico noted before, when th e GATT drafters wanted to limit the application of
GATT provisions to domestic measures, they did so in an explicit manner. The applicable principles
of treaty interpretation "neither require nor condone the imputation into a treaty of words that are not
there … " 129
4.444 The United States also refers to Article XVI:4 of the Marrakesh Agreement Establishing the
WTO to support its view that the phrase "laws and regulations" means "domestic laws and
regulations". However, a careful review of this provision actually supports Mexico's interpretation
that the scope of Article XX(d) is not limited to a Me mber's domestic laws. In fact, Article XVI:4 of
the WTO Agreement reads: "[e]ach Member shall en sure the conformity of its laws, regulations and
administrative procedures with its obligations … ". In comparison, Article XX(d) does not read
"measures … necessary to secure compliance with its laws and regulati ons which are not
incompatible with the provision of this Agreemen t". Again, Mexico notes that when the GATT or
WTO drafters wanted to limit the scope of certain provisions, they expressly did so.
4.445 Mexico would like to briefly address the United States' arguments that Mexico's measures are
not "necessary" within the meaning of Article XX(d) of the GATT 1994. The United States' second
written submission repeats the bald assertion that "Mexico had any number of alternative measures
reasonably available to it… to assist its domestic can e sugar industry and/or resolve its disagreement
with the United States over the exact terms of the NAFTA". 130 Mexico insists that there should be no
doubt for this Panel that Mexico exhausted all measures reasonably available to it, including:
 – Diplomatic and internatio nal cooperation efforts, including bilateral consultations and
negotiations;

 – resorting to the NAFTA's dispute settleme nt mechanism and exhausting all efforts to
establish an arbitral panel, but the United States not only refused to appoint panellists,
but when Mexico requested the United States NAFTA Secretariat to do so, ordered it
to abstain from appointing them;

 – sponsoring negotiations between industries of both countries;

 – providing relief, at considerable public e xpense, to its sugar industry which faced a
severe financial crisis.

4.446 In summary, Mexico at all times has sought to resolve the dispute in good faith. Of course,
the United States is unable to identify a single alte rnative measure which would have been reasonably
available to Mexico to achieve its legitimate objectives.
4.447 It was only when all of these attempts had failed that Mexico took the measures now
complained of. This Panel should reject the United States argument without hesitation.

129 Report of the Appellate Body on India – Patents, para. 46.
130 United States second written submission, para. 65.

4.448 Mexico would remind the Panel that virtually a ll the facts submitted by Mexico have been
corroborated by contemporaneous reports of the Un ited States Department of Agriculture. Mexico
did not submit self-serving evidence. Our first written submission cited those USDA reports.
6. Conclusions
4.449 For the reasons set out in Mexico's prior submissions and elaborated upon in this opening
statement, Mexico requests that the Panel fi nd that Mexico's measures are justified under
Article XX(d) of the GATT 1994. Accordingly, the United States' complaint must be rejected in its
entirety.
L. C
LOSING STATEMENT OF MEXICO AT THE SECOND MEETING OF THE PANEL
1. Response to the United States' oral arguments
(a) Paragraphs 6 and 7131
4.450 At paragraph 6 of its opening oral statement, the United States stated that "acceptance of
Mexico's interpretation of 'laws or regulations' to include obligations owed to Mexico under the
NAFTA would open the door for any Member to claim that a breach of the WTO Agreement, or some
other treaty, by another Member meant that the Member was to be free to breach any of its WTO
obligations". At paragraph 7, it further states th at in such a case "WTO dispute settlement would
become a forum of general dispute resolution for all international agreements, and all such agreements
would be in effect incorporated into, and enforced by, the WTO Agreement by virtue of
Article XX(d)". Mexico addressed those issues in the opening session in detail, at paragraphs 59 to
72 of its oral statement,
132 but would like to add that this is an incorrect but highly – albeit
unintentionally – revealing statement in that it assu mes that all WTO Members that are parties to
other international treaties will ordinarily refuse to submit to dispute settlement under those treaties,
just as the United States has done in this case.
4.451 In its opening statement, Mexico pointed out clearly that a Member must do more than merely
claim that a treaty has been breached in order to satisfy the necessity test; in addition, it must comply
with all the requirements established under Article XX( d), and its action is further subject to review
by means of the DSU. If a State sought to secure another Member's compliance with another treaty
through Article XX(d) without first invoking that treaty's dispute settlement mechanism, the obvious
answer of a WTO Panel would be that Article XX (d) cannot be used as a means of forum shopping.
The Member in question would have to use the prope r forum, that is, the one established by the other
treaty.
4.452 Moreover, the Panel should note the theoretical dimension of the United States' argument.
Frankly, the situation it poses is purely hypothetical. It would arise only if WTO Members were sued
pursuant to other international treaties owing to pr esumed breaches under such treaties, and refused to
submit to dispute settlement mechan isms under such treaties. The fi rst question that arises is: why
would WTO Members invoke a GATT 1994 exception when the treaties with which they seek to
secure compliance have mechanisms to resolve disputes arising thereunder? If both States submit to
the stipulated mechanism to settle their dispute, that will be the end of the matter.
4.453 There should not be any doubt: Mexico does not
 consider that the US attitude with regard to
this case is the regular conduct of the community of States. Mexico does not suppose that States
ordinarily commit acts giving rise to international complaints by other States and then refuse to

131 See paras. 4.347 and 4.348 of this report, above.
132 See paras. 4.426 to 4.439 of this report, above.

submit such acts to review under established disput e settlement mechanisms. International practice
shows that States regularly comply with agreemen ts to submit to dispute settlement procedures.
Mexico's participation in this and other proceedings corroborates this fact. In its first written
submission, Mexico showed how on the three ot her occasions where a NAFTA panel was requested,
the respondent agreed to appoint panellists. The United States was the respondent party in two of the
three cases and its measures were challenged successfully.
4.454 Mexico has made it clear that this case pres ents extraordinary circumstances in which a
dispute exists regarding compliance by a State – the United States – with its international obligations,
and that State has refused to submit to a dis pute settlement mechanism expressly established by
exploiting a deficiency in the procedure for the appointment of panellists.
4.455 Mexico maintains that in these extraordin ary circumstances, the GATT 1994 allows the
affected State to adopt measures to secure the obstructionist State's compliance, and to protect its
legitimate interests by rebalancing the situation and re-establishing the status quo ante . The only
reason why Mexico has invoked Article XX(d) in this case is that it cannot have access to the NAFTA
dispute settlement mechanism, which has been blocked by the United States.
(b) Paragraph 11133
4.456 In paragraph 11 of its opening statement, the United States claimed that "international trade
agreements, such as the NAFTA and the WTO Agreement, are not laws and are not enforceable in US
courts". This is a mischaracterization of US law and of the NAFTA itself.
4.457 The starting point is the US Constitution. Article VI, Clause 2 states that international
treaties, as well as the Constitution itself and the laws of the United States, "shall be the Supreme Law
of the Land". With regard to treaties subscribed by the US that are international trade agreements,
such as the WTO and NAFTA, for purposes of its dom estic law the United States has chosen to ratify
those agreements as if they were domestic legisla tion, and the US Congress has provided that in such
circumstances those agreements are not self-executing at the domestic level.
4.458 Nevertheless, the simple reason why the NAFTA is not a law which is enforceable by private
parties in the US courts is that the NAFTA Par ties expressly agreed in Article 2021 that they would
not provide for a right of action under their domestic law to secure another Party's compliance with its
NAFTA obligations. In the NAFTA the Parties expr essly agreed not to provid e for a domestic cause
of action that would allow private parties to sue in the domestic courts of a Party in order to secure
another NAFTA Party's compliance with its NAFTA ob ligations. In other words, it would have been
unnecessary to prohibit such a domestic cause of action if the NAFTA could never have the effect of a
law in the internal legal order of the United Stat es. In its second written submission, Mexico quotes
NAFTA Article 2012 at footnote 59 and notes the implementing action taken by Canada and the
United States. In the absence of such a NAFTA provision, any NAFTA Party could have made
NAFTA enforceable by private right of action before its domestic courts.
4.459 However, barring a private cause of action in the courts of each NAFTA Party does not mean
that NAFTA has no domestic legal effect in each Party.
4.460 Interestingly, Section 102(c) of the NAFTA Implementation Act states that "No person other
than the United States … shall have any cause of action or defence under …[the NAFTA] or by virtue
of Congressional approval thereof… ". Thus, US law expressly provides that international trade
agreements are directly enforceable in judicial actions brought by the federal government. For the
WTO, this is implemented in 19 USC 3512(b)(2)(A), which provides:

133 See para. 4.352 of this report, above.

"No State law, or the application of such a State law, may be declared invalid as to
any person or circumstance on the ground th at the provision or application is
inconsistent with any of the Uruguay Round Agreements, except in an action brought
by the United States for the purpose of declaring such law or application invalid."
4.461 Further, the United States actually retained a ty pe of domestic right of petition in Section 301
of its Trade Act of 1974, which permits privat e parties to petition the United States Trade
Representative to secure compliance with the NAFTA by another NAFTA Party. Clearly,
international treaties, including trade agreements, are treated as "laws" in the United States.
4.462 The recent court decision in the Corus Staal case, cited by the United States in its opening
statement does not support its propos ition that trade agreements are not laws. Rather, that decision
found that a private party could not rely on the WTO Anti-Dumping Agreement or WTO panel
decisions as a basis for overturning the US Co mmerce Department's interpretation of US anti-
dumping law. That is a much narrower point.
4.463 Accordingly, the position of the United States th at there is an absolute separation between
laws and regulations, as internal obligations, and international trea ties, as international obligations,
and that in no circumstances can international agreements be law, is incorrect. It is clear that the three
NAFTA Parties, like many other countries, consider inte rnational treaties to be laws. This contradicts
the United States position on the ordinary meaning of the terms "laws and regulations".
4.464 The Panel should appreciate as well that, as Mexico pointed out, when the drafters wished to
limit the meaning of the terms, they did do expressly. As the United States pointed out in its opening
statement, when they wished to refer to intern ational law as excluding domestic law, they did so
clearly through the use of the term "international la w". Equally, when they wanted to refer to the
domestic law as excluding international law they used formulas such as "laws and regulations of a
Member", "its laws and regulations", "the laws and internal regulations", etc. Article XX(d) is not the
only case in the WTO Agreements in which the fo rmula "laws and regulations" is used without
qualification and, accordingly, it cannot be presumed that it excludes international treaties.
(c) Paragraphs 16 and 17
134
4.465 At paragraphs 16 and 17 of its opening statement, the US alleges that Mexico has not made it
clear why it believes that its measures are necess ary to secure compliance with NAFTA. Mexico
thinks that it has made this point perfectly clear, but for the assistance of the United States, it will set
out its reasoning in summary form as follows:
– The NAFTA contains agreements on the bila teral sweeteners trade, pursuant to which
Mexico would export sugar to the US and the US would export HFCS to Mexico.

– Mexico believed that the US breached its obligations with regard to the Mexican
sweeteners trade, and had recourse to the dispute settlement mechanism.

– The US was fully aware of Mexico's grie vance. The USDA reported on the hardship
caused in Mexico by the breakdown of the bilateral sweeteners trade agreement.

– Although the first two stages – bilateral c onsultations and consultations through the
Free Trade Commission – took place, the US impeded the establishment of an arbitral
panel.

134 See paras. 4.357 and 4.358 of this report, above.

– Meanwhile, United States HFCS and HFCS locally produced from US corn continued
to gain access to the Mexican market, almost entirely displacing Mexican sugar in the
soft drinks segment.

– As the US refused to settle the dis pute through the mechanism established under
NAFTA's Chapter Twenty, after attempts to resolve it through this and other means
had failed, the Mexican Congress adopted a ta x in order to rebalance its market and
re-establish the status quo ante, as a temporary measure until a solution is reached.

– In these circumstances, Mexico believes th at its measures fall within the scope of
Article XX(d).

– The Mexican Congress measure is a response to the concern to rebalance the Mexican
market affected by the HFCS imports and its local production, until Mexican sugar is
granted the agreed access under the NAFTA or a solution is reached to the dispute in
another form. The affected commodity wa s HFCS, the directly related commodity.
The measure is intended to secure US compliance with its NAFTA commitments. It
provides a strong incentive for the US to cooperate in the dispute settlement
procedure or otherwise reach a mutually satisfactory solution.

(d) Paragraph 17
135
4.466 In paragraph 17 of its opening statement, the US points out that Mexico contends that "by
hurting US exports of HFCS through its discriminat ory tax, Mexico will 'induce' sweetener producers
to come to the 'negotiating table'". This is not what Mexico submitted. Mexico's rebuttal argument is
clearly expressed at paragraphs 82 and 83 of its second written submission. The concrete point is that,
even though the measures adopted by Mexico have not yet resolved the dispute, they have had an
effect aimed at resolution, even if this has been a minor one. As an example, Mexico referred to a
news report that quotes the President of the Nati onal Chamber of the Sugar and Alcohol Industries,
who points out that the tax motivated the US produ cers to sit down again at the negotiating table,
whereas previously they had not had any communi cation with the Mexican industry. Admittedly,
having the United States comply with its internat ional obligations is not the same as having the
producers of both countries establish contact; however, the fact that the US maintains a position of
complete intransigence does not make the measure any less necessary. Mexico would regret it if the
US chose to maintain that position of absolute intransigence, as seems to have been suggested.
(e) Paragraph 18136
4.467 In paragraph 18 of its opening statement, the United States offers a new argument. It suggests
that the anti-dumping measures adopted by Mexico w ith respect to HFCS imports altered the balance
of rights and obligations under the NAFTA. This is incorrect. Mexico conducted an anti-dumping
investigation pursuant to the request of the dom estic industry. It concluded that dumping was
occurring and that there was injury to the domestic industry, and it imposed anti-dumping measures.
The measures were challenged through the WTO dispute settlement procedures and NAFTA's
Chapter Nineteen. Mexico subm itted to both proceedings. When the panellists concluded that
Mexico had not satisfied the requirements needed to impose the measures, Mexico revoked the
corresponding administrative resolution, cancelled the bond posted, and the anti-dumping duties were
refunded. Mexico did not alter the balance of rights and obligations of the NAFTA. It considered
that it had a right and it exercised it. Afte r it was challenged successfully, Mexico revoked the
measures and cancelled their effects. Moreover, th e Mexican measures did not inhibit HFCS imports.

135 See para. 4.358 of this report, above.
136 See para. 4.359 of this report, above.

It must not be forgotten that during that period approximately 3 million tons of HFCS entered the
Mexican market.
(f) Paragraph 20
137
4.468 The argument that the United States attributes to Mexico at paragraph 20 of its opening
statement is also incorrect. In its second writte n submission, as well as in its opening statement,
Mexico alluded to the general law principle stated by the Permanent Court of International Justice in
the Chorzów Factory case pursuant to which a party cannot argue in its favour that another party has
not complied with an obligation or that it has not had recourse to some means of redress when, by
way of an illegal act, that party has prevented the other party from complying with its obligation or
from having recourse to a tribunal that would have been otherwise available. Mexico has also alluded
to other rules of international law. It considers that WTO panels and the Appellate Body can consider
and apply them. Mexico refers the Panel to para graphs 110 of Mexico's first written submission and
14 to 18 of its second written submission.
4.469 Mexico considers that the measures at issue in this dispute are justified pursuant to the
principles and rules of international law, in cluding the NAFTA and the rules of customary
international law. Mexico submits that the Panel can consider such rules, bu t it has not requested the
Panel to rule that, in the scope of the WTO, the measures are justified based on rules of international
law. Mexico relies on its defence in the application of Article XX(d) of the GATT 1994.
(g) Paragraph 22138
4.470 At paragraph 22 of its opening statement, the Un ited States refers to Articles 7 and 11 of the
DSU and argues that WTO panels "are established to examine the relevant provisions of the covered
agreements and to make such findings as will assi st the DSB in making the recommendations or in
giving the rulings provided for in those agreements". Mexico agrees with this general statement, but
reminds the Panel that the United States has made erroneous submissions on crucial points regarding
the meaning of these provisions.
 (a) "Making the recommendations" or "giv ing the rulings" provided for "in those
agreements", including the GATT 1994, does not mean that panel recommendations
are limited to recommendations that WTO- inconsistent measures be brought into
conformity with the covered agreements. Mexico discussed at length GATT Articles
XXII and XXIII. The United States has ignor ed them despite the fact that the GATT
is the specific covered agreement at issue. Those articles confer more flexibility on
WTO Panels than the US concedes. See paragraphs 43 to 52 of Mexico's opening
statement at this second meeting.

 (b) GATT Articles XXII and XXIII have not been amended by the DSU.

 (c) Pursuant to those GATT provisions, a WTO Panel has the flexibility to issue any
rulings or recommendations that it deems appropriate in the circumstances of a
dispute.

 (d) While it is true that, when a panel concludes that the measures in dispute are
inconsistent with the covered agreements , Article 19.1 of the DSU mandates it to
recommend that the Member concerned bring the measure into conformity,
Article 19.1 does not prevent a panel from issuing other
 rulings or recommendations

137 See para. 4.361 of this report, above.
138 See para. 4.363 of this report, above.

in accordance with GATT Articles XXII and XXIII. Contrary to the United States'
argument at paragraph 26 of its opening statement, Article 19 of the DSU only
clarifies that one recommendation is warrant ed when findings of inconsistency are
issued. It does not rule out the possibility that other recommendations or rulings be
issued based on GATT 1994 Articles XXII and XXIII.

 (e) Thus, it is entirely within the Panel's discretion to recommend, in the extraordinary
circumstances of this dispute, that the parties take steps to resolve the broader
NAFTA dispute.

2. Conclusions
4.471 Throughout this proceeding, Mexico has ur ged the Panel to recognize the substantial
prejudice resulting from the United States' refusal to c ooperate in good faith in the international arena
to resolve a legitimate dispute rega rding the bilateral sweeteners trade, in addition to an abuse of the
proceedings. The Panel is a jurisdictional body that operates under international law rules, and it
should not condone the US conduct.
4.472 Mexico has meticulously documented the origins of the bilateral dispute, the efforts it has
made to resolve it legally through all means, the United States' persistent refusal to submit to the
NAFTA's dispute settlement mechanism, and the serious prejudice that resulted and still can result for
Mexico.
4.473 There is not the least doubt that the United St ates has abused the pr oceedings, even this
Panel's proceeding. It has refused to submit to the established mechanism to settle disputes, a
mechanism that it negotiated and subscribed to in an international treaty, has engaged in forum
shopping and has not only presented to the Panel an incomplete overview of the pertinent facts, but
has also made false statements.
4.474 In deliberating on this case, consider the detailed account of the facts that Mexico has offered,
including the repeated efforts to establish an arb itral panel under the NAFTA and to find a solution to
the dispute, an account plainly established, in many instances in official documents drawn up by the
United States itself.
− Contrast that with the case that the US broug ht before the Panel, in which it chose to
omit all reference to the underlying broader dispute that in fact is the source of the
dispute that the Panel now has before it.
− Contrast that also with the lukewarm res ponse of the United States when confronted
with the undisputed facts: on the one hand, seeking to ignore it, stating that it is
completely irrelevant; but also sugges ting erroneously, for example, that both
countries are presently involved in the establishment of the arbitral panel requested
by Mexico.
− Consider further the US response to a Panel question where, notwithstanding having
admitted that no NAFTA panel has been established almost five years after Mexico
requested it, the US complained that Mexi co unilaterally made a determination that
the US had breached its market access ob ligations, without ha ving obtained a panel
ruling.
− Consider the United States' evasive respon se to Mexico's question about its current
views on the legitimacy of counter-measures when one State blocks another's access
to a treaty's dispute settlement mechanism.

Mexico's respectful view is that this Panel deser ved a sincere and complete response from the United
States.

4.475 The US has provoked an unfair interaction between the NAFTA and the WTO Agreement,
resulting from the automatic operation of the WTO's DSU and Chapter Eleven of the NAFTA, and the
corresponding lack of automaticity in the operatio n of NAFTA's Chapter Twenty, due to the US
refusal to appoint panellists in a proceeding that presently requires the good faith and cooperation of
both disputing Parties. On the one hand, Mexico has given its consent ex ante to submit to WTO
dispute settlement proceedings and to NAFTA's Ch apter Eleven. The United States, however, has
exploited the fault in the panellist appointment process under NAFTA's Chapter Twenty and has for
many years been able to avoid submitting to the dispute settlement system.
4.476 There is more than a little irony in this case:
– Mexico's grievance long pre-dates this US grievance before the Panel. However,
owing to US intransigence, in spite of Me xico's having satisfied all the requirements
for panel appointment in Chapter Twenty , no panel was established and all other
efforts to resolve the crisis failed. Mexi co took action to protect its own legitimate
interests and to rebalance its market, as well as to seek to secure US compliance with
its international obligations. The US insi sts that that it is not in breach of its
obligations but it refuses to allow an independent panel to examine that claim.
– Mexico emphasizes that it would never have imposed the measures in the first place
if it had not been for the US refusal to submit to dispute settlement. The Mexican
measures were immediately submitted to this Panel following the US claim, in
accordance with the DSU, and now Mexico faces three separate NAFTA Chapter
Eleven claims in addition to the one th at it has already successfully defended (the
GAMI Investments case) which arose out of the September 2001 expropriation of 29
failing mills, mills that were failing because of the sugar surplus crisis.
– However, the United States, whose refusal led to the measures now complained of in
both forums, has successfully managed to avoid any legal scrutiny of its conduct.
4.477 Mexico urges the Panel to reflect deeply on the ine quity of this situation. It is fundamentally
unfair to reward the obstructing respondent, who now comes here asking the Panel to consider only a
small part of the dispute between the parties. With all due respect, it would bring international dispute
settlement mechanisms into disrepute to reward a State that has avoided international cooperation.
4.478 The equities are in Mexico's favour and the prejudice that Mexico is suffering cannot be
understated:
– Treating the dispute as purely a WTO dispute would reward the United States for
engaging in forum shopping while it simulta neously continues to block Mexico's
good faith attempts to resolve its longsta nding grievance. This would be to
perpetuate an injustice that has persisted for more than six years and is prejudicial in
and of itself.

– The prejudice is compounded:

 On the one hand, there is the economic prejudice to the Mexican sugar industry and
the sugar producers segment, whose characteristics and economic, political and social
sensitivities already explained. The Panel should not forget that, as pointed out at
paragraph 77 of our first written submission, it is in the interests of the United States

to prolong the NAFTA dispute. At the origin of the broader dispute that arises under
the NAFTA there is a protectionist interest of the United States, an interest in
isolating its sugar industry from competing with Mexican sugar that has motivated
the trade restrictions on Mexican access to that market. The longer the economic
disruption of the Mexican sugar sector last s, the more its sugar production capacity
weakens. If this capacity diminishes, ther e is a smaller likelihood of sugar surplus
being generated that can be exported to the US market.

 If this Panel were to make the findings requ ested by the United States, it is likely that
they could directly contradict those that might be made by a NAFTA Panel presented
with the same facts. Mexico has directed the Panel to examples of counter-measures
taken in the NAFTA context as well as to other instances where the United States has
reserved the right to take action of the type that Mexico took. This evidence is being
put before the Panel, not because th e Panel can pass on the legality of
countermeasures under NAFTA, but to dem onstrate that Mexico would have a
perfectly legitimate defence against any US claim in this forum. Given the United
States' conduct to date, the prospect of a NAFTA Panel being in a position to make
such rulings appears remote. However, th ere is substantial evidence that a NAFTA
Panel would find Mexico's measures to be justified under applicable rules of
international law – if the United States agreed to submit to the jurisdiction of a panel
competent to examine all the facts and lega l matters – and this Panel should take note
of that evidence.

 There is, of course, the additional prej udice resulting from the inability to resolve a
grievance with regard to the bilateral trade in sweeteners.

− Mexico faces a prejudice of being sued in different forums. There is a potential
prejudice that could result from the NA FTA Chapter Eleven cases, in which
substantive monetary damage s are claimed, and a collateral effect of the United
States' complaint is the possibility that this Panel could make certain findings on the
facts that could be used in the NAFTA Chap ter Eleven claims against Mexico. This
Panel is being asked to determine legal issues in a narrow legal context (the GATT
1994) that may prejudge the resolution of the same or related issues under a broader
set of legal rules (including the NAFTA ru les). Yet this Panel cannot determine
Mexico's right to take countermeasures unde r the NAFTA; only a body that has that
jurisdiction can do so.
M. C
LOSING STATEMENT OF THE UNITED STATES AT THE SECOND MEETING OF THE PANEL
4.479 The United States would like to emphasize what this dispute is about. This dispute is about
Mexico's obligations under Article III of the GATT 1994 and the consistency of Mexico's tax
measures with those obligations. Throughout these pr oceedings, and again in its opening statement,
however, Mexico has done its utmost to avoid any discussion of this issue. Instead, Mexico has
chosen to focus its response in these proceedings on an unprecedented reading of Article XX(d) and a
recasting of this dispute as one about United St ates obligations under the NAFTA. As the United
States has maintained throughout these proceedings , and continues to maintain, both Mexico's
Article XX(d) defence and its efforts to recast th is dispute as one under NAFTA are unsustainable.
To avoid repetition on these points, the United Stat es would like to refer the Panel to its prior
submissions for the many reasons why Mexico's XX (d) defence must fail and why its discussions of
NAFTA in these proceedings are simply not relevant to task before this Panel. Instead, the United
States will use its closing statement to respond to some specific points raised in the various sections of
Mexico's opening statement.

1. Introduction and the relevance and the status of the NAFTA dispute
4.480 Turning to the first two sections of Mexico's statement (its introduction and discussion of the
relevance of the NAFTA dispute), Mexico makes three assertions there and one omission that merit
some remarks.
4.481 First, Mexico continues to fault the United States in these proceedings for not discussing
Mexico's grievances under the NAFTA. Yet, even Mexi co admits that Mexico's grievances under the
NAFTA are outside the Panel's terms of reference and, therefore, not issues which this Panel may
issue findings on in this dispute. Accordingly, rath er than engage on issues that are clearly outside
this Panel's terms of reference, the United States has chosen to remain focused on the issues that
actually are within the Panel's terms of reference – namely the consistency of Mexico's tax measures
with Mexico's WTO obligations.
4.482 Second, Mexico asserts that the United Stat es does not see any "link" between HFCS and
cane sugar. This, of course, is not the United Stat es view. The United States agrees with Mexico, for
example, that HFCS and cane sugar are directly competitive and substitutable products. What the
United States claims are not linked, however, ar e Mexico's obligations under the WTO Agreement
and United States obligations under the NAFTA. Th at is, nothing in the WTO Agreement makes the
obligations Mexico owes the United States unde r Article III of the GATT 1994 contingent on
Mexico's view of whether the United States has complied with obligations under the NAFTA.
4.483 Third, Mexico asserts that Article 31(3) of the Vienna Convention requires panels to consider
any relevant standards or norms applicable to the rela tions of the parties to a treaty. And, therefore,
Mexico asserts that the Panel must consider the NAFTA in this dispute. Article 31(3) of the Vienna
Convention, however, pertains to the interpretation of the terms of a treaty, and provides that "relevant
rules of international law applicable in the relati ons between the parties" shall be taken into account
along with the context of the treaty's terms. Mexico has not identified any terms of the WTO
Agreement for which it might be using the NAFTA or "general principles of international law" as
relevant context for interpretation of the meaning of the WTO Agreement's terms. Mexico reference
to Article 31(3) does not change the fact that inte rpretation and application of the NAFTA are outside
the Panel's terms of reference.
4.484 Fourth, as to Mexico's omission, Mexico fails to explain how the Panel could consider
whether Mexico's tax measures are necessary to sec ure United States compliance with the NAFTA, if
the Panel does not first examine what the terms of the NAFTA are and whether United States actions
are consistent with those terms. Yet, these issues as to the interpretation and application of the
NAFTA are the precise issues Mexico has already conceded are outside this Panel's terms of
reference. Thus, the very determ ination that Mexico's Article XX(d ) defence calls upon the Panel to
make – namely, United States compliance with th e NAFTA – is the very determination Mexico
asserts is not within the Panel's authority to make.
4.485 Mexico's suggestion that the Panel might cons ider the "facts" of the NAFTA, and take as
"background" that a dispute under the NAFTA prompt ed Mexico's tax measures and gave rise to the
present WTO dispute, does not save its Article XX(d) defence. The fact that the NAFTA exists or
that a dispute exists thereunder, does not answer the question of whether Mexico's tax measures
constitute measures to secure compliance with alle ged United States obligations to provide market
access for Mexican sugar under the NAFTA (that is, assuming for the moment the NAFTA
obligations fall within the scope of "laws or regul ations"). With respect to supposed factual issues
such as those in paragraph 36 of Mexico's opening statements, the United States would like to come
back to those later in writing.

2. Recommendations
4.486 Turning to the next section of Mexico's statem ent as to the recommendations a WTO panel is
permitted to make, Mexico contends that per Ar ticle XXIII of the GATT, the recommendations a
WTO panel might make in a given dispute are more flexible than suggested by the United States.
This is simply not true. DSU Article 19.1 defi nitively answers the question of what types of
recommendations WTO panels are permitted to make – that is, if a panel finds a Member in breach of
its WTO obligations, it "shall recommend that th e Member concerned bring the measure into
conformity" with the relevant covered agreement.
3. Article III
4.487 With respect to Mexico's points on Article III:2 and III:4, the United States has already
addressed the issues Mexico raises in the United States second submission and responses to questions.
The United States will not repeat those responses now, ot her than to make three brief points. One, as
the United States has said before, a measure may co nstitute both a breach of Article III:2 and III:4.
Two, Mexico has not rebutted the evidence and arguments presented by the United States that
Mexico's tax measures constitute a form of dissimila r taxation within the meaning of Article III:2 or a
law affecting the internal sale and use of importe d products within the meaning of Article III:4.
Three, it is Mexico that has chosen to alter the conditions of competition by applying tax measures
that discriminate against soft drinks and syrups as well as against sweeteners. Specifically, Mexico's
tax measures constitute an excise tax on soft drinks and syrups containing HFCS. The United States
has demonstrated how that tax translates linearly into a conditional tax on HFCS and, in fact, as a
prohibitive excise tax on HFCS. It, therefore, fa lls under Article III:2. Mexico's tax measures are
also measures "affecting" the use of importe d HFCS. The measures punish bottlers for using
imported HFCS. Mexico's tax measures, therefore, fall under Article III:4. If there is overlap with
respect to Articles III:2 and III:4 in this dispute, it is because the particular tax measures Mexico has
chosen to apply are discriminatory excise taxes on one product that also punishes the bottler for using
imported inputs to make that product.
4. Article XX(d)
4.488 Turning to Article XX(d) and the specific points Me xico raises there. The first point is that,
despite Mexico's assertions otherwise, Mexico mo st clearly has not met its burden of proof with
respect to its Article XX(d) defence. Under that burden, Mexico must put forth facts and arguments
sufficient to establish that its tax measures are, first, justified under para graph (d) as measures
"necessary to secure compliance with laws or regulations" and, second, applied in manner that is in
keeping with the chapeau to Article XX. As la te as this second meeting of the Panel, however,
Mexico has yet to marshal any legal argument under the relevant rules of treaty interpretation to
support its assertion that the phrase "laws or regul ations" encompasses United States obligations
under the NAFTA or to provide any factual support fo r its contention that its tax measures secure, or
even contribute, to United States compliance with alleged NAFTA obligations, much less that its tax
measures are necessary to such compliance.
4.489 Mexico's comments in paragraphs 9 and following of its closing statement on the status of the
NAFTA under United States law, to the extent the United States has been able to understand them, do
not appear accurate or complete. However, unfort unately the United States is not in a position to
comment in more detail on those paragraphs on such short notice.
4.490 More generally, the United States fails to see how Mexico's more general point assists its
position. Mexico seems to say that different countries treat the relationship between their
international obligations and their internal laws in different ways. The United States fails to see why
that would be an argument in favour of interpreti ng the words "laws or regulations" in Article XX(d)

of the GATT as applying to international agreemen ts. If anything, Mexico's point highlights the
difference between international obligations, and internal laws and regulations.
4.491 Further to this point, the phrase "laws or regul ations" within Article XX(d) means the "laws
or regulations" of the Member claiming the Article XX(d) exception; not the laws or regulations of
the Member against whom it has invoked its Article XX( d) exception. Therefore, by way of example,
Mexico might invoke Article XX(d) as justification for a measure to secure compliance with its own
laws or regulations, but not the laws or regulations of other Members. Said another way, Mexico
cannot assert an Article XX(d) defence for measures to enforce United States domestic law.
4.492 The United States' second point is that in its opening statement – and perhaps this is a
reflection of Mexico's recognition of where acce ptance of its Article XX(d) defence may lead –
Mexico suggests that its reading of Article XX(d) is not as broad as it might first appear. That is,
Mexico suggests that its reading of Article XX(d) only applies in situations where (i) a genuine
dispute exists under an international agreement; ( ii) dispute settlement under that international
agreement has not resolved the dispute; (iii) diplomatic efforts have also not resolved that dispute; (iv)
the domestic industry of the Member invoking Article XX(d) has suffered some type of harm as a
result of the dispute under the international agreemen t; and (v) the relevant in ternational agreement is
not a WTO agreement. This new reading of Article XX(d), however, does not get us past the fact that
Article XX(d) does not apply to obligations under an international agreement. Nor does it get us past
the fact that, under Mexico's reading of Article XX(d), any Member, who believes that another
Member has breached obligations owed under an inte rnational agreement, would be free to breach its
WTO obligations, provided the Member claimed to have exhausted other avenues to resolve the
dispute and to have a domestic industry in need of assistance. Despite Mexico's claims, this would be
an extremely broad exception to WTO rules.
4.493 Finally, no less than two pages from the end of its opening statement, Mexico tries to refute
some of the points the United States offers, based on application of the rules of treaty interpretation,
as to why the phrase "laws or regulations" means th e domestic laws or regulations of the Member
claiming the Article XX(d) exception. Mexico 's arguments here, however, do not save its
Article XX(d) defence. For example, the fact that Article XVI:4 of the Marrakesh Agreement
includes the word "its" before "laws, regulations and administrative procedures" only re-emphasizes
the United States point that "laws or regulations " as used in the WTO Agreement is understood to
mean the domestic laws or regulations of WT O Members, not obligations under international
agreements or under general principles of interna tional law. In the numerous instances where the
WTO Agreement references "laws" or "regulations" some are proceeded by the word "its" or the word
"their" (referring to a Member's, or Members' in th e plural, laws and regulations); others are simply
preceded by "the" or no article at all, as in Article XX(d). What is clear, however, is that when the
WTO drafters meant to refer to international law, they did so expressly, as in Articles 3.2 of the DSU
and 17.6 of the Anti-Dumping Agreement.
4.494 Moreover, contrary to Mexico's assertion, the United States is not reading "national" or
"domestic" into the text of Article XX(d). Rather, the ordinary meaning of the phrase "laws or
regulations" interpreted in its c ontext and in light of the WTO Agreement's object and purpose leads
to the conclusion that phrase "laws or regulations " with no qualifying adjective proceeding it, means
the domestic laws or regulations of the Member claiming the Article XX(d) exception.

V. ARGUMENTS OF THE THIRD PARTIES
5.1 The arguments presented by Canada, China, the European Communities, Guatemala and
Japan in their written submissions and oral statements are reflected in the summaries below.139
A. CANADA
1. Introduction
5.2 The Panel has invited the parties and third pa rties to comment on Mexico's request for a
preliminary ruling on whether the Panel should decline to exercise its jurisdiction in this dispute.
5.3 Canada's statement will therefore address the two following questions:
 – first, whether the Panel should decide this request by means of a preliminary ruling;
and

 – second, whether the Panel should in this case decline to exercise its jurisdiction.

5.4 For reasons that Canada will briefly elaborate, the answer to the first question is, yes, the
Panel should make a preliminary ruling. The answ er to the second question is, no, the panel should
not – and cannot – decline to exercise its jurisdiction.
2. Mexico's request for a preliminary ruling
5.5 Mexico asserts that this Panel (i) has the compet ence to decline to exercise its jurisdiction in
its entirety; and (ii) should do so in this case. Because a finding in favour of Mexico on these two
points would render moot any consideration of the United States' claims on their merits, this issue
should be dealt with at the earliest stages of the proceedings.
5.6 The WTO jurisprudence is clear on the need to raise and consider jurisdictional objections in
a timely manner. The Appellate Body in US – 1916 Act stressed that an objection to jurisdiction
should be raised as early as possible in the panel process because "the vesting of jurisdiction in a
panel is a fundamental prerequisite
 for lawful panel proceedings".140
5.7 The Appellate Body further emphasised this point in Mexico – Corn Syrup where it stated that
panels must address and dispose of certain issues of a fundamental nature such as jurisdiction in order
to satisfy themselves that they have authority to proceed in a particular matter.141
5.8 Mexico's request that the Panel decline to exer cise its jurisdiction, is not, as such, a challenge
or objection to the Panel's jurisdiction. Canada do es not understand Mexico to be suggesting that the
Panel does not have authority to proceed. On th e contrary, Mexico has recognised in its first
submission that this Panel has prima facie jurisdiction to hear this case. 142 However, whether the
question raised is a panel's authority to proceed to hear the claims on their merits, as in the case of a
jurisdictional objection, or, as in this case, the Panel's discretion to proceed, the issues in both
situations are of a fundamental nature. From a pr actical standpoint, were the Panel to find that it
could and should accede to Mexico's request, the c onsequences would be the same as if the Panel

139 The summaries of the third parties' arguments are based on the executive summaries submitted by
the third parties to the Panel, in the case of China, the European Communities and Japan; and on the oral
statements submitted by Canada and Guatemala.
140 Appellate Body Report on US – 1916 Act, para 54.
141 Appellate Body Report on Mexico –Corn Syrup (Article 21.5 – US), para 36.
142 Translation of the first written submission of Mexico, at para 93.

were to find that it did not have jurisdiction: it would obviate the need to consider the complainant's
claims or to make further recommendations to the Dispute Settlement Body.
5.9 In the light of the Appellate Body's guidance in the case of jurisdictional objections and given
that Mexico's request was duly formulated within the terms of paragraph 13 of the Panel's Working
Procedures, it would be appropriate, and indeed prefer able, for the Panel to deal with this issue on a
preliminary basis.
5.10 Canada is therefore of the view that the Pa nel should decide this issue by means of a
preliminary ruling rather than deal with the matter in its final report.
3. The Panel's authority to decline jurisdiction
5.11 Mexico relies on the principle of "judicial economy" to argue that the Panel may decline to
exercise its jurisdiction when one of the parties re fuses to take the matter in dispute before what
Mexico asserts is the appropriate forum.
143
5.12 Canada does not agree with Mexico that the Pane l has the authority to decline to exercise its
jurisdiction in this case.
5.13 Article 3.2 of the Dispute Settlement Unde rstanding expressly recognises that the dispute
settlement system serves to preserve the rights a nd obligations of WTO Members under the covered
agreements. Accordingly, as set out in Article 11 of th e DSU, a panel has a responsibility to make an
objective assessment of the matter before it, including an assessment of the conformity with the
relevant covered agreements of the measure at issue

5.14 This Panel was established with the standard te rms of reference set out Article 7.1 of the
DSU. According to these terms of reference the Pane l is charged with examining the matter before it
in the light of the relevant covered agreements and making such findings as necessary to assist the
Dispute Settlement Body in making recommendations or rulings. Article 3.4 of the DSU provides
that these recommendations or rulings are to be ai med at achieving a satisfactory settlement of the
matter in accordance with the rights and obligati ons of the parties under the relevant covered
agreements.144
5.15 The United States, in this case, claims that Mexico's tax measures are inconsistent with
Mexico's obligations under Article III of the GATT 1994. The GATT 1994 is a covered agreement in
Appendix 1 of the DSU. Nevertheless, Mexico s uggests, that based on the principle of "judicial
economy" the Panel could in this case simply decline to exercise its undisputed jurisdiction. The Panel
simply cannot do this.
5.16 "Judicial economy" is nothing more than a prin ciple by which a tribunal may choose to limit
its findings to those necessary to resolve the disput e. It cannot override the express provisions of the
DSU, nor the rights and obligations, of parties and of panels, that flow from those provisions. In
particular, "judicial economy" cannot be applied to relieve a panel of its duty to make the findings that
are necessary to resolve a dispute. Thus, in Australia - Salmon , the Appellate Body emphasized that
the principle of "judicial economy" must be applie d keeping in mind the aim of the dispute settlement
system, which is to resolve the matter at issue and "to secure a positive solution to a dispute".145

143 Ibid. at para 97.
144 Articles 7.1 and 3.4 of the DSU.
145 Report of the Appellate Body on Australia – Salmon, para. 223.

5.17 For the Panel to do as Mexico asks and abstai n entirely from making findings in this case
would be a gross misapplication of the principle of "judicial economy". To do so would be contrary
to the Panel's duty under Article 11 of the DSU, c ontrary to the Panel's terms of reference, and
contrary to the aims of resolving the matter at i ssue and securing a positive solution to the dispute. In
short, the Panel cannot accede to Mexico's request without disregarding critical provisions of the DSU
and undermining the effective functioning of the WTO dispute settlement process.
5.18 For these reasons, Canada respectfully submits that the Panel must deny Mexico's request to
decline to exercise its jurisdiction in this case.
B. CHINA
1. Introduction
5.19 China notices that this dispute raises some important issues in the interpretation and
application of GATT 1994 Article III. In this submission, China will focus on two issues:
 (i) Whether the HFCS can be deemed to be taxed in the meaning of GATT 1994
Article III:2, second sentence, based only on th e fact that soft drinks and beverages
sweetened with HFCS have been taxed in the meaning of GATT Article III:2, second
sentence; and

 (ii) Whether cane sugar can be established as the "like product" of HFCS under GATT
Article III:4 conclusively with the analysis on "directly competitive and substitutable"
products in the meaning of GATT Article III:2, second sentence.

2. Whether the HFCS can be deemed to be taxed in the meaning of GATT 1994
Article III:2, second sentence, based only on the fact that soft drinks and beverages
sweetened with HFCS have been taxed in the meaning of GATT Article III:2 second
sentence
5.20 In the opinion of the United States, HFCS and cane sugar have been dissimilarly taxed by the
"HFCS soft drink tax" in the meaning of GATT Artic le III:2, second sentence. This raises an issue
with regard to the interpretation and applicati on of GATT Article III:2, second sentence: that is
whether a product (HFCS in this case), can be deemed to be taxed simply because it is a component of
another product, soft drinks taxed by IEPS measu re in the meaning of GATT Article III:2, second
sentence.
5.21 Taking into account Mexico's HFCS soft dr ink tax measure itself and paragraph 2 of
Article III of GATT 1994, China understands that products subject to the HFCS soft drink tax are soft
drinks and syrups sweetened with HFCS, not the HFCS itself when used as a component in making
the products, soft drinks and syrups. As such China cannot concur with the United States'
interpretation of the applicability of the HFCS soft drink tax on HFCS used as sweetener in soft drinks
and syrups, other than the soft drinks and syrups using HFCS as sweetener.
5.22 Moreover, in the context of GATT Article III:2, second sentence, the word "apply" when used
in defining the scope of a statute, shall be read as application of a tax to the objects explicitly referred
to in the language of the statutes, and not any ot hers that have not been explicitly defined as
applicable in the statute. This is supported by the dictionary explanation of "apply" both in the legal
and ordinary sense of the word.
5.23 From the above, China believes that "apply" lead s to an explicit referring of object. In other
words, from the point of view of the measure at issue, the word "apply" in Article III:2 of GATT

1994, as well as the word "taxed product" in paragraph 2 of Ad Article III shall be construed narrowly
and the application of principles in Article III:2 of GATT 1994 shall not be extended to an item not
explicitly defined within the scope of the HFCS soft drink tax.
3. Whether cane sugar can be established as the "like product" of HFCS under GATT
Article III:4 conclusively with the analysis on "directly competitive and substitutable
products" within the meaning of Article III:2, second sentence of GATT1994
5.24 On this issue, the United Stat es claims that HFCS and cane s ugar are "like products" within
the meaning of Article III:4 of GATT 1994. The Un ited States also believes that HFCS imported
from United States competed succes sfully whereas Mexican bottlers were rapidly and increasingly
substituting HFCS for sugar, and that led the Mexi can Congress to impose the HFCS Soft Drink Tax
and Distribution Tax.
146
5.25 In proving the likeness of HFCS and cane suga r within the meaning of Article III:4, United
States mentions four elements relevant to the like product inquiry that the Appellate Body examined
more extensively in EC – Asbestos. 147 It seems that the United States' assertion of likeness of cane
sugar of Mexican origin with the US-imported HFCS is built first on its belief of a competitive
relationship between cane sugar and HFCS, which is, as the United States citing the Appellate Body
in EC – Asbestos148, "fundamentally" of like products under Article III:4 of the GATT.149
5.26 It is noteworthy that based on its understa nding of some of the precedent panel and/or
Appellate Body reports, the United States tends to equate the two distinct concepts, the "like
products" within the meaning of Article III:4 of GATT 1994 and "directly competitive and
substitutable products" within the meaning of Article III:2 of GATT 1994, second sentence. However,
this approach calls for further analysis.
5.27 Recognizing the relevancy of competitiveness and substitutability to product likeness under
Article III:4 of GATT 1994, China notes that the Appellate Body in EC – Asbestos had further
pointed out that "We are not saying that all products which are in some competitive relationship are
'like products' under Article III:4." Furthermore, th e Appellate Body concluded that the scope of
"like" in GATT Article III:4 is broader than the sc ope of "like" in GATT Article III:2 first sentence,
but not broader than the combined product scope of two sentences of Article III:2, i.e. both "like
product" and the "directly competitive and substitutable" products.
150
5.28 In addition, while acknowledging the four elements criteria as "a framework for analysing the
'likeness' of products on a case-by-case basis", the Appellate Body has emphasized that:
"These criteria are, it is well to bear in mi nd, simply tools to assist in the task of
sorting and examining the relevant evidence. They are neither a treaty-mandated nor a
closed list of criteria that will determine the legal characteristics of products. More
important, the adoption of a particular framework to aid in the examination of
evidence does not dissolve the duty or the n eed to examine, in each case, all of the
pertinent evidence."
151

146 Id.
147 Appellate Body Report on EC – Asbestos, para.101.
148 Appellate Body Report on EC – Asbestos, para.98-99.
149 United States first written submission, para.157.
150 Appellate Body Report on EC – Asbestos, para. 99.
151 Appellate Body Report on EC – Asbestos, paras.102.

5.29 In view of the different language of GATT Articles III:2 and GATT Article III:4, and the
reluctance of the Appellate Body to equate the pr oduct scope of GATT Article III:4 with that of
GATT Article III:2, second sentence, China believes th at the scope of "like products" in the meaning
of Article III:4 should not be taken as identical to "direct competitive and substitutable" within the
meaning GATT Article III:2, second sentence. Othe rwise, the drafters of GATT1994 and/or the
Appellate Body would have specified in that re gard, and therefore it deserves a separate and full-
length analysis in an assertion of likeness of products.
5.30 Subject to further analysis of application of th e four elements criteria by the United States in
this case, China expects that the panel will evaluate all factors pertinent to this case in determining the
likeness of products under Article III:4 in this case.
C. THE EUROPEAN COMMUNITIES
1. The preliminary ruling requested by Mexico th at the panel should decline to exercise its
jurisdiction
5.31 In its defence, Mexico has stated that it cons iders that the dispute before the Panel has its
roots in a wider dispute with the United States in the context of NAFTA. For this reason, Mexico has
requested the Panel to issue a preliminary ruling by which the Panel should decline to exercise its
jurisdiction.
5.32 In its defence, Mexico has recognised that the Panel does have prima facie jurisdiction to hear
the case brought by the United States. However, Mexi co also submits that the Panel has competence
to decline to exercise its jurisdiction. In support of this view, Mexico refers in particular to the
possibility for WTO panels to exercise "judicial economy". Mexico further submits that the United
States case is part of a larger dispute under NAFTA, and that addressing the United States claims
under the GATT would therefore not secure a positive solution to the dispute.
5.33 Article 11 of the DSU describes the function of panels as requiring the Panel to make an
objective assessment of the matter before it, including an objective assessment of the facts of the case
and the applicability of and conformity with the relevant covered agreements , and to make such other
findings as will assist the DSB in making the recommendations or in giving the rulings provided for in
the covered agreements. This function is also reflected in the standard terms of reference provided for
in Article 7 (1) of the DSU.
5.34 In the present case, the United States claims are based on Article III of the GATT 1994, i.e. a
provision of a covered agreement. There is no dou bt, and Mexico does not contest, that the Panel
therefore has jurisdiction to examine the United States claims under this provision, and to make
findings to assist the DSB in making appropriate recommendations.
5.35 The EC does not agree, however, that the Panel c ould decline to exercise this jurisdiction on
the basis of the notion of "judicial economy". In accordance with the jurispru dence of the Appellate
Body, the notion of judicial economy enables a Panel to omit making a finding on a specific claim,
when such a finding is not necessary for resolvin g the dispute under the covered agreements, for
instance because the measure has alre ady been found to be in violation of another provision of the
covered agreements. In contrast, the notion of judi cial economy does not entitle a panel to abstain
completely from making findings in a dispute properly before it.
5.36 In support of its view, Mexico has referred to the GATT Panel Report in US – Nicaraguan
Trade
 . However, in this case, which predates the entry into force of the WTO Agreement, the Panel's
terms of reference specifically excluded cons ideration of the United States' defence under

Article XXI(b)(iii) of the GATT 1994. Accordingly, this report cannot serve as precedent for the
present Panel, which has standard terms of reference in accordance with Article 7 (1) of the DSU.
5.37 The European Communities would like to add that it is not unusual that the same dispute
might arise, fully or partially, under the WTO a nd under international agreements outside the WTO.
This should not necessarily prevent a WTO panel from resolving a dispute properly brought before it.
A recent example in point would be Argentina – Poultry Anti-Dumping Duties , in which the Panel
considered the dispute despite the fact that the same measures had previously been the subject of
dispute settlement under Mercosur.
5.38 The EC takes note that Mexico has also compla ined that the United States has not agreed to
submit the broader dispute to dispute settlement under NAFTA. The EC is not in a position to
comment on the dispute settlement procedures unde r NAFTA. However, the absence of recourse to
dispute settlement under NAFTA cannot justify an exercise of "judicial economy" on the part of a
WTO panel. Whether the attitude of the United States might be legally relevant in other regards under
the WTO agreements, for instance from the point of view of good faith or estoppel, need not be
further examined here, since Mexico has not so far raised this question.
2. The relationship of the WTO agreements and other international agreements
5.39 The EC is not in a position to comment on Mexico's dispute with the United States under
NAFTA. However, since Mexico has evoked the NA FTA context in the present dispute, the EC
considers it appropriate to offer some preliminar y remarks regarding the relationship between the
WTO Agreements and other international agreements.
5.40 In accordance with Articles 7(1) and 11 of the DSU, the function of the Panel is to make
findings in the light of the provisions of the covered agreements. However, this does not mean that the
Panel cannot take into account ot her provisions of international law, when such provisions are
relevant to the dispute before it. In fact, the A ppellate Body has confirmed that the WTO Agreements
are not to be read in "clinical isolation" from public international law. In the view of the EC, it is
therefore not excluded that applicable rules of international law may also include bilateral or
multilateral agreements between the parties, when such rules are releva nt for the decision of a dispute
before a panel.
5.41 In the present case, Mexico has so far not invoked any specific provision of NAFTA or
general rules of public internationa l law in its defence against the claims of the United States. The
Panel may therefore not need to address the comp lex question of the relationship between the WTO
agreements and other bilateral or multilateral agre ements. However, should this issue arise, the EC
submits that the Panel should approach it bearing in mind the fundamental importance of this question
and taking into account the considerations set out above.
3. The claims raised by the United States under Article III:2 of the GATT 1994
5.42 As regards the United States claim under the fi rst sentence of Article III:2 GATT, the United
States has explained in considerable detail that beverages sweetened w ith HFCS and beverages
sweetened with cane sugar are like products. The EC shares this analysis of the United States. The EC
would like to add, however, that this applies not only in the comparison of beverages sweetened with
HFCS and cane sugar. For instance, it is clear that beverages sweetened with other types of sugar, and
notably with beet sugar as the main type of suga r produced in the EC, would equally have to be
considered to be "like" beverages sweetened with cane sugar.
5.43 As regards the question whether the Mexi can measure involves taxation of imported
beverages in excess of domestic beverages, the United States analysis appears to be based on a

comparison between beverages sweetened with HFCS and beverages sweetened with cane sugar. The
understanding therefore seems to be that all beve rages sweetened w ith cane sugar, whether domestic
or imported, are exempted from the Mexican tax measu re. However, in the factual part of the United
States submission, the United States has interpre ted the Mexican measure to impose the tax on
imported beverages sweetened with any sweetener, including beverages sweetened with cane sugar. If
this interpretation, on which Mexico has not so fa r commented, were correct, then at least as far as
beverages sweetened with cane s ugar are concerned, the Mexican measure would clearly constitute
taxation of imported beverages in excess of domestic beverages, i.e. de jure discrimination against
imports.
5.44 In contrast, the situation may be somewhat diffe rent in so far as the United States challenges
the Mexican taxation of imports of HFCS-sweetened beverages. The United States submits that
whereas virtually all beverages produced in the United States are sweetened with HFCS, all beverages
regular soft drinks and syrups produced in Mexico are sweetened with cane sugar. Whereas this may
be true at present, this statement was not true at the time the Mexican measure was adopted. In fact,
the United States itself submits that before the im position of the Mexican tax measure, Mexican soft
drink producers had begun to switch over to use of HFCS, and that accordingly a sizeable proportion
of soft drinks produced in Mexico was sweetened with HFCS.
5.45 It still appears that at the time the Mexican measure was adopted, a significant proportion of
beverages produced in Mexico were sweetened wi th cane sugar, whereas virtually all beverages
produced in the United States were sweetened with HFCS. To this extent, it may be justified to
consider that the Mexican measure overall invol ved taxation of imported products in excess of
domestic products. Moreover, it can be argued that by maintaining the tax measure in a situation
where virtually all beverages produced in Mexico are sweetened with cane sugar, whereas imported
beverages are sweetened with other sweeteners, Me xico effectively also taxes imported products in
excess of domestic products.
5.46 In response to the United States claim under the second sentence of Article III:2 of the GATT
1994, given in particular the intr oductory language of the Ad note to Article III:2 of the GATT 1994,
it might be questioned whether a measure which is incompatible with the first sentence of Article III:2
of the GATT 1994 can also be incompatible with the second sentence thereof. In any event, should the
Panel find that the Mexican treatment of imported beve rages is incompatible with the first sentence of
Article III:2 GATT, it may no longer need to a ddress the United States claim under the second
sentence.
5.47 As regards discriminatory taxation of HFCS and other sweeteners, the second sentence of
Article III:2 of the GATT 1994 provides that no contra cting 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. The Ad note to Article III:2 provides further that a "tax conforming to the
requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the
provisions of the second sentence only in cases where competition was involved between, on the one
hand, the taxed product, and, on the other hand, a directly competitive or s ubstitutable product which
was not similarly taxed".
5.48 In its submission, the United States has di scussed whether HFCS and cane sugar can be
regarded as directly competitive or substitutable prod ucts. In this respect, the EC would remark that
there are certain differences between HFCS and cane sugar as regards end-uses and consumer
preferences. In particular, HFCS is exclusivel y used in industrial production of beverages and
possibly other products. In contrast , cane sugar is also used in house holds for a variety of purposes,
which is not the case for HFCS. This notwithstanding, the EC would agree that there is a considerable
overlap in end-uses and preferences between HFCS a nd cane sugar. For this reason, the EC can agree

with the United States submission that HFCS and cane sugar are directly competitive or substitutable
products at least to the extent that use for the sweetening of beverages is concerned.
5.49 Furthermore, it follows from the United Stat es submission that HFCS is largely imported
from the United States, whereas cane sugar is la rgely a domestic and not an imported product in
Mexico. Accordingly, it can be considered that the Mexican measure involves taxation of imported
products in excess of domestic products.
4. The defence presented by Mexico under Article XX(d) of the GATT 1994
5.50 The EC cannot comment on Mexico's clai m against the United States under NAFTA.
However, the EC considers that Mexico's defe nce under Article XX(d) of the GATT 1994 in the
present case raises serious systemic issues and therefore warrants several remarks.
5.51 First, Article XX(d) justifies only measures necessary to secure compliance with "laws or
regulations". Such laws or regulations must be laws or regulations applicable in the internal legal
order of the WTO Member in question. At a ge neral level, the European Communities would not
exclude that an international agreement concluded by a WTO Member might also constitute a "law or
regulation" within the meaning of Article XX(d) of the GATT 1994, provided that the agreement is
directly applicable in the internal legal order of such member, and is therefore capable of being
directly enforced on individuals. However, Mexico has not provided any information on the status of
NAFTA in its internal legal order. More importan tly still, it appears that the provisions invoked by
Mexico impose obligations primarily on the United States, and are therefore not capable of being
enforced in the legal order of Mexico.
5.52 Secondly, the measure must be necessary to " secure compliance" with the law or regulation.
As just set out, this compliance must be secured within the legal order of the Member in question. The
object and purpose of measures under Article XX(d ) of the GATT 1994 is not to secure compliance
with the obligations incumbent on other WTO Member s under public international law. This is also
apparent from the examples listed in Article XX(d) of the GATT 1994, which include customs
enforcement, the protection of patents, trade ma rks and copyrights, and the prevention of deceptive
practices.
5.53 Third, the EC notes that the Mexican measur e does not only apply to beverages sweetened
with HFCS imported from the United States, but would also apply to, for instance, beverages
sweetened with beet sugar imported from any other WTO Member, including the EC. It is clear, that
this could not be justified as securing compliance with obligations under NAFTA.
5.54 At a systemic level, Mexico's interpretati on would transform Article XX(d) of the GATT
1994 into an authorisation of counter-measures within the meaning of public international law. It must
be assumed, however, that if the contracting parti es had intended such an interpretation, they would
have expressed this in a clearer way. Moreover, un der customary international law, as codified in the
International Law Commission's Articles on Respons ibility of States for Internationally Wrongful
Acts, counter-measures are subject to strict subs tantive and procedural conditions, which are not
contained in Article XX(d) of the GATT 1994.
5.55 The EC notes that Mexico has not so far jus tified its measure as a counter-measure under
customary international law. Such a justification would already meet the objection that the Mexican
measure does not only apply to products from the United States, but from anywhere. In any event,
should Mexico still attempt such a justification, th en this would also raise the difficult question of
whether the concept of counter-measures is available to justify the violation of WTO obligations. In
accordance with Article 50 of the Internationa l Law Commission's Articles on Responsibility of
States for Internationally Wrongful Acts, this would not be the case if the WTO agreements are to be

considered as a lex specialis precluding the taking of counter-measures. This complex question has
been addressed in the report of the International Law Commission at its fifty-third session.
D. GUATEMALA
5.56 Guatemala is grateful for the opportunity to pa rticipate in this meeting and to express its
views. It is participating in this dispute because it has a trade interest and a systemic interest in matter
at issue.
5.57 Guatemala's trade interest in this dispute is as outlined below.
5.58 In spite of the various distortions and problems connected with access to international
markets, Guatemala has an efficient and productiv e sugar sector. Indeed, Guatemala ranks seventh
among the world's leading sugar exporters; its pr oduction costs are among the lowest, and its output
per hectare among the highest.
5.59 Sugar production in Guatemala is not only an important source of subsistence in the rural
areas, but it provides benefits and elementary social assistance 152 to the population of Guatemala,
including education and health programmes developed and promoted by sugar producers.
5.60 Thus, given the characteristics of the Mexican sugar industry 153, Guatemala understands the
decisive role played by that industry in Mexico's development.
5.61 In view of the above, Guatemala thinks that the Panel should heed Mexico's call 154 to
consider, in the course of its deliberations, the im portance of the sugar industry in Mexico, and the
implications for the country of reforms to that sector.
5.62 As regards Guatemala's systemic interest in this dispute, there are two specific elements to be
mentioned.
5.63 The first is to ensure that the WTO agreements , in particular the Dispute Settlement
Understanding and Articles III and XX of the GATT, are properly interpreted.
5.64 It is in this context that Guatemala would lik e to express its views regarding the Government
of Mexico's request that the Panel decline to exercise its jurisdiction.155
5.65 Guatemala considers that the dispute settleme nt system serves to preserve the rights and
obligations of Members under the covered agreements.156
5.66 In this dispute, the United States considered Mexi co's tax measures to be inconsistent with its
obligations under Article III of the GATT 1994, and therefore requested the Dispute Settlement Body
to establish a panel pursuant to Article 6 of the DSU to examine the matter, with the standard terms of
reference as set out in Article 7.1 of the DSU.157

152 The unique initiatives that make Guatemala the world leader in social activities promoted by the
sugar industry have contributed, in particular, to the eradication of childhood blindness and the significant
decline in the infant mortality rate.
153 Section II A of the first written submission of Mexico, 1 November 2004.
154 Section III C of the first written submission of Mexico, 1 November 2004.
155 Section III B of the first written submission of Mexico, 1 November 2004.
156 Article 3.2 of the DSU.
157 Document WT7DS308/4 of 11 June 2004.

5.67 In Guatemala's view, the Panel's task is to examine the complaint brought by the United
States with respect to the violation of a covered agreement in order to preserve the rights of that
Member under that agreement.
5.68 Moreover, according to Article 7 of the DSU, the terms of reference and jurisdiction of a
panel are determined by the complaint brought by the complaining party, which must satisfy the
requirements laid down in Article 6 of the DSU.
5.69 On that basis, Guatemala considers that the Pane l has the jurisdiction to examine the matter at
issue. However, as confirmed by the Appellate Body
158 and pursuant to Article 6.1 of the DSU, the
establishment of a panel by the DSB is practica lly automatic, and as the DSB does not scrutinize
requests for the establishment of a panel in deta il, it is incumbent upon the Panel to examine the
request carefully to ensure its compliance with both the letter and the spirit of Article 6.2 of the DSU.
5.70 The second element of systemic interest to Guatemala is the importance of regional trade
agreements for the multilateral trading system.
5.71 The North American Free Trade Agreement (NAFTA) between the United States, Canada,
and Mexico has been the main source of insp iration or the model for other WTO Members in
negotiating free trade agreements.
5.72 NAFTA is a framework of model regulations fo r the expansion of free and fair trade among
its members. This fact should be stressed in orde r to remind the parties to the present dispute of the
importance of NAFTA in the context of international trade.
5.73 Furthermore, NAFTA also comprises various mechanisms for settling trade disputes between
its members.
5.74 In its first written submission, Mexico sets forth a number of circumstances relating to
NAFTA obligations. Guatemala is not in a position to pass judgement in that respect, nor will it take
a stance as to whether or not there has been any kind of violation of NAFTA rules. However,
Guatemala would like to mention two basic points that are of its interest.
5.75 Firstly, Guatemala considers the WTO dispute settlement mechanism to be a system that
brings legal certainty to trade relations between Members, and hence, there is nothing to prevent a
party from resorting to the system in relation to matters covered by the WTO agreements. However,
it is preferable for members of an agreement to see k practical solutions that help to strengthen free
trade within the dispute settlement mechanism provided for under that agreement.
5.76 Secondly, free trade agreements like NAFTA mu st be seen as milestones in the process of
liberalizing multilateral trade. Free trade agreements are not at variance with the multilateral trading
system – on the contrary, they are complementary.
5.77 Thus, it is impermissible to impede the exercise rights or to try to evade obligations under one
of these forums by resorting to the other. Moreover, a violation of a rule under a free trade agreement
cannot in itself be "isolated" or "exempt" from repercussions in the multilateral trading system;
consequently, it is equall y impermissible for Members to adopt unilateral measures to try to correct
the situation. Such measures are a threat to the multilateral trading system.
5.78 Finally, Guatemala considers that, to the extent that these free trade agreements fit together to
form the "multilateral system", Members should try to ensure that the commitments assumed

158 Appellate Body Report on EC – Bananas III, paragraph 142.

thereunder are not merely rhetorical and that any conflicts or disputes arising from those agreements
are settled by consensus.
E. JAPAN
1. Analysis of IEPS's conformity with the first sentence of Article III:2 of the GATT 1994
5.79 The United States claims that provisions which tax imported soft drinks and other beverages
(hereinafter collectively "soft drinks") as well as imported syrups, concentrates, powders, essences
and extracts that can be diluted to produce such be verages (hereinafter collectively "syrups") and the
agency, representation, brokerage, consignment and distribution (hereinafter collectively
"distribution") of soft drinks and syrups sweetened with HFCS pursuant to IEPS, are inconsistent with
Article III:2, first sentence.
5.80 As confirmed by the Appellate Body in Japan – Alcoholic Beverages II , a tax measure is
inconsistent with the first sentence of Article III:2 when: (i) the taxed imported and domestic products
are "like," and (ii) the taxes applied to the impor ted products are "in excess of" those applied to like
domestic products. 159 As regards the "in excess of" requireme nt, past panels have established that
"[e]ven the smallest amount of 'excess' is too much" 160 and the prohibition thereof is "not conditional
on a 'trade effects test' nor is it qualified by a de minimis standard."161 In the present case, it is
relatively straightforward that the second requirement of "in excess of" will be met, since imported
soft drinks and syrups as well as the distribution of soft drinks and syrups using HFCS are taxed an
additional 20 per cent as opposed to products us ing cane sugar or the distribution thereof.
Accordingly, the determination of "like products " becomes crucial in finding whether there is a
violation of the first sentence of Article III:2 in the present case.
5.81 Japan would like to address one preliminary point before going into the issue of determining
what "like products" under the first sentence of Artic le III:2 are. In its first written submission, the
United States compares soft drinks and syrups sw eetened with HFCS and those sweetened with cane
sugar to be "like products".
162 However, the IEPS on its face does not discriminate against imports of
soft drinks and syrups sweetened with HFCS, as th ose produced domestically are also subject to the
same taxation as imports, and an issue of whether su ch comparison is appropriate arises. The first
sentence of Article III:2 settles this issue by stipulating that such an origin neutral measure can also be
challenged under Article III:2. The first sentenc e of Article III:2 clearly stipulates that the
comparison to be made is between internal taxes on 'imported products and … those applied to like
domestic products.'"163 In other words, the point of contention in a case regarding the first sentence of
Article III:2 is whether imported products are si milar enough to be considered "like" domestic
products that are accorded more favourable treatment. If this is established, it is irrelevant whether an
imported product and an identical do mestic product of the particular import are treated equally under
the tax measure.164 Therefore, the point of contention the United States has raised is appropriate.
5.82 As to the interpretation of "like products" under the first sentence of Article III:2, there is no
treaty-mandated definition of how this shall be determined or a closed list of criteria. 165 T h e

159 Appellate Body Report on Japan – Alcoholic Beverages II , Section H.1, pp.18-19, DSR 1996:I, 97,
at 111.
160 Id., Section H.1.(b), p.23, DSR 1996:I, 97, at 115.
161 Id., Section H.1.(b), p.23, DSR 1996:I, 97, at 115; GATT Panel Report, US – Malt Beverages
para.5.8.
162 United States first written submission, Section V.B.1, para. 76.
163 Panel Report on Japan Alcoholic Beverages I, para. 5.5(a).
164 See GATT Panel Report on Japan – Alcoholic Beverages I, para.5.5.
165 Appellate Body Report on EC – Asbestos, para.102.

Appellate Body in Japan – Alcoholic Beverages II confirmed the "practice under the GATT 1947 of
determining whether imported and domestic products are 'like' on a case-by-case basis," following the
approach the Working Party Report on Border Tax Adjustments had taken to set out a case-by-case
interpretation of what "like products" shall mean within different provisions of the GATT 1947.
166 167
5.83 In interpreting the scope of "like products" unde r the first sentence of Article III:2 in a case-
by-case manner, previous panel and appellate body reports have employ ed a list of criteria, of which
commonly employed criteria are: (i) the product's pr operties, nature and qua lity, (ii) product's end-
uses in a given market, (iii) consumer's tastes and habits and (iv) tariff classification.168
5.84 As a corollary of the fact that the products compared in likeness in each individual case are
different and therefore necessitate a case-by-case analysis, it is also apparent that when applying a set
of criteria to determine "likeness," the weight put on each criterion should be adjusted to
accommodate the characteristics of the products con cerned in individual cases. In other words, one
criterion may be more decisive than others in a pa rticular case, and the decisive criterion may differ
from case to case.169
5.85 The analysis of the correct application of the above criteria is mainly factual. Therefore,
Japan, at this juncture, will confine its comments on the following points.
5.86 Firstly, in light of the fact that the products concerned in the case at hand are soft drinks and
syrups, which are articles of taste to be provided to consumers, and the similarity between such
products with alcoholic beverages contemplated in Japan – Alcoholic Beverages II in the sense that
both are beverages (or extracts which can be diluted into beverages) for mass consumption, Japan is
of the view that the four criteria above are helpfu l in determining whether the products concerned are
"like products." Therefore it is appropriate to apply these criteria as the United States has pointed out
in its submission.
5.87 Furthermore, due to the similarities between such products concerned in Japan – Alcoholic
Beverages II and those in the case at hand, it s hould be of reference that in Japan – Alcoholic
Beverages II , the likeness between shochu and vodka was determined based on the similarities in
physical characteristics and end-uses of products, sta ting that both are "white/clean spirits, made of
similar raw materials, and the end-uses were virtually identical." The Panel on Japan – Alcoholic
Beverages II also noted that shochu and vodka were classi fied in the same heading under Japan's tax
classification at the time, and were covered by th e same Japanese tariff binding at the time of its
negotiation.170
5.88 Secondly, with regard to the criterion of cons umer's tastes and habits, in the present case, the
consumers of soft drinks and syrups are individuals in Mexico. Accordingly, the relevant evidence
would be results of consumer survey s conducted on consumers in Mexico. However, the current
consumer perception may not be available due to the imposition of the tax measure, which has the
effects of restricting the production and importation of soft drinks and syrups sweetened by HFCS. In
this respect, the statement made by the Panel in Japan – Alcoholic Beverages II should be recalled:

166 The Report of the Working Party on Border Tax Adjustments, BISD 18S/97, para. 18 states that
such interpretation "would allow a fa ir assessment in each case of the di fferent elements that constitute a
'similar’ product." See also Panel Report, Japan – Alcoholic Beverages II, , para. 6.21.
167 Appellate Body Report on Japan – Alcoholic Beverages II , Section. H.1.(a), p.20, DSR 1996:I, 97,
at 113.
168 Id.,Section. H.1.(a), pp.20-22, DSR 1996:I, 97, at 113-114.
169 See Appellate Body Report on EC – Asbestos, para.146.
170 Panel Report on Japan – Alcoholic Beverages II, para. 6.23.

"[A] tax system that discriminates against imports had the consequence of creating
and even freezing preferences for domestic goods."171
5.89 Thirdly, the United States, in its submission, has referred to the Mexican tariff schedule. 172 It
should be noted that in order to apply the criteri on of tariff classification, consideration should be
given on whether the particular tariff classification is not too broad to be used for such comparison.173
2. Analysis of IEPS's conformity with the second sentence of Article III:2 of the GATT
1994
5.90 The United States alleges that taxes pursuant to IEPS is inconsistent with the second sentence
of Article III:2 of the GATT as taxes applied on imported HFCS, imported soft drinks and syrups, and
the agency, representation, brokerage, consignment and distribution of soft drinks and syrups
sweetened with HFCS.
5.91 As provided in the second sentence of Article III:2 and confirmed by the Appellate Body
report in Japan – Alcoholic Beverages II 174, whether a tax measure is in consistent with the second
sentence of Article III:2 is determined by three sep arate elements: (i) whether the products concerned
are directly competitive or substitutable, (ii) wh ether the directly competitive products are "not
similarly taxed"; and (iii) whether the dissimilar ta xation is applied "so as to afford protection to
domestic production."
5.92 With regard to the first element above, Japan agrees with the United States that, in assessing
the competitive relationship between products, the criteria should be determined on a "case-by-case"
basis in light of the relevant facts in the case. 175 Examples of specific criteria employed to determine
whether products are "directly compe titive or substitutable" are: physi cal characteristics, the channels
of distribution, the end-uses of the products, pri ce relationship (including cross-price elasticities)
among other relevant characteristics 176, which should be considered in view of the relevant "market
place."177
5.93 The United States, in its submission, refers to the results of the SECOFI anti-dumping
investigation of HFCS published on 23 January 1998 as Mexico's determination that cane sugar and
HFCS share the same essential physical characteristics. 178 Japan is concerned, however, whether the
likeness issue in an anti-dumping case could be equated with the issue of direct competitiveness under
Article III:2.179

171 Id., Panel Report, para.6.28.
172 United States first written submission, Section V.B.1(d), paras.3-4.
173 Appellate Body Report on Japan – Alcoholic Beverages II , Section H.1.(a), p.22, DSR 1996:I, 97,
at 115.
174 Id., Section H.2., p.24, , DSR 1996:I, 97, at 116.
175 United States first written submission, Section V. C.1(a), para. 15 (however, the relevant page
number of the AB Report referred to in the US submission should be 25, not 20). See also Panel Report on
176 Appellate Body Report on Japan – Alcoholic Beverages II , Section H.2(a), p.25; GATT Panel
Report on Japan – Alcoholic Beverages I, para. 6.22; Panel Report on Chile – Alcoholic Beverages, para. 7.30.
177 GATT Panel Report on Japan – Alcoholic Beverages I, para. 6.22, Appellate Body Report, Japan –
Alcoholic Beverages II, Section H.2(a), p.25, , DSR 1996:I, 97, at 117.
178 United States first written submission, V.C.1(i), para.23.
179 GATT Panel Report on Japan – Alcoholic Beverages I , para. 5.6 stated that: "The Panel was aware
of the more specific definition of the term 'like product' in Article 2:2 of the 1979 Antidumping Agreement
(BISD 26S/172) but did not consider this very narrow definition for the purpose of antidumping proceedings to
be suitable for the different purpose of GATT Article III:2."

5.94 With regard to the second element, "the amount of differential taxation must be more than de
minimis to be deemed 'not simila rly taxed' in any given case".
180 Although "whether any particular
differential amount of taxation is de minimis or is not … must … be determined on a case-by-case
basis181," in the present case, it appears relatively clear that an additional tax of 20 per cent in question
is beyond de minimis.
5.95 With regard to the third element, whether a tax measure is applied "so as to afford protection"
to domestic products is determined through the "desi gn, architecture and structure" of the measure,
and is not an issue of intent 182, as the United States has rightly claimed. Thus, an examination of the
stated objectives of the particular tax measure is i rrelevant in determining an y inconsistency with the
second sentence of Article III:2 as a general rule. However, neither the complainant nor the panel is
prevented from examining the relevancy between the features of a measure revealed by the "design,
architecture and structure" and the stated objective of such a measure. In Chile - Alcoholic Beverages,
the Appellate Body confirmed that a panel can "try to relate the observable structural features of the
measure with its declared purposes, a task that is unavoidable in appraising the application of the
measure as protective or not of domestic production."183 To this extent, the United States' reference to
the Mexican objectives of the tax measure could be relevant.184
VI. INTERIM REVIEW
6.1 The Panel issued its interim report to the parties on 27 June 2005. On 11 July 2005, the
United States and Mexico submitted written comment s and requested the Panel to review precise
aspects of the interim report. On 25 July 2005, the United States and Mexico submitted written
comments on each other's comments and requests for interim review.
6.2 The Panel has modified its report, where appropr iate, in light of the parties' comments and
requests, as explained below. The Panel has also made certain revisions and technical corrections for
the purposes of clarity and accuracy. References to paragraph numbers and footnotes in Section VI of
this report refer to those in the interim report, except as otherwise noted.
A. C
LERICAL AND EDITORIAL CHANGES
6.3 The United States suggests certain changes to correct clerical errors contained in the different
sections of the interim report, and to further clar ify the report. The Panel has taken account of the
United States' suggestions and modified most of th e indicated paragraphs. The Panel has also made
some additional clerical and editorial changes throughout the report. It has also corrected the numbers
of paragraphs from the English and Spanish versions of the interim report issued to the parties.

180 Appellate Body Report on Japan – Alcoholic Beverages II , Section H.2.(b), p. 27, DSR 1996:I, 97,
at 119; Panel Report on Japan – Alcoholic Beverages II , para.6.33.
181 Id.
182 The Appellate Body in Japan – Alcoholic Beverages II set out as follows:

"It is not necessary for a panel to sort through the many reasons legislators and regulators
often have for what they do and weigh the relative significance of those reasons to establish
legislative or regulatory intent. If the measure is applied to imported or domestic products so
as to afford protection to domestic production, then it does not matter that there may not have
been any desire to engage in protectionism in the minds of the legislators or the regulators
who imposed the measure" (Appellate Body Report, Japan – Alcoholic Beverages II , Section
H.2.(c), pp. 27-28, DSR 1996:I, 97, at 119.)

183 Appellate Body Report on Chile – Alcoholic Beverages, para. 72.
184 United States first written submission, V.C.1(c), para. 36.

6.4 Mexico notes that its comments on the United St ates' responses to questions posed by the
Panel after the second substantive meeting had not b een included in Annex C of the interim report.
The Panel has amended this omission for the final report.
B. FACTUAL ASPECTS
6.5 The Unites States requests the Panel to modify the interim report's language in certain
paragraphs in order to better reflect the facts dem onstrated by evidence submitted by the parties. The
United States also suggests that some cross-references and citation of evidence be added to the text of
the Report. The Panel has modified the language of the report and added the references as requested,
as well as other references not indicated by the United States.
C. ARGUMENTS OF THE PARTIES
6.6 The United States suggests modifications in certain paragraphs of the interim report, relating
to Mexico's arguments. The Panel has decided to keep the relevant text as it had been originally
presented by Mexico.
D. PRELIMINARY RULING
6.7 Mexico requests the Panel to amend paragraph 7.15 of the interim report, in order to clarify
that the Panel's findings, conclusions and recommendations in the report only relate to Mexico's rights
and obligations under the WTO Agreements, and not to Mexico's rights and obligations under other
international agreements or other obligations under international law. Mexico also requests the Panel
to delete paragraph 7.16, since in its opinion its measures would be justified under the NAFTA if the
dispute were to be submitted in its entirety to di spute settlement under the m echanism established by
this agreement.
6.8 The Panel has modified paragraph 7.15 of the interim report, as requested by Mexico, and
modified paragraph 7.16 in order to clarify its meaning. The Panel has also made other minor
changes.
E. COMMENTS ON PANEL'S FINDINGS
6.9 The parties request a number of modifications and minor corrections in the text of the report.
Such requests have been duly considered and a dopted, where appropriate, by the Panel. Some
suggestions, however, have not been accepted as they would have improperly altered the substance of
the findings, as noted below.
6.10 The United States requests the deletion of para graphs 8.54, 8.115 and 8.153 of the interim
report, since in its opinion they did not adequately reflect the United States arguments on the different
treatment received by domestic a nd imported products as a result of the application of the soft drink
tax, the distribution tax and the bookkeeping requirement s. The Panel rejects the request to delete the
paragraphs. However, in the light of the United States request, the Panel clarified their language. The
Panel's reasoning is in fact based on the United States argument, supported by factual evidence, that
most imports are being discriminated against.
6.11 Mexico disagrees with the description made by the Panel in paragraph 8.162, in fine, of the
interim report.
185 Mexico considers that the paragraph wrongfully suggested that Mexico's position
was that certain rules of international law were irrelevant for the purpose of interpreting Article XX of

185 The interim report in Spanish, as issued to th e parties, erroneously iden tified this paragraph as
8.180.

the GATT 1994. Mexico states that the Panel could reso rt to rules of international law other than the
WTO Agreements to evaluate whether its measure s were justified as measures necessary to secure
compliance by the United States with the NAFTA. Me xico further states that its position throughout
the dispute was that such measures were justified under international law. Mexico wishes to note
these points for the record, but requests no specific action from the Panel.
6.12 The United States requests the revision of paragr aphs 8.184 and 8.185 of the interim report.
In its opinion, the Panel's analysis should focus on whether Mexico has met the burden of proof of its
affirmative defence (which it has not, in the view of the United States) and not on what it means to
enforce or to secure compliance. The United States suggests that the Panel consider the contribution
that the measures at issue have made to securing compliance on the part of the United States, rather
than focus on whether the outcome of such measures is "certain" or "uncertain". Mexico expressed its
strong objection to the United States' request, and asked the Panel to reject it. Although it expresses
its disagreement with the Panel's conclusions, Mexico is of the view that paragraphs 8.184 to 8.187 of
the interim report need to be maintained, being ge rmane to the Panel's finding that Mexico failed to
demonstrate that the impugned measures were intende d to secure compliance with laws or regulations
that are not inconsistent with the GATT 1994. The Panel has retained the concerned paragraphs,
although it has introduced changes in order to cl arify their meaning. The Panel notes that its
reasoning does not focus on whether the achievement of Mexico's objective through the measures at
issue is certain or uncertain. Rather, the Panel c onsiders that international countermeasures (as the
ones allegedly imposed by Mexico) are intrinsically unable to secure compliance of laws and
regulations. In contrast, national measures are, bey ond particular factual considerations, usually in a
position to achieve to achieve that objective, through the use of coercion, if necessary.
6.13 The United States raises an additional argu ment in support of the Panel's finding in
paragraphs 8.184 and 8.185 of th e interim report that Mexico's tax measures do not qualify under
Article XX(d) of the GATT 1994, namely that the parties to the NAFTA (including Mexico) agreed
on the mechanism necessary to resolve any dispute concerning compliance with that agreement. The
argument has not been raised in the course of the di spute, until the interim review stage. Moreover,
the United States has not requested consideration of such an argument in the final report.
6.14 The United States questions the use of the Appellate Body Report on US – Gambling in
support of the Panel's conclusion that "the uncerta in outcome of international countermeasures is a
reason for disqualifying them as measures eligible for considerati on under Art. XX(d)" in paragraphs
8.186 and 8.187 of the interim report. The Un ited States argues that the referred case was not
considering the necessity of a measure "to secure comp liance with a law or regulation", but rather for
the protection of public morals or the maintenance of public order. The United States adds that the
Appellate Body did not say that a measure with uncertain results could never qualify as a reasonably
available alternative, but rather it concluded, on the basis of the facts presented in that case, that a
process of negotiation about regulation of a service was not an alternative "capable of comparison" to
a measure restricting the service. The Panel agrees with the United States on the different context of
the US – Gambling findings and those of the present case, but it considers that the reference is worthy
of being kept as confirmation of the view that the uncertain outcome of international countermeasures
is a reason for disqualifying them as measures eligible for consideration under Article XX(d).
6.15 With relation to paragraph 8.192 of the interim report, the United States requests the Panel to
consider some of its arguments related to the mean ing of the word "law", su ch as a definition of the
term "laws" previously recalled in its submissions, the importance of the use of the word "laws" in
plural in Article XX(d) of the GATT 1994 and the diffe rent translation into French and Spanish of the
word "law", as used in Article XX(d) and in Artic le 3.2 of the DSU. Mexico did not oppose this
request. The Panel has included the appropriate re ferences to the definition presented by the United
States and its other arguments related to the ordi nary meaning of the word "law", which were
considered in the course of the proceedings.

6.16 Finally, the United States requests the deletion of paragraph 8.234 of the interim report, which
referred to Mexico's allegations that questioned wh ether the United States had acted in good faith in
the course of the proceedings. Mexico expressly states that it does not object to deleting such
paragraph. The Panel has accepted the request.
VII. PRELIMINARY RULING
A. INTRODUCTION
7.1 On 18 January 2005, the Panel issued a prelimin ary ruling, rejecting Mexico's request for the
Panel to decline to exercise its jurisdiction in th e case in favour of an Arbitral Panel under Chapter
Twenty of the North American Free Trade Agreement (NAFTA). 186 The Panel concluded that, under
the DSU, it had no discretion to decide whether or not to exercise its jurisdiction in a case properly
before it. Furthermore, even if it had such discreti on, the Panel did not consider that there were facts
on record that would justify the Panel declining to exercise its jurisdiction in the present case. The
Panel informed the parties that it would provide th em with a detailed reasoning for that ruling in its
final report.
7.2 In order to issue its preliminary ruling, the Pa nel considered Mexico's request as well as the
arguments presented by the United States, the complaini ng party in the case, and by the third parties.
Nothing in the DSU, or in the Panel's working procedures, required the Panel to address Mexico's
request in a preliminary ruling. Instead, the Pane l could have waited to ru le on the request until its
final report. It was the Panel's opinion, however, that both the parties and the panel proceeding were
better served by an early ruling on the request. Ha d it been appropriate for the Panel to decline to
exercise its jurisdiction, an early decision to this effect would have saved time and resources. On the
other hand, if the Panel – as in the event it did – re jected Mexico's request, an early decision would
allow the parties to concentrate on the other aspects of the dispute.
7.3 In view of the above, the Panel issued a prelim inary ruling rejecting Mexico's request that it
decline to exercise its jurisdiction in the case.
B. THE PANEL'S JURISDICTION TO HEAR THE PRESENT CASE
7.4 Both parties agreed that the Panel had jurisdic tion to hear the United States' claims in the
present case.187 The Panel's jurisdiction in this case was thus not challenged by either of the parties.
In light of the above, the Panel was satisfied that it had proper jurisdiction in this case and therefore
the authority to consider and make rulings and recommendations on the matters raised by the parties.
C. MEXICO'S REQUEST
7.5 In considering Mexico's request, the Panel fi rst addressed whether it had the discretion to
decline to exercise its jurisdiction to hear and decide a case properly brought before it.
7.6 The Panel recalled that Article 11 of the DSU states that:
"The function of panels is to assist th e DSB in discharging its responsibilities under
this Understanding and the covered agreements. Accord ingly, a panel should make
an objective assessment of the matter before it, including an objective assessment of

186 See Annex B to this Report.
187 Mexico's first written submission, para. 93. Mexico's response to Panel question No. 35. United
States' written version of oral statements during the fi rst substantive meeting of the parties with the Panel,

the facts of the case and the applicability of and conformity with the relevant covered
agreements, and make such other findi ngs as will assist the DSB in making the
recommendations or in giving the rulings provided for in the covered agreements..."
7.7 In the context of Mexico's request, the term "discretion" would imply that the Panel has the
power to decide whether or not to act. Indeed, discretion may be said to exist only if a legal body has
the freedom to choose among several options, all of th em equally permissible in law. It seems that
such freedom for a panel would exist within the fra mework of the DSU only if a complainant did not
have a legal right to have a panel decide a case properly before it.
7.8 As the Appellate Body has stated, the aim of th e WTO dispute settlement system is to resolve
the matter at issue in particular cases a nd to secure a positive solution to disputes.
188 A panel has thus
to address the claims on which a finding is necessary to enable the DSB to ma ke sufficiently precise
recommendations or rulings to the parties. A pane l would seem therefore not to be in a position to
choose freely whether or not to exercise its jurisdic tion. Were a panel to choose not to exercise its
jurisdiction in a particular case, it would be failing to perform its duties. More specifically, the panel
would be failing to perform its duty to make "a n objective assessment of the matter before it,
including an objective assessment of the facts of th e case and the applicability of and conformity with
the relevant covered agreements, and to make such other findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in the covered agreements...".
7.9 Moreover, the Panel recalled that, under Articl es 3.2 and 19.2 of the DSU, a panel may not
add to or diminish the rights and obligations of WTO Members provided in the covered agreements.
If a WTO panel were to decide not to exercise its jurisdiction in a particular case, it would diminish
the rights of the complaining Member under the DS U and other WTO covered agreements. In this
regard, the Panel also recalled Article 23 of th e DSU, which provides that Members of the WTO
"shall" have recourse to, and abide by, the rules and procedures of the DSU when they seek the
redress of a violation of obligations or other nullif ication or impairment of benefits under the WTO
covered agreements. In the Panel's view, the terms of Article 23 of the DSU make it clear that a WTO
Member that considers that any of its WTO benefits have been nullified or impaired as a result of a
measure adopted by another Member has the right to bring the case before the WTO dispute
settlement system.
7.10 That being said, the Panel would point out that it makes no findings about whether there may
be other cases where a panel's jurisdiction might be legally constrained, not withstanding its approved
terms of reference. In any event, such a situation would be distinguishable from the case before this
Panel, where Mexico argued that the Panel legally had the discretion not to exercise its jurisdiction and
requested the Panel to apply such discretion.
7.11 Mexico has argued that the United States' claims are linked to a broader dispute between the
two countries related to trade in sweete ners under a regional treaty, the NAFTA.
189 I n M e x i c o ' s
opinion, under those circumstances, it would not be appropriate for the Panel to issue findings on the
merits of the United States' claims. 190 In this regard, Mexico emphasized that its request to the Panel
was not so much that the Panel decline to exercise its jurisdiction, but rather that it decline to exercise
it "in favour of a NAFTA Chapter Twenty Arbitral Panel". In Mexico's opinion, only such a panel
under the NAFTA would be in a position to "address the dispute as a whole".191

188 Appellate Body Report on Australia – Salmon, para. 223.
189 Mexico's first written submission, paras. 88-92.
190 Ibid., paras. 102-103.
191 Ibid., para. 13.

7.12 According to the information supplied by Mexi co, there is a differing interpretation between
Mexico and the United States regarding the c onditions provided under the NAFTA for access of
Mexican sugar to the United States' market. 192 The United States has acknowledged that there is such
a difference which has resulted in a dispute unde r the NAFTA that "is presently in the panelist
selection stage".193
7.13 However, Mexico did not argue, nor is there any evidence on record to indicate, that there are
legal obligations under the NAFTA or any other international agr eement to which Mexico and the
United States are both parties, which might raise legal impediments to the Panel hearing this case or to
the United States bringing its complaint to the WTO. Indeed, when specifically questioned on this point
by the Panel, Mexico responded that there was not hing in the NAFTA that would prevent the United
States from bringing the present case to the WTO dispute settlement system.194 Mexico further added
that it did not challenge the United States' right to bring its complaint to the WTO dispute settlement
system nor to request the establishment of the Panel.195
7.14 Moreover, neither the subject matter nor the resp ective positions of the parties are identical in
the dispute under the NAFTA which ha s been mentioned by Mexico and the dispute before us. In the
present case, the complaining party is the United States and the measures in dispute are allegedly
imposed by Mexico. In the NAFTA case, the situa tion appears to be the reverse: the complaining
party is Mexico and the measures in dispute are a llegedly imposed by the United States. As for the
subject matter of the claims, in the present case th e United States is alleging discriminatory treatment
against its products resulting from internal taxes and other internal measures imposed by Mexico. In
the NAFTA case, instead, Mexico is arguing that th e United States is violating its market access
commitments under the NAFTA.
7.15 The Panel was mindful that, under Article 3.10 of the DSU, Members should not link
"complaints and counter-complaints in regard to dis tinct matters". In other words, even conceding
that there seems to be an unresolved disput e between Mexico and the United States under the
NAFTA, the resolution of the present WTO case cannot be linked to the NAFTA dispute. In turn, any
findings made by this Panel, as well as its conc lusions and recommendations in the present case, only
relate to Mexico's rights and obligations under the WTO covered agreements, and not to its rights and
obligations under other internationa l agreements, such as the NAFTA, or other rules of international
law.
7.16 The Panel additionally noted that Mexico h as not argued that its challenged tax measures
have been mandated or authorized under the rules of the NAFTA.196
7.17 Even assuming, for the sake of argument, th at a panel might be entitled in some
circumstances to find that a dispute would more appr opriately be pursued before another tribunal, this
Panel believes that the factors to be taken into account should be those that relate to the particular
dispute. We understand Mexico's argument to be th at the United States' clai ms in the present case
should be pursued under the NAFTA, not because that would lead to a better treatment of this
particular claim, but because it would allow Mexico to pursue another, albeit related, claim against the
United States. The Panel fears that if such a matte r were to be considered then there would be no

192 Ibid., paras. 5, 27-77.
193 United States' response to Panel question No. 7, para. 20.
194 Mexico's response to Panel question No. 4.
195 Mexico's response to Panel question No. 34.
196 However, Mexico has argued that under th e NAFTA the examination of the challenged tax
measures could be linked to its complaint regarding the United States' market access commitments for Mexican
sugar. See, Mexico's second written submission, para. 6. See also, Mexico's response to Panel question No. 58.
But see, United States' response to Panel question No. 58, paras. 22-24.

practical limit to the factors which could legitimately be taken into account, and the decision to
exercise jurisdiction would become political rather than legal in nature.
D. R
ULING BY THE PANEL
7.18 For the reasons indicated above, the Panel decided to reject Mexico's request for the Panel to
decline to exercise its jurisdiction in the case in favour of an Arbitral Panel under Chapter Twenty of
the North American Free Trade Agreement (NAFTA). The Panel concluded that, under the DSU, it
has no discretion to decide whether or not to exer cise its jurisdiction in a case properly before it.
Furthermore, even if it had such discretion, the Pa nel did not consider that there were facts on the
record that would justify the Panel declining to exercise its jurisdiction in the present case.
VIII. FINDINGS
A. CLAIMS AND ORDER OF ANALYSIS
1. Claims regarding soft drinks and claims regarding sweeteners
8.1 The United States' claims concern three measur es adopted by Mexico, namely: a "soft drink
tax", a "distribution tax" and a number of "bookk eeping requirements". The "soft drink tax" is a 20
per cent ad valorem tax on the transfer or, as applicable, th e importation of certain soft drinks and
syrups. The "distribution tax" is a 20 per cent ta x on the provision of specific services (commission,
mediation, agency, representation, brokerage, cons ignment and distribution), when these services are
provided for transferring certain soft drinks and sy rups. Finally, the "bookkeeping requirements" are
a number of requirements imposed on taxpayers subject to the "soft drink tax" and to the "distribution
tax".
8.2 The United States has submitted claims regarding the treatment that Mexico accords both to
imports of soft drinks and syrups and to imports of non-cane sugar sw eeteners, such as beet sugar and
HFCS. The United States emphasizes that although the measures at issue are imposed by Mexico on
soft drinks and syrups, this is a dispute which fundamentally concerns the treatment accorded to
sweeteners.197
8.3 Mexico does not contest that this is mainly a di spute about the treatment of sweeteners, rather
than about the treatment of soft drinks and sy rups. Mexico agrees with the United States that,
although the measures at issue are taxes that appl y to soft drinks and syrups, these measures were
imposed to "stop the displacement of domestic can e sugar by imported HFCS and soft drinks and
syrups sweetened with HFCS". Mexico contends, however, that the dispute concerns, not just the
treatment of imported sweeteners in Mexico, but is part of a broader dispute with the United States
concerning the bilateral trade in sweeteners under a regional trade agreement, the NAFTA.198
8.4 Accordingly, the Panel will first examine the Un ited States' claims regarding the treatment of
imported non-cane sugar sweeteners in Mexico and will then turn to its claims regarding the treatment
of imported soft drinks and syrups.

197 United States' first written submission, para. 1.
198 Mexico's first written submission, paras. 1-14 and 111. Written version of Mexico's oral statement
during second substantive meeting of the Panel with the parties, para. 36.

2. Claims under Articles III:2 and III:4 of th e GATT 1994, regarding the treatment of
sweeteners
8.5 With respect to the sweeteners, the United States claims that that the soft drink tax and the
distribution tax are inconsistent with both Artic les III:2 and III:4 of the GATT 1994, whereas the
bookkeeping requirements are inconsistent with Article III:4 of the GATT 1994.199
(a) Claims under Article III:2 of the GATT 1994
8.6 The United States argues that both the soft drink tax and the distribution tax, as they are
applied to beet sugar and to HFCS, are inconsis tent with the first sentence and with the second
sentence of Article III:2 of the GATT 1994, respectively.200
8.7 The United States contends that beet sugar a nd cane sugar are "like" products, but that only
beet sugar when used as a sweetener for soft drinks and syrups is subject to the soft drink tax and the
distribution tax. According to the United States, th is results in imported beet sugar being subject to
taxes in excess of those applied to like domestic pr oducts, and that the taxes are therefore inconsistent
with the first sentence of Article III:2 of the GATT 1994.201
8.8 The United States also contends that HFCS and cane sugar are directly competitive or
substitutable products and that the soft drink tax and the distribution tax result in imported HFCS
being taxed dissimilarly compared to domestic cane sugar in a manner so as to afford protection to
Mexican domestic production. According to the United States, the soft drink tax and the distribution
tax are therefore inconsistent with the second sentence of Article III:2 of the GATT 1994.
202
(b) Claims under Article III:4 of the GATT 1994
8.9 The United States further argues that the soft drink tax, the distribution tax and the
bookkeeping requirements, as they are applied on HFCS and beet sugar, are inconsistent with
Article III:4 of the GATT 1994.
8.10 The United States says that, as sweeteners for soft drinks and syrups, beet sugar, HFCS and
cane sugar are "like products" within the meaning of Article III:4 of the GATT 1994. It adds that the
Special Tax on Production and Services (Impuesto Especial sobre Producción y Servicios, or IEPS)203
affects the use of beet sugar and HFCS, by cond itioning access to an advantage (the exemption from
the tax) on use of a domestic sweetener (cane sugar) . Producers of soft drinks and syrups who use
imported beet sugar or HFCS to sweeten their pro ducts do not enjoy the same advantage. The IEPS
thus accords less favourable treatment to imports than to like Mexican domestic products. The United
States concludes that the soft drink tax, the distribution tax and the bookkeeping requirements are
inconsistent with Article III:4 of the GATT 1994.
204

199 United States' second written submission, paras. 10-13
200 United States' second written submission, paras. 14, 15 and 18.
201 United States' second written submission. paras. 18-22.
202 United States' first written submission, paras. 93, 94 and 131-140.
203 For the remainder of this Section, we will refer to the Mexican Special Tax on Production and
Services as IEPS and to the Law that regulates such tax (the Law on the Special Tax on Production and
Services, Ley del Impuesto Especial sobre Producción y Servicios) as LIEPS.
204 United States' first written submission, paras. 22, 153-162. United States' second written
submission, paras. 12, 13 and 34-36.

(c) Simultaneous claims under Articles III:2 and III:4 of the GATT 1994
8.11 As noted above, the United States presents claims in relation to sweeteners under both
Articles III:2 and III:4 of the GATT 1994. These clai ms have not been presented as alternatives.
Rather, the United States argues that the IEPS as a tax on non-cane sugar sweeteners may be
examined under both paragraphs. In its view, th e IEPS is both an "internal tax" on non-cane sugar
sweeteners for use in soft drinks and syrups within the meaning of Article III:2 and a "law ... affecting
the internal ... use" of non-cane sugar sw eeteners within the meaning of Article III:4.
205 The United
States argues that Article III:2 prohibits dissimila r taxation of imported and domestic products, while
Article III:4 prohibits less favourable treatment of imported products as compared to domestic
products with respect to laws affecting their internal sale, use, etc. Thus, to the extent the less
favourable treatment of the imported product takes th e form of dissimilar taxation that affects its
internal sale and use, the measure at issue may constitute a breach of both Articles III:2 and III:4 of
the GATT 1994.206
8.12 The United States argues that, if there is overlap with respect to Articles III:2 and III:4 in this
dispute, it is only "because of the particular ta x measures Mexico has chosen to employ to
discriminate against [non-cane sugar sweeteners]". In its opinion, "a discriminatory excise tax on a
product, which also punishes users of that product for using imported inputs, would fit under both
provisions".207
8.13 Mexico responds that, under previous WTO juri sprudence, when a measure, such as in this
case, is an internal tax or other internal charge, it should be assessed under Article III:2 of the GATT
1994, and not under Article III:4. Non-fiscal regula tions, on the other hand, would be covered by
Article III:4.208
(d) Panel's analysis of the simultaneous claims
8.14 The Panel asked the parties whether a particular order should be followed when dealing with
the United States' claims under Articles III:2 and III:4 of the GATT. As noted, in Mexico's opinion,
WTO jurisprudence suggests that, if the challenge d measure constitutes a tax measure, it should be
assessed under Article III:2 of the GATT 1994, whereas a non-fiscal regulation would be covered by
Article III:4 of the GATT 1994. 209 In turn, the United States does not express any strong preference
on the order in which to analyse the claims. Howe ver, it suggests that the Panel could employ the
same order used by the United States in its submissions, i.e., first Article III:2 and then Article III:4.210
8.15 Accordingly, the Panel will begin its analysis regarding the treatment accorded to sweeteners
by Mexico under the challenged measures, by ex amining whether the soft drink tax and the
distribution tax are internal taxes within the mean ing of Article III:2. If the measures are internal
taxes under Article III:2, the Panel will then cont inue its analysis on whether the measures are
consistent with the requirements of Article III:2.

205 United States response to Panel question No. 11, para. 26.
206 United States response to Panel question No. 21, para. 43.
207 United States response to Panel question No. 55, para. 16.
208 Mexico's response to Panel questions Nos. 11 and 55. Written version of Mexico's oral statement
during second substantive meeting of the Panel with the parties, paras. 53-54.
209 Mexico's response to Panel questions Nos. 11 and 55.
210 United States response to Panel question No. 55, para 17.

B. BURDEN OF PROOF
1. General rule on burden of proof
8.16 The general rule is that the burden of proof rests upon the party, whether complaining or
defending, who asserts the affirmative of a particular claim or defence. 211 Following this principle,
the Appellate Body has explained that the complaining party in any given case should establish a
prima facie case of inconsistency of a measure with a provision of the WTO covered agreements,
before the burden of showing consistency with a provision or defending it under an exceptional
provision is taken on by the defending party. 212 According to the Appellate Body, a prima facie case
is "one which, in the absence of effective refu tation by the defending party, requires a panel, as a
matter of law, to rule in favour of the complaining party presenting the prima facie case."213 To
establish a prima facie case, the party asserting a particular cl aim must adduce evidence sufficient to
raise a presumption that what is claimed is true. In this regard, precisely how much and precisely
what kind of evidence will be required to establish a presumption that a claim is valid will necessarily
vary from case to case.214
8.17 In this case, the initial burden of proof rest s upon the United States, as a complainant, to
establish its prima facie case that the measures at issue are incons istent with certain provisions of the
WTO covered agreements. The burden will then be on Mexico to rebut such a claim.
2. Burden of proof applied to the present case
8.18 In assessing the parties' claims and arguments in this case, the Panel notes that, other than to
argue that the measure is not applied "so as to a fford protection", Mexico does not respond to the
United States' claims on the alleged violations of Article III of the GATT 1994. However, Mexico
does not concede to the United States' claims on the alleged violations of Article III, nor does it agree
that its tax measures are in violation of Article III. Mexico submits that its decision not to respond to
the United States claims does not release the Unite d States from its obligation as a complainant to
establish a prima facie case, and that the Panel should make fi ndings only after an examination of
whether the conditions required by the different provisions of Article III have been met.215
8.19 In this regard, the United States argues that it should not be an arduous task for the Panel to
confirm that it has established a prima facie case of in consistency in this disp ute. According to the
United States, it has put forward more than am ple evidence and legal arguments in its two
submissions, its oral statements and responses to the Panel's questions, and all the uncontested facts
that have been presented by the United States s hould be accepted for purposes of the Panel's factual
and legal findings in this dispute. The United Stat es also draws the Panel's attention to the approach
in US – Shrimp and Turkey – Textiles , where the panels undertook a brief analysis, based on the
evidence before them, confirming that the complaining parties had made their prima facie case and
then proceeded to examine the respondents' affi rmative defence under Articles XX and XXIV of the
GATT 1994, respectively when, as in this case, th e respondents did not make any rebuttals to the
complainants' claims.216

211 Appellate Body Report on US – Shirts and Blouses , p. 14, DSR 1997:I, p. 323 at p. 335. Panel
212 Appellate Body Report on EC – Hormones, para. 104.
213 Ibid.
214 Appellate Body Report on US – Shirts and Blouses, p. 14, DSR 1997:I, p. 323 at p. 335.
215 Mexico's response to Panel questions Nos. 9, 18 and 41.
216 United States response to Panel question No. 9, pa ras. 22-23; and question No. 12, para. 27. United
States second written submission, para. 6. Written vers ion of United States oral statement during second
substantive meeting of the Panel with the parties, para. 3.

8.20 The assessment of the consistency of the m easures at issue with Article III entails an
examination of factors such as like products, excess ive or dissimilar taxation between imported and
domestic products, protection of domestic industry, and less favourable treatment afforded to
imported products. Therefore, to determine whethe r the United States has established its Article III
claims, the Panel will need to examine the claims , arguments and evidence submitted by the parties
for each legal requirement under the relevant provisi on of Article III while, at the same time, being
mindful of the relatively succinct analyti cal approach adopted by the panels in US – Shrimp and
Turkey – Textiles in the absence of any counter-arguments by the respondent.
C. T
HE UNITED STATES' CLAIMS REGARDING SWEETENERS UNDER THE FIRST SENTENCE OF
ARTICLE III:2 OF GATT 1994
1. The United States' claims
8.21 The United States claims that two of the challe nged tax measures, specifically the soft drink
tax and the distribution tax, are inconsistent with the first sentence of Article III:2, because they are
internal taxes imposed on imported beet sugar in excess of the taxes applied to a like domestic
product, in this instance, cane sugar.
8.22 The United States argues that beet sugar and cane sugar are "like" products and that the
incidence of the challenged taxes on the non-cane suga r sweeteners (in this case, beet sugar) for the
production of soft drinks and syrups is much greater than the nominal 20 per cent tax on the final soft
drinks and syrups. Such taxes, which are not applied to the like domestic product, would be
inconsistent with the first sentence of Article III:2 of the GATT 1994.
217
2. Mexico's response
8.23 Mexico does not respond to the United States' claims in this regard.218
3. Article III:2, first sentence, of the GATT 1994
8.24 Under the first sentence of Article III:2 of the GATT 1994:
"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
or other internal charges of any kind in ex cess of those applied, di rectly or indirectly,
to like domestic products."
8.25 As articulated by the Appellate Body in its report in Canada – Periodicals , the analysis of
whether a measure is inconsistent with the firs t sentence of Article III:2 of the GATT 1994 involves a
two-step test:
"[T]here are two questions which need to be answered to determine whether there is a violation
of Article III:2 of the GATT 1994: (a) whet her imported and domestic products are like
products; and (b) whether the imported products are taxed in excess of the domestic products.
If the answers to both questions are affirmative, there is a violation of Article III:2, first
sentence."
219

217 United States' second written submission, paras. 18-22.
218 Mexico's first written submission, para. 114. Mexico's response to Panel question No. 9.
219 Appellate Body Report on Canada – Periodicals, pp. 22-23, DSR 1997:I, p. 449, at p. 465-66.

4. Panel's analysis
8.26 In order to examine this claim, and taking into account the fact that Mexico has chosen not to
respond to the claims that the measures are inconsis tent with Article III, the Panel will consider the
United States' legal arguments, as well as all the available evidence.
(a) Likeness of products
8.27 The United States argues that beet sugar a nd cane sugar are "like products" within the
meaning of the first sentence of Article III:2 of the GATT 1994. Indeed, the United States asserts
that, although Article III:2 does not require that product s be identical to be considered alike, cane and
beet sugar are virtually identical with respect to th eir physical properties and end-uses, are distributed
in the same manner to consumers (in this case, pro ducers of soft drinks and syrups) that use them
interchangeably and are both classified under heading 1701 of the Harmonized System.
220
8.28 The consistent interpretation of dispute settlement bodies under the GATT 1947 and the WTO
has been that the determination that products are "like" under Article III:2, first sentence, must be
done "on a case-by-case basis, by examining relevant factors".221 These factors include "the product's
end-uses in a given market; consumers' tastes and ha bits, which change from country to country; the
product's properties, nature and quality." 222 Another relevant factor iden tified by the Appellate Body
is tariff classification, which, if sufficiently detailed, "can be a helpful sign of product similarity", and
has been used for this purpose in several adopted panel reports.223 The Appellate Body has added that
the definition of "like products" in Article III:2, first sentence, must be construed narrowly.224
8.29 In order to address the likeness requirement of the first sentence of Article III:2, the Panel will
therefore consider, on the basis of the evidence pr esented by the parties, the products' properties,
nature and quality; their end-uses in a given mark et; consumers' tastes and habits; and the tariff
classification of the products based on the Harmonized System. It will construe the test of likeness in
a narrow manner, as has been consistently done un der the first sentence of Article III:2 of the GATT
1994.225
(i) Products' properties, nature and quality
8.30 Physically and chemically, beet sugar and cane sugar are forms of sucrose (a combination of
glucose and fructose bonded together) with an iden tical molecular structure. The main difference
between these two forms of sugar is the source fro m which they are derived, sugar beets and sugar
cane respectively.226
8.31 Both beet sugar and cane sugar are sweeteners and, more precisely, nutritive sweeteners or
sweeteners with a caloric content (as opposed to non-nutritive or non-caloric sweeteners, such as

220 United States' second written submission, para. 19.
221 Appellate Body Report on Canada – Periodicals , p. 21, DSR 1997:I, p. 449, at p. 466. See also,
Appellate Body Report on Japan – Alcoholic Beverages II, p. 20, DSR 1996:I, p. 97, at p. 113.
222 GATT Report of the Working Party on Border Tax Adjustments, BISD 18S/97, para. 18, as quoted
in Appellate Body Report on Japan – Alcoholic Beverages II, p. 20, DSR 1996:I, p. 97, at p. 113.
223 Appellate Body Report on Japan – Alcoholic Beverages II, pp. 21-22, DSR 1996:1, p. 97, at p. 114.
224 Ibid., pp. 19-21, DSR 1996:1, p. 97, at 112-114.
225 Appellate Body Report on Canada – Periodicals , p. 21, DSR 1997:I, p. 449, at p. 468. See also,
Appellate Body Report on Japan – Alcoholic Beverages II, pp. 19-21, DSR 1996:1, p. 97, at pp. 112-114.
226 United States' first written submission, para. 22. United States' second written submission, para. 19.

saccharine). As such, both may be used as a sw eetener in the industrial production of various
products, including the soft drinks and syrups that are involved in the present dispute.
227
(ii) Products' end-uses
8.32 For the particular end-use that is relevant in this case, the production of soft drinks and
syrups, there is no difference between beet sugar and cane sugar. Producers can use beet sugar or
cane sugar, or any combination of the two, when preparing soft drinks and syrups.228
8.33 Being virtually identical in their physical properties and end-uses, beet sugar and cane sugar
can be distributed in the same manner, and industr ial consumers (in this case, the producers of soft
drinks and syrups) can use them interchangeably. In so far as a choice is made between them it will
be based on availability and price.229
(iii) Consumers' tastes and habits
8.34 With regard to consumers' pe rceptions and behaviour in respect of the products, the Panel
notices that both beet sugar and cane sugar are almost identical "sugars". There does not seem to be a
conspicuous difference in taste between the two products. 230 Furthermore, for the particular end-use
that is relevant in this case, i.e. the production of soft drinks and syrups, any difference in taste
between beet sugar and cane sugar is even less no ticeable. Consumers of soft drinks and syrups
would not be aware that one type of sugar has been u sed, rather than the other, since the use of one or
the other does not alter the taste of the product, nor is it normally indicated on the labelling of the soft
drink or syrup. The United States has quoted a majo r soft drink producer who states that "[b]ecause
there is no noticeable taste difference, bottlers have the option of using either high fructose corn syrup
(HFCS), beet sugar or cane sugar, depending on availability and cost."231
(iv) Tariff classification of the products
8.35 Beet sugar and cane sugar are both classified under Harmonized System heading 1701.232
(v) Conclusion
8.36 Having considered the above factors, the Panel concludes that beet s ugar and cane sugar are
"like products" within the meaning of the firs t sentence of Article III:2, as sweeteners in the
production of soft drinks and syrups.

227 United States' first written submission, paras. 8 and 29. United States' second written submission,
para. 19.
228 United States' first written submission, para. 77. United States' second written submission,
paras. 19, 27-29. See also United States' responses to Panel question No. 74, para 68. Exhibit US-40 (a),
paras. 412, 415, 416, and 425 (original in Spanish).
229 United States' first written submission, para. 109. United States' second written submission,
paras. 19, 27-29. European Communities' third part y written submission, para. 25. Exhibit US-40 (a),
paras. 367 and 407 (original in Spanish).
230 Exhibit US-40 (a), paras. 355 and 391 (original in Spanish).
231 United States' first written submission, para. 77. United States' second written submission,
paras. 19, 27-29. See also United States' response to Panel question No. 74, para 68.
232 United States' second written submission, para. 19. See also United States' response to Panel
question No. 74, para. 68.

(b) Taxed in excess
8.37 Having determined that beet sugar and cane suga r are "like products" within the meaning of
the first sentence of Article III:2 of the GATT 1994, the Panel will now examine whether, through the
soft drink tax and the distribution tax, Mexico is s ubjecting, directly or indirectly, imported products
to internal taxes in excess of those applied, directly or indirectly, to like domestic products.
8.38 The United States argues that, by imposing a tax on soft drinks and syrups because they are
sweetened with sweeteners other than cane sugar, Mexico has also imposed a tax on the sweeteners
themselves. It further argues that, while the tax rate on the soft drinks and syrups is 20 per cent
ad valorem, the effective rate of the tax, when calcula ted on the value of the sweeteners in the soft
drinks and syrups, far exceeds that figure. This is because the value of the sweeteners is only a
fraction of that of the soft drinks or syrups of wh ich they form part. Acco rding to the United States,
the soft drink tax and the distribution tax result in an effective tax rate of nearly 400 per cent on beet
sugar, which is clearly a tax "in excess" of that applied to the like domestic product for the purposes
of the first sentence of Article III:2.233
8.39 The Panel will focus its analysis on two questions : (i) whether beet sugar contained in soft
drinks and syrups is "subject, directly or indirectly," to the soft drink tax and the distribution tax; and,
(ii) whether the soft drink tax and the distribution tax subject imported beet sugar to internal taxes "in
excess of" those applied to domestic cane sugar.
(i) Is beet sugar subject, directly or indirectly, to the soft drink tax and the distribution tax?
8.40 Article III:2 of the GATT 1994 does not cover all in ternal taxes and internal charges, but only
those internal taxes or internal charges that are "applied" by Members, directly or indirectly, to
products. The Article also refers in its first sen tence to products that are "subject, directly or
indirectly, to internal taxes or other internal ch arges". In the context of the present case, the two
expressions (that "a tax be applied on a product" and that "a product be subject to a tax") can be taken
to have a common meaning that involves the existe nce of a link between the relevant tax and the
taxed product.
8.41 Although they are contained in the same legisla tive instrument (the LIEPS), the soft drink tax
and the distribution tax are distinct measures that operate in different ways. The United States has
asked the Panel to make findings on the consiste ncy of each of these measures (as well as of the
bookkeeping requirements) with Mexi co's obligations under the GATT 1994.
234 Accordingly, the
Panel will consider separately whether beet sugar is s ubject to internal taxes in the form of the soft
drink tax or the distribution tax, or both.
Soft drink tax
8.42 The first sentence of Article III:2 refers to inte rnal taxes or other inte rnal charges that are
applied "directly or indirectly" to products. It al so refers to products that are subject "directly or
indirectly" to internal taxes or other internal ch arges of any kind. The provision thus requires some
connection, even if indirect, between the respective in ternal taxes or other internal charges, on the one
hand, and the taxed product, on the other. The qua lifying expression "directly or indirectly" does not
eliminate the requirement for such a connection.

233 United States' second written submission, para. 20. United States response to Panel question
No. 15, para. 33, and question No. 74, paras. 71-73.
234 United States response to Panel question No. 22, para. 48.

8.43 The soft drink tax is regulated by the Law on the Special Tax on Production and Services (Ley
235 and its implementing legislation.
The tax is triggered by the importation or the intern al transfer of soft drinks and syrups containing
sweeteners other than cane sugar and it is charged on the importer or the purchaser as a percentage of
the value of the soft drinks or syrups.
236 Because the tax is not proportional to the value of non-cane
sweeteners in the drink or syrup, it might be argued that beet sugar is not subject directly to the tax.
However, because, as explained in the following paragraph, beet sugar is subject at least indirectly to
the tax, the point need not be decided here.
8.44 In regard to the question of the indirect imposition of the soft drink tax on sweeteners, it is
significant that: (a) it is the presence of non-cane sugar sweeteners that provides the trigger for the
imposition of the tax; and, (b) the burden of the tax can be expected to fall, at least in part, on the
products containing the sweetener, and thereby to fa ll on the sweetener. The Appellate Body has said
that "Article III protects expectations not of any particular trade volume but rather of the equal
competitive relationship between imported and dom estic products". 237 T a x e s directly imposed on
finished products can indirectly affect the conditions of competition between imported and like domestic
inputs and therefore come within the scope of Article III:2, first sentence.238 Indeed, in a previous case
the word "indirectly" was considered to cover, inter alia, taxes that are imposed on inputs.239
8.45 Given the facts just stated, the Panel concludes that the operation of the soft drink tax in
regard to sweeteners is a factor influencing su ch competitive relationship and that such non-cane
sugar sweeteners are therefore "subject … to" the tax, albeit that the relationship is indirect.
Consequently, non-cane sugar sweeteners are indirectly subject to the soft drink tax when they are
used for the production of soft drinks and syrups.
Distribution tax

8.46 The distribution tax is also regulated by the LIEPS and its implementing legislation. 240
However, the degree of connection between the tax a nd the relevant products is more remote in the
case of the distribution tax than in the case of the soft drink tax.
8.47 The "distribution tax" is a tax on the provision of certain services when those services are
provided "for the purpose of transferring" certain products, including soft drinks and syrups. 241 I n
general, it is not evident that the distri bution tax is a tax imposed on products, even indirectly.
According to some of the criteria used in a previ ous WTO case, there may be reasons to consider the
distribution tax as a tax on services rather than on products. 242 It is not triggered by the sales of the
relevant products, but rather by the prov ision of services related to those products 243; it is imposed at
ad valorem rates, not on the price of the relevant pr oducts, but rather on the value of the related

235 As noted, for the remainder of this Section, we will refer to the Mexican Law on the Special Tax on
Production and Services as LIEPS and to the tax itself (Special Tax on Production and Services, Impuesto
Especial sobre Producción y Servicios) as IEPS.
236 Mexico's response to Panel question No. 48.
237 Appellate Body Report on Japan – Alcoholic Beverages II, p. 16, DSR 1996:1, p. 97, at p. 110.
238 Cf., Appellate Body Report on Canada – Periodicals, p. 19, DSR 1997:I, p. 449, at pp. 464-465.
239 GATT Panel Report on Japan – Alcoholic Beverages I , para. 5.8. See also, Panel Report on
Canada – Periodicals, paras. 3.49 and 5.29.
240 Mexico's response to Panel questions Nos. 81-82.
241 LIEPS, article 2 (II.A). Although the tax is also imposed on the provision of services related to
other products, such as alcoholic beverages, cigarettes and other tobacco products.
242 Appellate Body Report on Canada –Periodicals, pp. 17-18, DSR 1997:1, p. 449, at pp. 463-464. See
also, Panel Report on Canada –Periodicals, paras. 5.28-5.29.
243 LIEPS, article 2 (II.A).

services provided244; a special section of the LIEPS 245, separate from the section governing taxes on
products, is only applicable to this tax; and, the pe rson legally liable for the payment of the tax is the
supplier of the service and not the producer of the relevant products (although the producers are
obliged by law to retain the tax246).
8.48 Until January 2002, the LIEPS imposed payment of the distribution tax on the provision of
services related to all soft drinks and syrups, rega rdless of the sweetener used. Since January 2002,
and as a result of amendments introduced in the LIEPS, payment of the distribution tax has been
exempted for the provision of services related to soft drinks sweetened with cane sugar. Pursuant to
this amendment, the distribution tax is now imposed on certain services relate d to one group of soft
drinks and syrups, while the same services related to another group of soft drinks and syrups are
exempted from the tax, based only on whether those soft drinks and syrups are sweetened with cane
sugar or with non-cane sugar sweeteners.
8.49 In the case of the soft drink tax, it was not ed that the imposition of the tax creates a
connection such that non-cane sugar sweeteners, such as beet sugar, can also be regarded to be
indirectly subject to such tax, because the tax is based solely on the nature of the sweetener used, and
because the burden of the tax can be expected to fall, at least in part, on the products containing the
sweetener, and thereby to fall on the sweetener. 247 The imposition of the distribution tax creates a
similar connection, considering again that it is base d solely on the nature of the sweetener used, and
that the burden of the tax can be expected to fa ll, at least in part, on the products containing the
sweetener, and thereby to fall on the sweetener. T hus, while on its face the distribution tax is a tax
directly applied on the provision of certain services, in the circumstances of this case, it is also an tax
indirectly applied on non-cane sugar sweeteners when they are used for the production of soft drinks
and syrups.
8.50 In conclusion, the distribution tax is a tax indirectly imposed on non-cane sugar sweeteners,
such as beet sugar.
(ii) Do the soft drink tax and the distribution tax s ubject imported sweeteners to internal taxes in
excess of those applied to like domestic sweeteners?
8.51 If the soft drink tax and the distribution tax are regarded as taxes indirectly imposed on non-
cane sugar sweeteners248, the evidence supports the conclusion that they subject beet sugar to internal
taxes in excess of those applied to cane sugar. I ndeed, the soft drink tax subjects the importation or
the internal transfer of a certain group of soft drinks, those sweetened with non-cane sugar sweeteners,
to the payment of a 20 per cent ad valorem tax. 249 As for the distribution tax, assuming that the
services provided have some value, the 20 per cent ad valorem tax on those services will result in an
additional tax on non-cane sugar sweeteners.
8.52 The Appellate Body has said that even the sma llest amount of excess of the tax that imported
products are subject to over the tax applied to like domestic products will satisfy the "in excess"
criterion in Article III:2, first sentence. It has al so made clear that the prohibition of discriminatory
taxes in this provision is not conditional on a "trade effects test", nor qualified by a de minimis
standard.250

244 Ibid., Articles 17 and 3(XII).
245 Ibid., Chapter IV of the Law.
246 Ibid., Article 5-A.
247 See para. 8.44 above.
248 See paras. 8.45 and 8.50 above.
249 United States response to Panel question No. 74, paras. 72-75.
250 Appellate Body Report on Japan – Alcoholic Beverages II, p.23, DSR 1996:1, p. 97, at p. 115.

8.53 The United States contends that under the soft dr ink tax and the distribution tax the effective
tax rate to which non-cane sugar sweeteners in soft drinks and syrups are subject is as high as 400 per
cent.
251 Mexico does not dispute this figure. In any event, it is clear that, in ad valorem terms, the
indirect tax burden on beet sugar as an input r esulting from the 20 per cent tax on the value of the
finished soft drinks or syrups and that resulting from the 20 per cent tax on the value of services
associated with the soft drinks or syrups, based solely on the use of that non-cane sugar sweetener,
would have to be compared with the correspondi ng burden on cane sugar, the like domestic product,
which is zero per cent. In each case, there can be no doubt that the one is "in excess" of the other.
8.54 The United States contends that almost all im ported products are being taxed in excess of like
domestic products as a result of the application of the soft drink tax and the distribution tax, and that
the only sweetener exempted from the measures ( cane sugar ) is almost exclusively a domestic
product. As the following paragraphs explain, th e Panel finds that the facts of the case support this
contention. However, the Panel refrains from ruli ng on whether such a finding is necessary in order
for the United States to establish its claim under Article III:2, first sentence, of the GATT 1994.
8.55 As described above, the IEPS establishes a different regime for two groups of soft drinks and
syrups. One group of soft drinks and syrups is subject, inter alia, to the payment of a soft drink tax
and a distribution tax, while the other group is ex empted from these taxes. The criterion established
by the Mexican legislation for the division of soft drinks and syrups into these two groups is whether
the soft drinks and syrups are sweetened with can e sugar or with non-cane su gar sweeteners, such as
beet sugar.
8.56 Mexico produces cane sugar for the use of the soft drink and syrup in dustry. Most sugar
consumed in Mexico is locally produced.
252 In the five years from 1997 to 2001, cane sugar
represented less than 1 per cent each year of total Mexican imports of sweeteners. 253 Unlike the
United States, Mexico does not produce beet sugar. Consequently, any soft drinks containing beet
sugar would contain an imported sweetener.
8.57 Although there is no record of imports of beet sugar into Mexico, not even incorporated in
imported soft drinks, the soft drink tax and the di stribution tax alter the conditions of competition to
the detriment of beet sugar, making it less likely that there would be imports of beet sugar. As the
European Communities indicates in its third party submission, in some WTO Members beet sugar
may be the sweetener of choice for the production of soft drinks and syrups.254
8.58 The Panel therefore concludes that the situation where beet sugar is liable to higher taxes than
those applied to cane sugar is in effect one where imported products are subject to taxes in excess of
those applied to the like domestic products.
5. Conclusion
8.59 For the reasons stated above, the Panel conclud es that the soft drink tax and the distribution
tax indirectly subject beet sugar imported into Mexico to internal taxes in excess of those indirectly
applied to like domestic products, and are in this respect inconsiste nt with Article III:2, first sentence,
of the GATT 1994.

251 United States' second written submission, para. 20.
252 Exhibit US-15.
253 United States' first written submission, paras. 19, 20, 23-26 and 56. See also United States' response
to Panel question No. 74, paras. 70 and 75. Exhibit US-42.
254 European Communities' third party written submission, para. 25.

D. THE UNITED STATES' CLAIMS REGARDING SWEETENERS UNDE R THE SECOND SENTENCE OF
ARTICLE III:2 OF GATT 1994
1. The United States' claims
8.60 The United States also requests the Panel to find that two of the challenged tax measures, the
soft drink tax and the distribution tax, are incons istent with the second sentence of Article III:2,
because directly competitive or substitutable pr oducts – HFCS and cane sugar – are not taxed
similarly and protection is thereby afforded to domestic production.
8.61 The United States argues that HFCS and cane sugar are "directly competitive or substitutable"
products when used as sweeteners for soft drinks a nd syrups. The United States further contends that,
as a result of the soft drink tax and the distributio n tax, HFCS and cane sugar are not being similarly
taxed in Mexico. According to the United Stat es, the incidence of the taxes on HFCS for the
production of soft drinks and syrups is much great er than the 20 per cent tax that is imposed on the
final soft drinks and syrups. The United States clai ms that this dissimilar taxation is being applied by
Mexico so as to afford protection to domestic pr oduction, inconsistently with the second sentence of
GATT Article III:2.255
2. Mexico's response
8.62 Mexico's only response to the United States' claim under the second sentence of Article III:2,
regarding the treatment of HFCS, is that its measu res are not intended to afford protection to its
domestic production within the meaning of Article III of the GATT.256
3. Article III:2, second sentence, of GATT 1994
8.63 The second sentence of Article III:2 of the GATT 1994 says:
"Moreover, no contracting party shall otherw ise apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the principles set
forth in paragraph 1 [of Article III]."
8.64 In turn, paragraph 1 of Article III of the GATT states:
"The contracting parties recognize that intern al taxes and other internal charges, and
laws, regulations and requirements affecting the internal sale, offering for sale,
purchase, transportation, distribution or use of products, and internal quantitative
regulations requiring the mixture, processing or use of products in specified amounts
or proportions, should not be applied to imported or domestic products so as to afford
protection to domestic production." (Emphasis added).
8.65 Finally, the Ad Note to Article III:2 of the GATT provides:
"A tax conforming to the requirements of th e 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

255 United States' first written submission, paras. 93 -140. United States' second written submission,
paras. 14-16.
256 Mexico's first written submission, section III.D. Mexico's response to Panel question No. 83.
Written version of Mexico's oral statement during second substantive meeting of th e Panel with the parties,
para. 18.

the other hand, a directly competitive or substitutable product which was not similarly
taxed." (Emphasis added).
4. Panel's analysis
8.66 There are three elements to be considered to determine whether a measure is inconsistent with
Article III:2, second sentence: first, whether th e imported products and the domestic products are
"directly competitive or substitutable products" wh ich are in competition with each other; second,
whether the directly competitive or substitutable im ported and domestic products are "not similarly
taxed;" and third, whether the dissimilar taxation of the directly competitive or substitutable imported
and domestic products is "applied ... so as to afford protection to domestic production."
257
(a) Directly competitive or substitutable products
8.67 Ad Note to paragraph 2 of Article III makes it clear that to fall within the scope of
paragraph 2, second sentence, it is sufficient that the relevant products be "directly competitive or
substitutable".
8.68 The Appellate Body has said that products are "d irectly competitive or substitutable" if they
are interchangeable or if they offer "alternative ways of satisfying a particular need or taste". 258 The
phrase connotes a relationship between imported a nd domestic products at issue that can be
essentially described as "in competition" in the marketplace. 259 In order to make this assessment,
GATT and WTO bodies have examined the following f actors: the competitive conditions between
the products in the relevant market, in the light of the nature of both products, their physical
characteristics, their common end-uses, consumers' perceptions and behaviour in respect of the
products, and the products' tariff classifications. 260 The Panel will examine these factors in respect of
HFCS and cane sugar.
(i) Products' properties, nature and quality
8.69 Both HFCS and cane sugar are sweeteners a nd, more precisely, nutritive sweeteners or
sweeteners with a caloric content (as opposed to non-nutritive or non-caloric sweeteners, such as
saccharine).261 As such, both may be used, during an industrial process, for the purpose of sweetening
products such as the soft drinks and syrups that are involved in the present dispute.
8.70 Physically, although not identical, HFCS and cane sugar have similar characteristics. They
are both combinations of glucose and fructose, albe it in different proportions. In the case of HFCS,
the precise proportions of glucose and fructose depe nd on the grade of the HFCS. The United States
has provided evidence regarding the existence of three types of HFCS: HFCS-42, HFCS-55 and
HFCS-90. The number stands for the percentage of fructose in the product. HFCS-42 and HFCS-55
are the grades most commonly used in the produc tion of soft drinks and syrups. In these two
formulations, the proportions of glucose and fructose in HFCS are similar to those in cane sugar. This
similarity is deliberate, since HFCS is designed to mimic sugar as far as possible, so that it can be
used as an alternative industrial sweetener. HFCS-9 0 may also be used as a sweetener for soft drinks
and syrups if it is blended with HFCS-42 to produ ce HFCS-55. While HFCS is always liquid, sugar
can also be consumed in liquid form, particularly for industrial uses such as the production of soft

257 Appellate Body Report on Japan – Alcoholic Beverages II, p.24, DSR 1996:1, p. 97, at p. 116.
258 Appellate Body Report on Korea – Alcoholic Beverages, para. 115.
259 Ibid., para. 114.
260 See, for example, Appellate Body Report on Japan – Alcoholic Beverages II , p. 25, DSR 1996:1,
p. 97, at p. 117.
261 United States' first written submission, para. 29.

drinks and syrups. Indeed, as part of the process of producing soft drinks and syrups, cane sugar is
mixed with water to produce a sugar syrup, which is then added to other ingredients to produce the
soft drink or syrup.262
(ii) Products' end-uses
8.71 Cane sugar and HFCS may serve the same end-use, i.e., to be sweeteners in the production of
soft drinks and syrups. Indeed, the evidence sugg ests that HFCS was developed mainly as a cost-
effective alternative to sugar for the production of so ft drinks. Producers of soft drinks and syrups
will decide whether to use cane sugar or HFCS – or, indeed, beet sugar – or any combination of those
sweeteners, very largely on th e basis of their relative prices. 263 Some producers may even use blends
of sugar and HFCS.264
(iii) Consumers' perceptions and behaviour
8.72 Concerning consumers' perceptions, the Panel h as already noted that the sweeteners in the
present case are an input used in the production of a fi nal product, i.e., soft drinks and syrups. The
immediate consumers of the sweeten ers are the industrial producers of soft drinks and syrups. The
evidence suggests that these producers consider HFCS and cane sugar to be completely
interchangeable and will substitute HFCS for cane s ugar, if that reduces costs. According to the
United States Department of Agriculture, "HFC S deliveries have shown strong growth from the
period when first introduced in the 1970s up to th e late 1990s. In the period up to 1986, HFCS
growth came at the expense of corresponding redu ctions in sugar deliveries. After 1986, strong
demand for carbonated soft drinks helped promote strong demand for HFCS. Since 1999, soft drink
consumption growth has fallen and with it, the demand for HFCS."265
8.73 In the particular case of Mexico, the evidence indicates that, as HFCS became available, and
before the tax measures were imposed, Mexican producers of soft drinks and syrups started
substituting it for cane sugar. The United States Depa rtment of Agriculture estimated that "prior to
the imposition of the tax in January 2002, Mexico's soft drink industry was using 450,000-480,000 mt
of HFCS, or between 75 and 80 percent of tota l HFCS consumption of 600,000 mt, dry basis". 266
When the Mexican Government imposed measures on HFCS (such as anti-dumping duties and the tax
measures challenged under the present case), the produ cers switched back to cane sugar. The United
States has also pointed to the fact that industrial producers of fruit and vegetable juices, which are not
subject to the IEPS, have continued using HFCS. All this evidence indicates that industrial consumers
of sweeteners regard cane sugar and HFCS as interc hangeable products for producing soft drinks and
syrups.267
8.74 As for final consumers, the evidence indicates that the consumers of soft drinks and syrups do
not differentiate between products sweetened with cane sugar and those sweetened with HFCS.
HFCS and cane sugar are similar in terms of sm ell and colour: both are odourless and, when
presented as liquids, colourless. The taste, colour an d other physical characteristics of soft drinks and
syrups sweetened with HFCS and cane sugar are indistinguishable.268 Furthermore, Mexican labelling

262 United States' first written submission, paras. 96-102 and 107. United States response to Panel
question No. 72, paras. 56-60. Exhibits US-22 and US-40 (a ), paras. 339 to 426 (especially paras. 350 to 355,
original in Spanish).
263 Exhibit US-40 (a), para. 355 (original in Spanish).
264 United States' first written submission, paras. 106-113. Exhibit US-27.
265 United States Department of Agriculture, "Sugar and Sweeteners Outlook" (May 27, 2004), Exhibit
US-21, p. 19.
266 Ibid., p. 23.
267 United States' first written submission, paras. 14, 34, and 106-113. Exhibits US-26 and US-27.
268 Exhibit US-22.

regulations do not make a distinction between th e different sweeteners, so a bottler can switch
between different mixtures of HFCS and cane suga r without changing the labelling, and the consumer
will not be aware which of them is being used.
269 The Panel may therefore conclude that, as between
HFCS and cane sugar, the specific caloric sweetener used is not a factor that Mexican consumers take
into account when choosing a soft drink or syrup.270
(iv) Tariff classification of the products
8.75 Both cane sugar and HFCS are described as "suga rs" in the Harmonized System. Cane sugar
occupies heading 1701 of the Harmonized System, wh ile HFCS is classified within heading 1702,
together with liquid sugar and inve rt sugar, as part of the group "other sugars". Both products are
therefore part of Harmonized System Chapter 17, "Sugars and sugar confectionery".271
(v) Determination by other authorities
8.76 The determination that HFCS and cane sugar may be regarded as "directly competitive or
substitutable products" for producing soft drinks and syrups is s upported by a similar conclusion
reached by other bodies. In a press bulletin issu ed in 2003, the Mexican Ministry of Economics
announced, in response to requests from industrial cons umers of sugar in Mexico, the approval of an
import quota of refined sugar as a "preventive me asure", in case domestic production was insufficient
to satisfy domestic demand. The bulletin goes on to state that the concerns of the industrial
consumers of sugar were "mainly the consequence of the entry in to force of the Special Tax on
Production and Services (IEPS) for soft drinks elaborated with fructose, which generated a
replacement of fructose with sugar in the sweetene rs market of approximately 500 thousand tonnes..."
(Dichas preocupaciones son consecuencia fundamenta lmente de la entrada en vigor del Impuesto
toneladas).272
8.77 A decision by the Mexican Federal Compe tition Commission in June 1999 similarly
concluded that "Refined sugar is used mainly in the producti on of bottled refreshments, while
standard sugar is used in various branches of the f ood industry. High fructose corn syrup (HFCS) is a
substitute mainly for refined sugar" ( El azúcar refinada se utiliza prin cipalmente en la producción de
industria alimentaria. El jarabe de maíz de a lta fructuosa (jmaf) es sustituto principalmente del
azúcar refinada.). 273 An earlier report of the same Mexican Federal Competition Commission had
defined HFCS as a "close substitute for refined sugar in processing soft drinks" ( un sustituto cercano
(vi) Conclusion
8.78 For the reasons indicated above, the Panel conc ludes that HFCS and cane sugar are "directly
competitive or substitutable products" for producing so ft drinks and syrups, within the meaning of
Article III:2, second sentence.

269 Exhibit US-37 (a), table 1 (original in Spanish).
270 United States' first written submission, paras. 99, 100 and 111. Exhibit US-40 (a), para. 391
(original in Spanish).
271 United States' first written submission, para. 117.
272 Exhibit US-53 (original in Spanish).
273 Exhibit US-56 (original in Spanish).
274 Exhibit US-55 (original in Spanish).

(b) Not similarly taxed
8.79 For the Panel to conclude that an imported pr oduct is being "not similarly taxed" when
compared to a directly competitive or substituta ble domestic product, within the meaning of the
second sentence of Article III:2 of the GATT 1994, it must determine that the tax burden on the
imported product is heavier than on the domestic product, and that this difference is more than
de minimis.275
8.80 The Panel has already determined that the soft drink tax and the distribution tax are indirectly
applied to non-cane sugar sweeteners.276
8.81 The evidence indicates that, as a result of the application of the soft drink tax and the
distribution tax, HFCS is being taxed dissimilarly compared to cane sugar. Indeed, as has been noted,
the soft drink tax subjects the importation and the inte rnal transfer of a certain group of soft drinks,
those sweetened with non-cane sugar sweeteners, to the payment of a 20 per cent ad valorem tax. As
for the distribution tax, assuming that the services provided have some value, the 20 per cent
ad valorem tax on those services will result in an additional tax indirectly imposed on non-cane sugar
sweeteners. When considered as a tax on the input, in ad valorem terms the actual tax burden that the
soft drink tax and the distribution tax impose on no n-cane sugar sweeteners (in particular, on HFCS),
is higher than the rate of 20 per cent tax imposed on the finished product. Indeed, the actual tax
burden on the input would be relative to the proporti on that the value of the input represents of the
price of the finished product and the value of the services provided.
8.82 The United States contends that under the soft dr ink tax and the distribution tax the effective
tax rate to which non-cane sugar sweeteners in soft drinks and syrups are subject is as high as 400 per
cent.
277 Mexico does not dispute this figure. In any ev ent, it is clear that the burden on sweeteners
resulting from the 20 per cent tax on the value of the fi nished soft drinks or syrups and that resulting
from the 20 per cent tax on the value of services associated with the soft drinks or syrups, based solely
on the use of non-cane sugar sweeteners, would have to be compared with the corresponding burden
on cane sugar, the like domestic product, which is zer o per cent. The term "not similarly taxed" is
taken to mean a difference in tax that is more than de minimis.278 The Panel is in no doubt that in each
case the difference in taxation between soft drin ks or syrups sweetened with HFCS and those
sweetened with cane sugar is more than de minimis. Consequently, a product (HFCS) which is being
taxed at considerably more than 20 per cent is not being "similarly taxed" to one (cane sugar) which is
subject to no tax.
8.83 For these reasons, the Panel concludes that the difference in taxation between imported HFCS
and domestic cane sugar, resulting from the application of the soft drink tax and the distribution tax, is
more than de minimis and the two products are therefore "not similarly taxed".
(c) So as to afford protection to domestic production
8.84 The last issue to be considered by the Panel in regard to Article III:2, second sentence, is
whether the soft drink tax and the distribution tax are being applied "so as to afford protection" to
Mexican domestic production. The United States argues that, with respect to HFCS, the soft drink tax
and the distribution tax afford protection to Mexican domestic production of cane sugar.279

275 Appellate Body Report on Japan – Alcoholic Beverages II, p. 27, DSR 1996:1, p. 97, at p. 119.
276 See paras. 8.45 and 8.50 above.
277 United States' second written submission, para. 20.
278 Appellate Body Report on Japan – Alcoholic Beverages II, p. 27, DSR 1996:1, p. 97, at p. 119.
279 United States response to Panel question No. 29, para. 68.

8.85 For a violation of Article III:2, second sentence, it is not enough that imports and directly
competitive or substitutable domestic products be dissi milarly taxed, the relevant tax must also be
applied "so as to afford protection" to domestic production. In that regard, as explained by the
Appellate Body:
"[W]e believe that an examination in any case of whether dissimilar taxation has been
applied so as to afford protection requires a comprehensive and objective analysis of
the structure and application of the measure in question on domestic as compared to
imported products. We believe it is possible to examine objectively the underlying
criteria used in a particular tax measure, its structure, and its overall application to
ascertain whether it is applied in a way that affords protection to domestic products.
Although it is true that the aim of a measure may not be easily ascertained,
nevertheless its protective application can most often be discerned from the design,
the architecture, and the revealing structure of a measure."
280
8.86 The design and operation of the soft drink tax and the distribution tax indicate that they afford
protection to Mexican production of cane sugar. These taxes apply to the importation and internal
transfers of all soft drinks and syrups, except for internal transfers of soft drinks and syrups sweetened
with cane sugar. As the Panel has already dete rmined, this means that the challenged measures
mostly affect imported sweeteners as opposed to domestic like products. 281 Mexican production of
sweeteners for soft drinks and syrups is concentr ated on cane sugar, whereas imports of sweeteners
were overwhelmingly concentrated on HFCS (un til this trade ceased, coinciding with the imposition
of the taxes).
8.87 The magnitude of the tax differential between imported and domestic products, resulting from
the application of the soft drink tax and the distri bution tax, is additional evidence of the protective
effect of the measure on Mexican domestic production of sugar. As has been already noted, the 20
per cent tax rate on the finished soft drinks and sy rups constitutes a tax on HFCS as an input that is
considerably more than 20 per cent.282
8.88 The finding that the tax measures have a protective effect is in line with the general character
of the measures taken by Mexico in recent years in the sugar sector. 283 Mexico has been able to
maintain a relatively protected market for sugar. 284 This has allowed Mexico to maintain relatively
high domestic prices for sugar, compared to intern ational prices. According to the available data,
most sugar consumed in Mexico is domestically produced, since Mexico imports very small quantities
of sugar. Indeed, annual Mexican imports of s ugar in the period 1995-2003, never exceeded 2.65 per
cent of its domestic consumption and, in seven out of the nine years that comprise this period, they
were below 1 per cent of domestic consumption.285
8.89 Mexico does not deny the importance it attributes to the protection of its cane sugar industry.
Although Mexico states that its tax measures were "not intended to afford protection to domestic
production within the meaning of Article III of the GATT 1994" 286, it acknowledges that the IEPS

280 Appellate Body Report on Japan – Alcoholic Beverages II, p. 29, DSR 1996:I, p. 97, at p. 120.
281 See para.8.56, above.
282 See para. 8.82 above.
283 See, for example, Mexico's first written submissi on, para. 52. See also, United States' first written
submission, footnote 30. United States' comments to Mexico's response to Panel question No. 90, para. 48.
Exhibits US-59, US-61, US-62, US-63, US-64 and US-65.
284 Cf. Appellate Body Report on Japan – Alcoholic Beverages II , p. 31, DSR 1996:I, p. 97, at p. 122.
See also, Panel Report on Japan – Alcoholic Beverages II, para. 6.35.
285 United States' first written submission, para. 20. Exhibit US-42.
286 Mexico's first written submission, section III.D. Written version of Mexico's oral statement during
second substantive meeting of the Panel with the parties, para. 18.

was one of a number of measures adopted by th e Mexican authorities to alleviate the adverse
economic situation experienced by its domestic sugar industry. Indeed, it has expressed its agreement
with the United States' observation that the ch allenged measures were imposed to "stop the
displacement of domestic cane sugar by imported HFCS and soft drinks and syrups sweetened with
HFCS".287 Mexico claims, however, that its tax meas ures are not intended to afford protection to
domestic production within the meaning of Article III of the GATT 1994, but were rather adopted as a
response to the impairment of Mexico's ri ghts under the NAFTA regarding market access
opportunities for its sugar exports to the United States' market.288
8.90 In its various submissions in this case, Mexi co describes at length the economic and social
importance of its sugar sector. For example, it says that "in Mexico the cultivation of sugarcane is
widespread and crucial to the rural economy. It is a vital cash crop for many relatively poor farmers
in 15 of Mexico's 32 states. There are some 155,00 0 cane growers in Mexico and it is estimated that
nearly 3 million people in rural Mexico depend on the sugarcane crop." 289 Mexico adds that:
"Sugarcane is the leading and most important crop in Mexico. The cultivated field area is twice that
of tomatoes, corn, carrots, and potatoes." 290 According to its figures, 1.5 per cent of the Mexican
workforce depends directly on its sugar industry. 291 Sugar cane generates higher returns to the
farmers than any other crop, in terms of production value per harvested hectare.292
8.91 The protective effect of the measure on Mexican domestic production of sugar does not seem
to be an unintended effect, but rather an inten tional objective. The Appellate Body has cautioned
against ascribing too much importance to the subjectiv e legislative intent of legislators and regulators
in the drafting of a particular measure, to determin e whether the measure is applied so as to afford
protection to domestic production, particularly when th at declared intent is that protectionism was not
an objective.293 However, the declared intention of legislators and regulators of the Member adopting
the measure should not be totally disregarded, par ticularly when the explicit objective of the measure
is that of affording protection to domestic productio n. Indeed, the Appellate Body has confirmed that
statements made by government representatives of a Member, admitting to the protective intent of a
measure, may be relevant as part of a number of considerations in reaching the conclusion that a
measure is applied so as to afford protection to domestic production.294
8.92 In this respect, the United Stat es has presented a copy of the writte n record of the debate that
took place in December 2001 in the Mexican Congress on the bill that proposed the amendments to
the LIEPS that would put in place the measures at issue. During that debate, a member of the
Mexican Congress presented the bill on behalf of th e committee that had drafted it (the Committee of
Treasury and Public Credit of the Chamber of Deputies ( Comisión de Hacienda y Crédito Público ).
During his presentation, the representative of the co mmittee declared, after explaining to the chamber
the taxes that would be imposed on soft drinks and syrups, "[w]e legislat ors, however, have the
commitment to protect the national sugar industry, because a great number of Mexicans' subsistence
depends on it. To that effect, it is proposed that the tax on soft drinks be applied only to those [soft
drinks] that for their production utilize fructose instead of cane sugar".
295
8.93 In March 2002, the Mexican Executive exempted, inter alia, all imports and transfers of soft
drinks and syrups (and not only those of soft drinks and syrups sweetened with cane sugar) from

287 Mexico's first written submission, para. 111. United States' first written submission, para. 3.
288 Mexico's response to Panel question No. 83.
289 Mexico's first written submission, para. 4.
290 Ibid., para. 16.
291 Ibid., para. 17.
292 Ibid., para. 20.
293 Appellate Body Report on Japan – Alcoholic Beverages II, pp. 27-28, DSR 1996:I, p. 97, at pp. 119.
294 Appellate Body Report on Canada – Periodicals, pp. 30-32, DSR 1997:1, p. 449, at pp. 475-476.
295 Exhibit US-28, US-29 (original in Spanish) and US-34(a), page 90 (original in Spanish).

payment of the soft drink tax. The Mexican Supr eme Court of Justice was asked by the Chamber of
Deputies of the Mexican Congress to annul that ex emption on the grounds that the exemption was
unconstitutional. When considering the case, the Supreme Court of Justice stated that:
"[i]n order to resolve the alleged unconstituti onality of the challenged decree, that is,
whether the law approved by the Congress of the Union is being duly executed, it is
necessary to turn to the motives that prompted the ordinary legislator to reform the
Law on the Tax on Production and Services, in order to extend the scope of subjects
to that tax to those who use sweeteners different than cane sugar."
296
8.94 The Mexican Supreme Court of Justice looked at the report of the Committee of Treasury and
Public Credit of the Mexican Chamber of Deputies a nd at the statement made to the chamber by the
representative of that committee to which we have referred. From those documents, the Court
concluded that "the legislator's intent when exte nding the aforementioned tax to gasified waters, soft
drinks, hydrating drinks and other taxed goods and activities, when they use fructose in their
production rather than cane sugar, was that of pr otecting the sugar industry". The Court concluded
that the Executive had violated, not only the fiscal objective of the measure, but "also its extra-fiscal
objective that was expressed in the legislative proce dure, that is the protection of the domestic sugar
industry".
297 The exemption granted by the Mexican Executive was thus annulled.
8.95 Having considered all these factors, the Panel concludes that the soft drink tax and the
distribution tax are being applied so as to affo rd protection to Mexican domestic production of cane
sugar.
5. Conclusion
8.96 For the reasons given above, the Panel concl udes that the dissimilar taxation imposed on
directly competitive or substitutable imports (HFCS) and domestic products (cane sugar) is applied in
a way that affords protection to domestic production, and that the tax measures are therefore
inconsistent with Article III:2, second sentence, of the GATT 1994.
E. T
HE UNITED STATES' CLAIMS REGARDING SWEETENERS UNDER ARTICLE III:4 OF GATT 1994
1. The United States' claims
8.97 The United States requests the Panel to find that the challenged tax measures (the soft drink
tax, the distribution tax and the bookkeeping requireme nts) are inconsistent with Article III:4 of the
GATT 1994, because they are internal measures that affect the internal use and sale of imported non-
cane sugar sweeteners and accord those non-cane sugar sweeteners treatment that is less favourable
than that accorded to like products of national origin, i.e. cane sugar.
8.98 The United States claims that beet sugar, HFCS and cane sugar, as sweeteners for soft drinks
and syrups, are "like products"; that the three ch allenged tax measures (the soft drink tax, the
distribution tax and the bookkeeping requirements) affect the use of beet sugar and HFCS, by
conditioning access to an advantage (the exempti on from the tax) on use of a domestic sweetener
(cane sugar); that producers of soft drinks and syrups who use imported beet sugar or HFCS to
sweeten their products do not enjoy the same advant age; and that the three measures therefore accord
less favourable treatment to imports than to lik e Mexican domestic products. The United States

296 Exhibit US-31 (original in Spanish).
297 Ibid.

concludes that the soft drink tax, the distribution tax and the bookkeeping requirements are therefore
inconsistent with Article III:4 of the GATT 1994.298
2. Mexico's response
8.99 Mexico does not respond to the United States' claims in this regard.299
3. Article III:4 of GATT 1994
8.100 Under Article III:4 of the GATT 1994:
"The products of the territory of any contr acting party imported into the territory of
any other contracting party shall be accord ed treatment no less favourable than that
accorded to like products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use. The provisions of this paragraph shall not prevent the application
of differential internal transportation ch arges which are based exclusively on the
economic operation of the means of tran sport and not on the nationality of the
product."
8.101 The Appellate Body has said that "[f]or a viola tion of Article III:4 to be established, three
elements must be satisfied: that the imported and domestic products at issue are 'like products'; that
the measure at issue is a 'law, regulation, or require ment affecting their internal sale, offering for sale,
purchase, transportation, distribution, or use'; a nd that the imported products are accorded 'less
favourable' treatment than that accorded to like domestic products".300
4. Panel's analysis
8.102 The Panel has already determined that the soft drink tax and the distribution tax, as applied on
beet sugar and HFCS, are internal taxes incons istent with Article III:2 of the GATT 1994.
Consequently, the Panel need not proceed any furthe r in respect of these two measures. Nevertheless,
the Panel will analyse the United States' claims ag ainst the soft drink tax and the distribution tax
under Article III:4, in the event that either or bot h of the two measures should be considered more
properly as measures affecting the internal use of sweeteners, rather than as internal taxes on
sweeteners.
(a) Likeness of products
8.103 The United States argues that, as sweeteners for th e production of soft drinks and syrups, beet
sugar, HFCS and cane sugar are "like products" within the meaning of Article III:4. In its opinion,
cane and beet sugar are not only "like", but are almost identical. HFCS and cane sugar, on the other
hand, are near perfect substitutes as sweeteners in soft drinks and syrups.
301

298 United States' first written submission, paras. 15 5-162. United States' second written submission,
paras. 34-36.
299 Mexico's first written submission, para. 114. Mexico's response to Panel question No. 9.
300 Appellate Body Report on Korea – Various Measures on Beef, para. 133.
301 United States' first written submission, paras. 15 5-162. United States' second written submission,
paras. 34 and 36.

8.104 The analysis of the likeness between importe d and domestic products for the purpose of
Article III:4 covers the characteristics of the rele vant products and the extent of the competitive
relationship between them. The Appellate Body has said that:
"As products that are in a competitive relationship in the marketplace could be
affected through treatment of imports 'less favourable' than the treatment accorded to
domestic products, it follows that the word 'like' in Article III:4 is to be interpreted to
apply to products that are in such a comp etitive relationship. Thus, a determination
of 'likeness' under Article III:4 is, fundame ntally, a determination about the nature
and extent of a competitive relationship between and among products."
302
8.105 Beet sugar and cane sugar have already been f ound to be like products within the meaning of
the first sentence of Article III:2 of the GATT 1994, as sweeteners in the production of soft drinks and
syrups.303 Since the Appellate Body has clarified that "that the scope of 'like' in Article III:4 is
broader than the scope of 'like' in Article III:2, first sentence" 304, it follows that beet sugar and cane
sugar are like products within the meaning of Article III:4.
8.106 As regards the likeness of cane sugar and HFCS, the factors to be taken into account – the
products' properties, nature and quality; their end-uses in a given market; consumers' tastes and habits;
and the tariff classification of the products – ar e the same as those examin ed by the panel when
considering whether the two products were "direct ly competitive or substitutable" under Article III:2,
second sentence.305 It is not necessary for the Panel to repeat its factual conclusions regarding those
factors. All that is necessary is that the Panel should consider, in the light of those factual
conclusions, whether, and to what extent, the pro ducts involved are, or could be, in a competitive
relationship in the marketplace and satisfy the "like products" criterion in Article III:4. The Panel is
satisfied that the facts amply demonstrate that, as sweeteners for soft drinks and syrups, cane sugar
and HFCS are in a close competitive relationship and that they undoubtedly can be considered as "like
products" under Article III:4.
(b) Measures affecting the internal use of sweeteners
8.107 The United States claims that the LIEPS "affects" the use of beet sugar and HFCS, because
they grant producers of soft drinks and syrups an advantage (an exemption from the three challenged
tax measures: the soft drink tax, the distribu tion tax and the bookkeeping requirements) that is
conditional on the use of a domestic sweetener, cane sugar. The added burdens imposed on the use of
beet sugar and HFCS would influence the producers' choice of sweeteners. In the United States'
opinion, the best evidence of this effect is the fact that, after imposition of the tax measures, all
Mexican bottlers of soft drinks and syrups that were using HFCS, reverted to use of cane sugar. The
United States thus concludes that the LIEPS is a law "affecting" the "internal use" of beet sugar and
HFCS.
306
8.108 The term "affecting" in the expression "laws, regulations and requirements affecting [the]
internal sale, offering for sale, purchase, transporta tion, distribution or use" in Article III:4 of the
GATT 1994 has a broad scope. As articulated in WTO and GATT jurisprudence, it "cover[s] not only
laws and regulations which direc tly govern the conditions of sale or purchase but also any laws or

302 Appellate Body Report on EC – Asbestos, para. 99.
303 See para. 8.36 above.
304 Appellate Body Report on EC – Asbestos , para. 99. Cf. Appellate Body Report on Japan –
Alcoholic Beverages II, p. 19-21, DSR 1996:I, p. 97, at pp. 112-114.
305 See paras. 8.69 to 8.77 above.
306 United States' first written submission, para. 160. United States' second written submission,
No. 55, para. 14.

regulations which might adversely modify the conditions of competition between domestic and
imported products307."308
8.109 The Panel has already concluded that two of the measures challenged by the United States
under Article III:4 of the GATT 1994 (the soft dri nk tax and the distribution tax) are imposed on
imported sweeteners in a manner inconsistent with Article III:2. 309 The facts that were analysed by
the Panel and led it to consider that th e two taxes "apply" to imported sweeteners, 310 also support the
conclusion that these taxes "affect" imported sweeteners.
8.110 The LIEPS exempts producers of soft drinks and syrups from payment of the soft drink tax,
contingent on the use of cane sugar as a sweetener. On the other hand, producers of soft drinks and
syrups that use any other sweeten er to sweeten their products, including beet sugar or HFCS, do not
enjoy the same exemption. Similarly, the LIEPS imposes a distribution tax on the provision of certain
services, when these services are provided for the pur pose of transferring soft drinks and syrups
sweetened with non-cane suga r sweeteners. Providers of the same services, when the soft drinks and
syrups are sweetened with cane sugar, are exempted from the distribution tax.311
8.111 The LIEPS also imposes a number of require ments (referred to in this case as the
"bookkeeping requirements") on taxpayers who are s ubject to the soft drink tax and the distribution
tax.312 The bookkeeping requirements include the following obligations:
(a) Provide the tax authorities, in March of each year, in respect of the goods produced,
transferred or imported in the immediately preceding year, with information
regarding consumption of the goods by state and the corresponding tax, and the
services provided by establishment in each state
313;
(b) Provide the Tax Administration Service with quarterly information, in the months of
April, July, October and January of the re levant year, on their 50 main customers and
suppliers in the quarter immediately pr eceding that in which they filed their
statement, in respect of such goods314;
(c) Maintain physical volumetric controls of the goods manufactured, produced or
bottled, as appropriate, and report quarterly, in the months of April, July, October and
January of the relevant year, on the monthly readings registered by each of the
devices used for such controls, in the qua rter immediately preceding that in which
they filed their statement
315;
(d) In the case of importers or exporters of soft drinks or syrups, register in the sectoral
register of importers and exporters, as appr opriate, kept by the Ministry of Finance
and Public Credit316; and,

307 (footnote original) Panel Report on Italy – Agricultural Machinery, para. 12.
308 See, for example, Panel Report on Canada – Autos, para. 10.80.
309 See paras. 8.59 and 8.96 above.
310 See paras. 8.42 to 8.45 and 8.46 to 8.50 above. See also, para. 8.80 above.
311 United States' first written submission, paras. 15 9-160. United States' second written submission,
paras. 34-36. United States response to Panel question No. 74, paras. 72-75.
312 Mexico's response to Panel questions Nos. 22 and 50. United States response to Panel question No.
74, para. 76.
313 LIEPS, article 19(VI).
314 LIEPS, article 19(VIII).
315 LIEPS, article 19(X).
316 LIEPS, article 19(XI).

(e) Provide the Tax Administration Service with quarterly information, in the months of
April, July, October and January of the re levant year, on the price, value and volume
of each product transferred in the immediately preceding quarter.
317
8.112 These bookkeeping requirements impose a burden on pr oducers of soft drinks and syrups in
addition to the payment of the soft drink tax and th e distribution tax. However, this burden does not
extend to producers who use cane sugar rather than beet sugar or HFCS as a sweetener. In light of the
previous considerations and the broad scope of th e expression "affect the internal sale, offering for
sale, purchase, transportation, distribution, or use of imported products", the Panel considers that these
bookkeeping requirements affect the "use" of import ed beet sugar and HFCS by the soft drinks
industry.
8.113 For the reasons indicated above, the Panel concl udes that the soft drink tax, the distribution
tax and the bookkeeping requirements may be consider ed as measures that affect the internal use in
Mexico of non-cane sugar sweeteners, such as beet sugar and HFCS, within the meaning of
Article III:4 of the GATT 1994.
(c) Less favourable treatment
8.114 The United States argues that the IEPS accords less favourable treatment to imports than that
accorded to like products of national origin. In the United States' opinion, this is because in relation
to their use in the production of soft drinks and syrups, the challenged measures bestow a substantive
advantage on cane sugar that is not extended to non-cane sugar sweeteners, such as beet sugar or
HFCS. The United States does not contend that the challenged measures overtly discriminate
between imported and domestic products, but that they result in the latter being treated less favourably
in practice . Since in Mexico cane sugar is almost ex clusively a domestically produced sweetener,
while HFCS is mostly an imported product and beet sugar is exclusively an imported product, this
advantage in fact implies that the measures affo rd imported HFCS and beet sugar less favourable
treatment than that accorded to the like product of national origin, cane sugar.318
8.115 The United States contends that almost all imported products are being accorded less
favourable treatment as a result of the applicati on of the challenged measures, since almost all
imported products are comprised of non-cane sugar sweeteners and the only sweetener exempted from
the measures (cane sugar) is al most exclusively a domestic product. As the following paragraphs
explain, the Panel finds that the facts of the case support this contention. Ho wever, the Panel refrains
from ruling on whether such a finding is necessary in order for the United States to establish its claim
under Article III:4 of the GATT 1994.
8.116 The LIEPS establishes a different regime for two groups of soft drinks and syrups. One group
of soft drinks and syrups is subject to the payment of a soft drink tax and a distribution tax and to the
fulfilment of certain bookkeeping requirements, while the other group is exempted from these taxes
and requirements. The criterion established by the Me xican legislation for the division of soft drinks
and syrups into these two groups is whether the soft drinks and syrups are sweetened with cane sugar
or with non-cane sugar sweeteners, such as beet s ugar or HFCS. These measures have the effect of
penalizing the consumption of non-can e sugar sweeteners by industrial producers of soft drinks and
syrups. Producers who opt for the use of non-cane sugar sweeteners, such as beet sugar or HFCS, in
the preparation of their soft drinks and syrups are subject to the payment of taxes and to the
completion of requirements that are not demanded of those producers who use cane sugar instead.

317 LIEPS, article 19(XIII).
318 United States' first written submission, paras. 16 1-162. United States' second written submission,
paras. 34 and 36.

8.117 The challenged measures create an economic incentive for producers to use cane sugar as a
sweetener in the production of soft drinks and syrups, instead of other non-cane sugar sweeteners such
as beet sugar or HFCS. This incentive is created by conferring an advantage (the exemption from the
soft drink tax, the distribution tax and the bookkeeping requirements) on those producers that use cane
sugar instead of non-cane sugar sweeteners, such as beet sugar or HFCS. These measures do not
legally impede producers from using non-cane sugar sweeteners, such as beet sugar or HFCS.
However, they significantly modify the conditions of competition between cane sugar, on the one
hand, and non-cane sugar sweeteners, such as beet sugar or HFCS, on the other. Indeed, there is
evidence that the imposition of these measures reverted the trend that was seemingly under way in the
Mexican market towards the replacement of cane sugar as an industrial sweetener in the production of
soft drinks and syrups, for non-cane sugar sweeteners, such as HFCS.
319
8.118 The description of the soft drink tax, the dist ribution tax, and the bookkeeping requirements,
and the fact that they are imposed only on soft drinks and syrups that contain non-cane sugar
sweeteners, leaves no doubt that the soft drinks and syrups sweetened with beet sugar and HFCS are
less favourably treated. The measures therefore alte r the conditions of competition in the Mexican
market in favour of cane sugar and to the detrimen t of non-cane sugar sweeteners, such as beet sugar
or HFCS, according a less favourable treatment to the latter than that accorded to cane sugar.
8.119 The evidence demonstrates that, although on their face the challenged measures do not
distinguish between imported and dom estic sweeteners, the distinction they make between the use of
cane sugar and non-cane sugar sweeteners is, in fact , one that distinguishes between imported and
domestic sweeteners. Domestically produced sweet eners in Mexico consist overwhelmingly of cane
sugar. In the years prior to the imposition of th e challenged measures, production of HFCS started to
develop in Mexico, mainly to satisfy the demand for sweeteners by the domestic soft drinks and
syrups industry. However, even in 2001, when HFCS reached its highest share of the Mexican
sweetener market, it still represented less than 10 per cent, with cane sugar accounting for almost all
the rest. Coinciding with the imposition of the challenged measures, Mexican production of HFCS
started to decline.320
8.120 In turn, before the challenged measures were instituted, as a group imported sweeteners in
Mexico were overwhelmingly cons tituted by non-cane sugar sweeteners. In the five years from 1997
to 2001, non-cane sugar sweeteners, consisting almo st entirely of HFCS, represented almost 100 per
cent of total Mexican imports of sweeteners. Imports of cane sugar during that period represented less
than 1 per cent of total Mexican imports of sweeteners in each year.
321
8.121 In conclusion, it is evident that in practice the challenged measures detrimentally affect the
competitive situation of the imported sweeteners that the producers of soft drinks and syrups could
have chosen (mostly HFCS), when compared to that of the most widely available domestic sweetener
(i.e., cane sugar).
8.122 Consequently, the Panel finds that the challe nged measures accord less favourable treatment
to imported non-cane sugar sweeteners, such as beet sugar and HFCS, than that accorded to like
products of national origin.

319 United States' first written submission, paras. 25-26. United States response to Panel question No.
72, para. 59.
320 United States' first written submission, paras. 16 and 23-25. See also, Exhibits US-11(b), US-11(c),
US-11(d) and US-11(e).
321 United States' first written submission, para. 25. See also Exhibit US-42.

5. Conclusions
8.123 For the reasons indicated (and subject to the qualification made above
322, regarding the
Panel's findings that the soft drink tax and the dist ribution tax are inconsistent with Article III:2 as
regards imported beet sugar and imported HFCS), the Panel concludes that, through the soft drink tax,
the distribution tax and the bookkeeping requirement s, Mexico accords less favourable treatment to
imported non-cane sugar sweeteners, such as beet sugar and HFCS, than that accorded to like
products of national origin, i.e ., cane sugar. These measures are therefore inconsistent with
Article III:4 of the GATT 1994.
F. THE UNITED STATES' CLAIMS REGARDING SOFT DRINKS AND SYRUPS UNDER THE FIRST
SENTENCE OF ARTICLE III:2 OF GATT 1994
1. The United States' claims
8.124 The United States requests the Panel to find that two of the challenged tax measures,
specifically the soft drink tax and the distribution tax, are inconsistent with the first sentence of
Article III:2, because they are internal taxes impos ed on imported soft drinks and syrups sweetened
with HFCS and beet sugar in excess of the taxes a pplied to the like domestic product, i.e., soft drinks
and syrups sweetened with cane sugar.323
8.125 With regard to the soft drink tax, the United States argues that the measure is imposed at the
time of importation into Mexico of all soft drinks and syrups, regardless of the type of sweetener
used.324 The tax is also imposed on internal transfer s of soft drinks and syrups, except for those
exclusively sweetened with cane sugar (and with th e exception of public sales). The distribution tax
is imposed on the provision of certain services (a gency, representation, brokerage, consignment and
distribution) for soft drinks and syrups, except for those exclusively sweetened with cane sugar. 325
8.126 The United States observes that the vast major ity of soft drinks and syrups produced in
Mexico are sweetened with cane sugar, while in the United States the sweetener of choice for soft
drink and syrup production is HFCS. 326 Since soft drinks and syrups sweetened with non-cane sugar
sweeteners, such as HFCS and beet sugar, and Mexican domestic soft drinks and syrups sweetened
with cane sugar are "like" products, the United States submits that the imposition of the soft drink tax
and the distribution tax subjects imported products to taxes higher than those applied to the like
domestic product, in a manner inconsistent with the first sentence of Article III:2 of the GATT 1994.
2. Mexico's response
8.127 Mexico does not respond to these United States' claims.
327
3. Panel's analysis
8.128 As was done with respect to the treatment accorded to beet sugar, the Panel will analyse the
consistency of the challenged measures with Arti cle III:2, first sentence, by considering two

322 See para. 8.102 above.
323 United States' first written submission, paras. 57 and 62-90. United States' second written
submission, paras. 23 and 25-31.
324 United States response to Panel question No. 13, para. 29 and question No. 14, paras. 30-32.
325 United States' first written submission, paras. 59 , 60, 85 and 89. United States' second written
submission, para. 9.
326 United States' first written submission, para. 56.
327 Mexico's first written submission, para. 114. Mexico's response to Panel question No. 9.

questions. First, whether the imported and domestic products are like products. Second, whether the
imported products are subject to taxes in excess of those applied to the like domestic products.328
(a) Likeness of products
8.129 The United States contends that imported soft dr inks and syrups and domestic soft drinks and
syrups are alike, because soft drinks and syrups sweetened with non-cane suga r sweeteners including
HFCS and beet sugar (which are mostly imported) , are like those sweetened with cane sugar (which
are mostly domestic). 329 According to the United States, soft drinks sweetened with non-cane sugar
sweeteners, in particular, with HFCS and beet su gar, and those sweetened with cane sugar, have
"virtually identical" characteristics in terms of physical properties, end-uses, consumer tastes and
habits, and tariff classification.
330
8.130 Under the principles established by previous GATT and WTO dispute settlement bodies, the
Panel will determine the "likeness" of the products by examining the products' properties, nature and
quality; their end-uses in the given market; consum ers' perceptions and be haviour; and the products'
tariff classification.331
(i) Products' properties, nature and quality
8.131 Regarding the physical characteristics of the soft drinks, both types of products (soft drinks
and syrups sweetened with non-cane sugar sweeteners and soft drinks and syrups sweetened with cane
sugar) are virtually identical. They have identi cal physical appearances. They are virtually
indistinguishable by the human body, since they contain similar amounts of calories and are digested
and absorbed in the same manner. Since caloric non-cane sugar sweeteners (HFCS and beet sugar)
and cane sugar have a very similar chemical comp osition, it follows that soft drinks and syrups
sweetened with non-cane sugar sweeteners and soft drinks and syrups sweetened with cane sugar have
nearly the same chemical composition. In countri es such as Mexico and the United States, both types
of soft drinks and syrups are usually indistinguis hable on the basis of their ingredient labels, since
both generally bear the same ingredient inscription on the label.
332
(ii) Products' end-uses
8.132 As the United States has contended, it is evident that soft drinks and syrups, regardless of the
caloric sweetener used, share identical end-uses. Both types of products may be drunk for quenching
thirst, providing energy or nourishment, or for socialization; they may be drunk straight or mixed with
other beverages; they may be consumed before, afte r or during meals; and they may be consumed at
home or in public places alike, regardless of whether they are sweetened with HFCS or beet sugar or
with cane sugar.333
8.133 The evidence also indicates that, regardless of the caloric sweetener used, soft drinks and
syrups use similar distribution channels. The Unite d States has quoted major producers of soft drinks
(Coca-Cola and the Pepsi Bottling Group) to the effect that there are no differences in the distribution
channels used for these products. Retail seems to be the primary distribution channel in both Mexico

328 Appellate Body Report on Canada – Periodicals, p. 24, DSR 1997:I, p. 449, at p. 465-466.
329 United States second written submission, para. 23.
330 United States first written submission, paras. 66 -83. United States second written submission,
paras. 23 and 26-29. United States responses to Panel question No.. 18, para. 39, and question No. 74, paras. 68
and 69.
331 Appellate Body Report on Canada – Periodicals , p. 21, DSR 1997:I, p. 449, at p. 466. See also,
Appellate Body Report on Japan – Alcoholic Beverages II, pp. 21-22, DSR 1996:I, p. 97, at p. 113.
332 Exhibits US-22 and US-37(a), table 1 (original in Spanish).
333 United States first written submission, para. 72 and footnote 117. Exhibit US-38.

(where most soft drinks are sweetened with cane s ugar) and the United States (where most soft drinks
are sweetened with HFCS). Considering the evid ence, there is no indication that channels of
distribution for major producers of soft drinks in Mexico changed during the 1990s through 2001,
even though the producers switched from cane sugar to a blend of HFCS and sugar, and then again to
cane sugar during this period.
334
(iii) Consumers' perceptions and behaviour
8.134 Regarding consumer tastes and preferences, th e United States has indicated that surveys and
taste tests conducted by soft drinks bottlers dem onstrate that consumers do not show any consistent
pattern of preference for soft drinks sweetened with sugar versus soft drinks sweetened with HFCS,
nor do they detect any significan t difference in taste and sweetness. 335 There is also evidence that in
Mexico, under labelling regulations, labels w ill generally identify "all monosaccharides and
disaccharides that are present in a non-al coholic food or beverage" as "sugars" ( azúcares), so that
consumers may not even be aware of the specific type of caloric sweetener used. 336 Also, marketing
strategies in Mexico seem not to have changed when the largest local bottler of soft drinks switched to
a blend of sugar and HFCS, instead of pure cane sugar, from 1996 through 2003. 337 All these facts
support the conclusion that there is no perceived consumer preference for any of the considered
products based exclusively on the type of caloric sw eetener that is used. Indeed, the difficulty for
consumers to distinguish between soft drinks and syrups sweetened with HFCS and those sweetened
with cane sugar is not a matter of chance. HFCS was designed to mimic sugar as much as possible, in
order to be an alternative industrial sweetener.338
(iv) Tariff classification of the products
8.135 With respect to their tariff classification, Mexi co does not draw any distinction between soft
drinks and syrups on the basis of the type of sweet ener used (cane sugar, beet sugar or HFCS). Its
tariff schedule classifies soft drinks and syrups as follows:
(a) soft drinks, hydrating and rehydrating beverages: 2202.10 and 2202.90
(b) syrups (including concentrates, powders , essences and extracts): 2101.11, 2101.12,
2101.20, 2101.30, 2106.90.05, 2106.90.06 and 2106.90.07.339
(v) Conclusion
8.136 In view of these considerations, the Panel conc ludes that soft drinks and syrups sweetened
with HFCS and soft drinks and syrups sweetened with cane sugar are "like products" for the purposes
of Article III:2, first sentence of the GATT 1994. HFCS and cane sugar have a slight difference in the
exact ratio of their component s (i.e. fructose to glucose) 340, but the difference between both products
is not enough to make soft drinks sweetened with one or the other not "like". Likewise, the Panel
finds that soft drinks and syrups sweetened with b eet sugar and soft drinks and syrups sweetened with
cane sugar are "like products" for the purposes of th is provision. In fact, the two are virtually
identical.

334 United States first written submission, paras. 73-76 . Exhibits US-16, US-18, US-19, US-20, US-24
and US-39.
335 United States first written submission, paras. 77, 78 and 99.
336 United States first written submission, paras. 68-71 and 111. Exhibits US-36 and US-37.
337 United States first written submission, para. 81.
338 United States first written submission, para. 107.
339 United States first written submission, paras. 27 and 82. Exhibit US-43. Mexico's response to Panel
question No. 44.
340 See footnote 115 of the United States first written submission.

(b) Taxed in excess
8.137 Having determined that soft drinks and syrups sweetened with beet sugar and HFCS may be
regarded as "like products" when comp ared with soft drinks and syru ps sweetened with cane sugar,
the Panel will now turn to the issue of whether, through the soft drink tax and the distribution tax,
Mexico is subjecting, directly or indire ctly, imported products to internal taxes in excess of those
applied, directly or indirectly, to like domestic products, in a manner inconsistent with the first
sentence of Article III:2 of the GATT.
8.138 The challenged tax measures (soft drink tax and th e distribution tax) are applied at different
points in time. First, at the time of importation, the soft drink tax is applied to all imported soft drinks
and syrups, regardless of the sweetener used. S econd, once imported soft drinks and syrups clear
customs and enter into the Mexican market, the soft dr ink tax is applied to soft drinks sweetened with
non-cane sugar sweeteners upon each internal transfer (w ith the exception of public sales). Third, the
distribution tax is applied to soft drinks and sy rups sweetened with non-cane sugar sweeteners on the
provision of certain services within Mexico. Th e Panel will examine the challenged tax measures
considering these three points in time to determine whether they are imposed on imported soft drinks
and syrups in excess of the taxes imposed on like domestic soft drinks and syrups.341
(i) Soft drink tax at the time of importation
8.139 At the time when the DSB established this Pane l and approved its terms of reference, Mexico
was imposing a 20 per cent tax (the soft drink tax) on "all imported soft drinks and syrups" at the
point of importation, regardless of the sweetener used. 342 The United States argues that this tax
discriminated on its face against imports, since it was not applied to domestic products.343
Amendments to the LIEPS
8.140 In November 2004, the Mexican Congress amended the LIEPS with the effect that, from
January 2005, imported soft drinks and syrups qu alify for the exemption from payment of the soft
drink tax, as long as they are sweetened exclusively with cane sugar.344
8.141 The United States argues that the Panel should not take such amendment into consideration,
because it is outside the Panel's terms of reference. It submits that the measures before the Panel are
Mexico's tax measures as they stood when this Pa nel was established, which were embodied in the
text of the LIEPS published on 1 January 2002 a nd its subsequent ame ndments published on 30
December 2002 and 31 December 2003. 345 Mexico responds that the Panel has the power to consider
the amendments to the LIEPS in the context of this dispute. In its opinion, the obligation contained in
Article 11 of the DSU, under which a Panel must assist the DSB in discharging its responsibilities
under the DSU by making an objective assessment of the matter before it, require panels to take into
account events which occurred during the proceedi ngs, including amendments to the measures at
issue.346

341 United States first written submission, paras. 38-44.
342 Mexico's response to Panel question No. 45.
343 United States second written submission, para. 11.
344 Mexico's response to Panel questions Nos. 45, 50 and 52. Exhibit MEX-46.
345 United States second written submission, para. 32. United States response to Panel question No. 52,
paras. 1-6.
346 Mexico's response to Panel question No. 52.

8.142 In respect of these arguments, the Panel first notes that the entry into force of the amendments
to the LIEPS occurred after the date of es tablishment of the Panel (6 July 2004).
347 The parties do not
claim that the amendments are within the Panel' s terms of reference. In its request for the
establishment of a panel in this case, the United States identified the measures at issue as the "Law on
the Special Tax on Production and Services ( Ley del Impuesto Especial sobre Producción y Servicios
or "IEPS") published on 1 January 2002 and its s ubsequent amendments published on 30 December
2002 and 31 December 2003". 348 The specific reference made by the United States to "subsequent
amendments published on 30 December 2002 and 31 D ecember 2003" is not broad enough to include
further amendments that came after the establishment of the Panel 349, and consideration of such
amendments does not seem necessar y to secure a positive solution to the present dispute for the
reasons explained below.
8.143 Several previous panels have refrained from making findings on measures terminated before
their establishment.350 In Argentina – Textiles and Apparel , the panel declined to rule on a measure
that was "revoked before the Panel was established and its term of reference set, i.e. before the Panel
started its adjudication process" 351, even though the measure had b een included in its terms of
reference. The panel cited in its support the statem ent of the Appellate Body that the aim of dispute
settlement is not:
"[T]o encourage either panels or the Appe llate Body to 'make law' by clarifying
existing provisions of the WTO Agreement outside the context of resolving a
particular dispute. A panel need only address those claims which must be addressed
in order to resolve the matter in issue in the dispute."
352
8.144 In the present case, however, the amendments to the LIEPS entered into force on 1 January
2005, which was six months after the establishment of the Panel. Furthermore, the effects of the new
amendments seem to be limited to only part of the claims against the challenged measures, i.e. the
imposition of the soft drink tax to all imported soft drinks and syrups at the point of importation,
regardless of the sweetener used. The Panel recal ls that the Appellate Body has said that "the
demands of due process are such that a complaining party should not have to adjust its pleadings
throughout dispute settlement proceedings in orde r to deal with a disputed measure as a 'moving
target'."353 Given its terms of reference354, in the light of the obligations contained in Article 11 of the
Dispute Settlement Understanding, and without an agreement between the parties to terminate the
proceedings as regards this aspect of the contested measures, the Panel considers there is no basis for
it to abstain from ruling on the complaint made by the United States. Indeed, several panels have

347 ". Constitution of the Panel Established
at the Request of the United States. Note by the Secretariat". Doc. WT/DS308/5/Rev.1 of 25 August 2004.
348 See, ". Request for the Establishment
of a Panel by the United States". Doc. WT/DS308/4 of 11 June 2004.
349 See, Appellate Body Report on Chile – Price Band System, para. 144.
350 See, for example, Panel report on US – Gasoline , and Panel Report on Argentina – Textiles and
Apparel.
351 Panel report on Argentina – Textiles and Apparel, para. 6.13.
352 Appellate Body Report on US – Wool Shirts and Blouses, p. 19, DSR 1997:I, p. 323 at p. 340.
353 Appellate Body Report on Chile – Price Band System, para. 144.
354 See, ". Constitution of the Panel
Established at the Request of the United States. Note by the Secretariat". Doc. WT/DS308/5 of 20 August
2004. See also, ". Request for the Establishment of
a Panel by the United States". Doc. WT/DS308/4 of 11 June 2004.

reached the same conclusion, when examining me asures terminated before or during the panel
process.355
Soft drink tax at the time of importation
8.145 The Panel will therefore examine the soft drink tax as it stood on 6 July 2004, in respect of its
application at the point of importation. 356 There is no question that the imported soft drinks and
syrups were directly subject to the soft drink tax. The same tax is also dir ectly applied on internal
transfers of the product domestically, as long as the soft drinks or syrups are not sweetened with cane
sugar.357 According to Ad Article III of the GATT 1994:
"Any internal tax or other internal charge , or any law, regulation or requirement of
the kind referred to in paragraph 1 which applies to an imported product and to the
like domestic product and is collected or en forced in the case of the imported product
at the time or point of importation, is nevert heless to be regarded as an internal tax or
other internal charge, or a law, regulation or requirement of the kind referred to in
paragraph 1, and is accordingly subject to the provisions of Article III."
8.146 The Panel has already discussed the meaning of the term "in excess of". 358 This term has
been interpreted very strictly, and encompasses even the slightest difference in the level of taxes. The
Appellate Body has said that "[e]ven the smallest amo unt of 'excess' is too much. 'The prohibition of
discriminatory taxes in Article III:2, first sentence, is not conditional on a "trade effects test" nor is it
qualified by a de minimis standard.'"359 There can be no doubt that a tax difference of 20 per cent can
be regarded as "in excess".
Conclusion
8.147 Since at the point of importation all imported soft drinks and syrups, whether sweetened with
cane or beet sugar or with HFCS, were subject to a tax in excess of the tax applied to the like
domestic products (soft drinks and sy rups sweetened with cane sugar), the soft drink tax is in this
respect inconsistent with Article III:2, first sentence, of the GATT 1994.
(ii) Soft drink tax on internal transfers
8.148 Mexico also imposes a 20 per cent soft drink tax on internal transfers of soft drinks and
syrups sweetened with non-cane s ugar sweeteners, including HFCS and beet sugar. An exemption
from this tax is available only for those soft dri nks and syrups that are sweetened with cane sugar. 360

355 See, for example, Panel Report on US – Certain EC Products ; Panel Report on US – Wool Shirts
and Blouses; Panel Report on Indonesia – Autos; Panel Report on Chile – Price Band System; and, Panel Report
on Canada – Wheat Exports and Grain Imports.
356 LIEPS, article 1 (I). United States first writte n submission, paras. 85-86. United States second
written submission, paras. 11, 23, 30-31. United States response to Panel question No. 14, para. 30; question
No. 27, paras. 59-60; and question No. 74, para. 73.
357 Domestic soft drinks and syrups sweetened with cane sugar are exempted from the soft drink tax on
their internal transfers under Article 8 of the LIEPS.
358 See para. 8.52 above.
359 Appellate Body Report on Japan – Alcoholic Beverages, p. 23, DSR 1996:I, p. 97, at p. 115.
360 United States response to Panel questions Nos. 14, 27 and 74.

The United States claims that th is aspect of the tax constitutes de facto discrimination and is
inconsistent with Article III:2, first sentence, of the GATT 1994.
361
8.149 The Panel has already concluded that, in regard to internal transfers, as a result of the soft
drink tax, beet sugar used as a sweetener in soft drin ks and syrups is subject, directly or indirectly, to
a tax in excess of that applied to the like domest ic product, because of the non-application of that tax
when the sweetener used is cane sugar and considerin g that the burden of the tax can be expected to
fall, at least in part, on the products containing the sweetener. 362 By the same logic, the Panel finds
that the soft drinks and syrups sweetened with beet sugar or HFCS are subject, directly or indirectly,
to the soft drink tax. Furthermore, as concluded above
363, a difference of 20 per cent tax undoubtedly
meets the "in excess of" criterion. Finally, the Panel notes that soft drinks and syrups imported into
Mexico are sweetened primarily with non-cane suga r sweeteners (HFCS or beet sugar), whereas
Mexican domestic soft drinks and syrups are sweetened primarily with cane sugar. 364 Since the latter
are the main beneficiaries of the exemption from th e tax, and using the logic that it applied to the
discrimination regarding sweeteners 365, the Panel concludes that, although the soft drink tax does not
on its face distinguish between imported and domestic products, it has this result in practice.
(iii) Distribution tax
8.150 The United States also claims that the distribution tax of 20 per cent, which is charged on
representation, brokerage, agency, c onsignment and distribution provided in relation with soft drinks
or syrups sweetened with non-cane sugar sweeteners, is inconsistent with Article III:2, first sentence.
This is because no such tax is applied to such servi ces when provided in rela tion to soft drinks or
syrups sweetened with cane sugar. In this instance also the United States argues that the
discrimination is de facto.366
8.151 The distribution tax is imposed on certain services provided for the purpose of transferring
one group of soft drinks and syrups, while the same services related to anothe r group of soft drinks
and syrups are exempted from the tax, based only on the consideration of whether those soft drinks
and syrups are sweetened with cane sugar or with non-cane sugar sweeteners.
8.152 The Panel has already concluded that the impositi on of the distribution tax, based solely on
the nature of the sweetener used, and considering that the burden of the tax can be expected to fall, at
least in part, on the products containing the sweeten er, creates a connection such that the tax can also
be regarded as a tax indirectly imposed on non-cane sugar sweeteners.367 By the same logic, the Panel
finds that, while on its face the distribution tax is a tax on the provision of certain services, in the
circumstances of this case, it is also a tax applied indirectly on soft drinks and syrups. Furthermore,
as concluded above
368, assuming that the services provided have some value, the 20 per cent
ad valorem tax on those services will result in an additi onal tax on soft drinks and syrups sweetened
with non-cane sugar sweeteners. That figure would have to be compared with the tax rate applied to

361 United States first written submission, para. 87. United States second written submission, paras. 11,
23, 30-31 and 33. United States response to Panel question No. 14, paras. 30-31; question No. 27, paras. 59 and
61; and question No. 74, paras. 71-74.
362 See para. 8.59 above.
363 See para. 8.146 above.
364 United States first written submission, paras. 30 , 32 and 35. Exhibits US-8, US-10, US-13 and
US-57.
365 See paras. 8.55 to 8.58 above.
366 United States first written submission, paras. 89-90. United States second written submission,
paras. 11, 23, 30-31. United States response to Panel question No. 14, para. 32; question No. 27, paras. 59 and
61; question No. 74, paras. 71-74.
367 See para. 8.48 above.
368 See para. 8.51 above.

the provision of services related to soft drinks and syrups sweetened w ith cane sugar, the like
domestic product, which is zero per cent. There can be no doubt that the former is "in excess" of the
latter. Finally, using the same logic that it applied to the discrimination regarding the soft drink tax369,
the Panel concludes that, although the distributi on tax does not on its face distinguish between
imported and domestic products, it has this result in practice.
(iv) Taxes imposed in excess
8.153 Considering the respective groups of products th at are subject to the soft drink tax and the
distribution tax, domestic soft drinks and syrups ar e the main beneficiaries of the tax exemption under
the LIEPS. Indeed, most domestic soft drinks and sy rups in Mexico are sweetened with cane sugar,
while most imported soft drinks and syrups are sweetened with non-cane suga r sweeteners, such as
HFCS.
8.154 In light of the above, a soft drink tax and a distribution tax imposed only on soft drinks and
syrups with non-cane sugar sweeteners, most of whic h are imported, and not applied to soft drinks
and syrups sweetened with cane sugar, most of which are domestic, may be regarded as a tax imposed
on imports "in excess of" that imposed on like domestic products.
4. Conclusion
8.155 For the reasons given above, the Panel concludes that, at the ti me of establishment of this
Panel, the soft drink tax, as applied by Mexico at the point of importation, subjected soft drinks and
syrups imported into Mexico to internal taxes in excess of those directly applied to like domestic
products, in a manner inconsistent with Article III:2, first sentence, of the GATT 1994.
8.156 The Panel also finds that the soft drink tax, as applied on internal transfers in Mexico,
subjects imported soft drinks and syrups to intern al taxes in excess of those directly applied to like
domestic products, in a manner inconsistent with Article III:2, first sentence, of the GATT 1994.
8.157 Finally, the Panel finds that the distribution tax, as applied on the provision of certain
services, when those services are provided for the pur pose of transferring soft drinks and syrups
sweetened with non-cane suga r sweeteners, subjects imported soft dr inks and syrups to internal taxes
in excess of those indirectly applied to like dom estic products, in a manne r inconsistent with
Article III:2, first sentence, of the GATT 1994.
G. T
HE UNITED STATES' CLAIMS REGARDING SOFT DRINKS AND SYRUPS UNDER THE SECOND
SENTENCE OF ARTICLE III:2 OF GATT 1994
1. The United States' claims
8.158 The United States also argues that two of the challenged tax measures, specifically the soft
drink tax and the distribution tax, are inconsiste nt with the second sentence of Article III:2 of GATT
1994, because soft drinks and syrups sweetened with HFCS and beet sugar and the directly
competitive or substitutable products, i.e., soft dr inks and syrups sweetened with cane sugar, are
dissimilarly taxed, so as to afford protection to domestic production.370
8.159 The United States presents this cl aim only as an alternative should the Panel not consider that
soft drinks and syrups sweetened with HFCS a nd those sweetened with cane sugar are like products,

369 See para. 8.149 above.
370 United States first written submission, paras. 141-152.

and that the soft drink tax and the distribution tax ar e in this respect inconsistent with Article III:2,
first sentence, of the GATT 1994.
371
2. Mexico's response
8.160 Mexico's only response to this claim is that its measures are not intended to afford protection
to its domestic production within the meaning of Article III of the GATT.372
3. Panel's analysis
8.161 The panel has already determined that the soft drink tax and the distribution tax, as applied by
Mexico on soft drinks and syrups , are inconsistent with Article III:2, first sentence, of the GATT
1994.373 Since the condition set by the United States has therefore not been fulfilled, the Panel will
not address this claim.
H. MEXICO'S DEFENCE UNDER PARAGRAPH (D) OF ARTICLE XX OF GATT 1994
1. Mexico's defence
8.162 As described above, for the most part Mexico has not presented rebuttal arguments regarding
the United States' claims under Article III of GATT 1 994. Mexico argues, however, that if the IEPS
taxes are found by the Panel to violate Article III, the measures are nevertheless justifiable under
Article XX(d) of GATT 1994.374 In its opinion, the measures are "necessary to secure compliance" by
the United States with the United States' obligati ons under the NAFTA, an international agreement
that is a law not inconsistent with the provisions of the GATT 1994. 375 Mexico does not claim any
justification for its measures other than that provi ded through Article XX(d). Furthermore, although
Mexico has characterized its actions as an exercise of countermeasures, as recognized under
international law376, it does not seem to be suggesting that the international law rules governing such
actions should affect the interpretation of Article XX(d).
2. The United States' response
8.163 The United States responds that, although Article XX(d) of GATT 1994 permits a WTO
Member to maintain measures that are "necessary to secure compliance with laws or regulations
which are not inconsistent" with the provisions of the GATT 1994, the NAFTA is not a "law or
regulation," and Mexico's taxes are not "necessary to secure compliance." In its opinion, nothing in
Article XX(d) supports the contention that a WTO Me mber may violate its WTO obligations in order
to punish another Member because the former th inks that the latter has not complied with its

371 United States responses to Panel questions, question No. 18, para. 39. United States second written
submission, paras. 23-24.
372 Mexico's first written submission, section III.D. Mexico's responses to Panel questions, question
No. 83. Written version of Mexico's oral statement duri ng second substantive meeting of the Panel with the
parties, para. 18.
373 See paras. 8.155 to 8.157 above.
374 Mexico's first written submission, paras. 115-138.
375 Mexico's first written submission, paras. 117-118 and 125.
376 See, for example, written version of Mexico's oral statement during second substantive meeting of
the Panel with the parties, para. 3.

obligations under another international agreement.377 The United States adds that Mexico's measures
are also incompatible with the requirements of the chapeau to Article XX .378
3. Article XX(d) of GATT 1994
8.164 According to the chapeau and paragraph (d) of Article XX of the GATT:
"Subject to the requirement that such me asures are not applied in a manner which
would constitute a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prev ail, or a disguised restriction on
international trade, nothing in this Agre ement shall be construed to prevent the
adoption or enforcement by any contracting party of measures: [...]
(d) necessary to secure compliance with laws or regulations which
are not inconsistent with the provisions of this Agreement, including
those relating to customs enfo rcement, the enforcement of
monopolies operated under paragraph 4 of Article II and
Article XVII, the protection of patents, trade marks and copyrights,
and the prevention of deceptive practices;"
4. Panel's analysis
(a) Order of analysis
8.165 The Panel will follow the well-established two-tiere d process of analysis elaborated by the
Appellate Body in US – Gasoline:
"In order that the justifying protection of Article XX may be extended to it, the
measure at issue must not only come under one or another of the particular exceptions
- paragraphs (a) to (j) - listed under Article XX; it must also satisfy the requirements
imposed by the opening clauses of Article XX."
379
8.166 The burden lies on Mexico, as the party invoki ng the affirmative defence provided by
Article XX(d), to demonstrate that the measures wh ich the Panel has found to be inconsistent with
Article III, satisfy the requirements of the invoked defence.380
8.167 Regarding the first stage in the application of Article XX, the Panel will follow the order of
analysis set out by the Appellate Body:
"For a measure, otherwise inconsistent with GATT 1994, to be justified provisionally
under paragraph (d) of Article XX, two elemen ts must be shown. First, the measure
must be one designed to 'secure compliance' with laws or regulations that are not
themselves inconsistent with some provision of the GATT 1994. Second, the
measure must be 'necessary' to secure such compliance. A Member who invokes

377 Written version of United States' oral statement during first substantive meeting of the Panel with
the parties, paras. 7-8. United States second written submission, paras. 41-67.
378 United States second written submission, paras. 68-73.
379 Appellate Body Report on US – Gasoline, p. 22, DSR 1996:I, p. 3, at p. 20.
380 Appellate Body Report on Korea – Various Measures on Beef, para. 157. See also, Appellate Body

Article XX(d) as a justification has the burden of demonstrating that these two
requirements are met.
 381"382
(b) Designed to secure compliance with laws or regulations
8.168 Mexico argues that the challenged tax measur es are "designed to secure compliance" by the
United States with the NAFTA, a law that is not inconsistent with the provisions of the GATT
1994.383
8.169 In order to determine whether a measure ma y be considered to be "designed to secure
compliance", the Panel will look at the meaning of the expression "to secure compliance". It will then
examine the issue of the design of the measures. Finally, it will address the issue of whether the
NAFTA may be considered to be part of the laws and regulations covered by paragraph (d).
(i) To secure compliance
8.170 Mexico argues that the tax measures at issue are justifiable under Article XX(d) as "necessary
to secure compliance" by the United States with th e United States' obligations under the NAFTA. In
Mexico's opinion, this provision allows WTO Members to adopt measures that are necessary to secure
compliance by another Member with the latter's intern ational obligations arising from a treaty that is
not one of the WTO "covered agreements". Mexico re fers to its IEPS taxes on soft drinks and syrups
as "temporary and proportionate measures" intended to induce the United States to comply with what
Mexico says are its NAFTA obligations regarding ma rket access conditions for Mexican sugar or to
submit to dispute settlement procedures unde r the NAFTA regarding these obligations. 384 M e x i c o
also speaks of the measures as intended to rebalancin g its market so that Mexican surplus sugar that
could have been exported to the United States can be sold locally. 385 While acknowledging that there
are no WTO or GATT precedents to support an interp retation that Article XX(d) would justify such
measures, Mexico argues that there are none that deny it.386
8.171 The United States responds that Article XX(d) does not provide an exception for measures to
secure compliance with obligations of a WTO Member under another international agreement. In the
first place, the United States argues that obligations under an international agreement are not covered
by the expression "laws or regulations". 387 According to the United States, the ordinary meaning of
the terms "laws or regulations" encompasses only the domestic laws or regulations of a government; it
does not include obligations under an internationa l agreement, which have a different meaning. 388
The United States submits that such interpretation of the ordinary meaning of "laws or regulations" is
supported by the context in which the terms appear – namely, Article XX of the GATT and more

381 (footnote original) Appellate Body Report, United States – Gasoline, supra, footnote 98, pp. 22-23;
Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from
India, WT/DS33/AB/R, adopted 23 May 1997, pp. 14-16; Panel report, United States – Section 337 , supra,
footnote 69, para. 5.27.
382 Appellate Body Report on Korea – Various Measures on Beef, para. 157. See also, Appellate Body
383 Mexico's first written submission, para. 118.
384 Written version of Mexico's oral statement during first substantive meeting of the Panel with the
parties, para. 45. Written version of Mexico's oral st atement during second substantive meeting of the Panel
with the parties, para. 36. Mexico's response to Panel question No. 87.
385 Mexico's first written submission, para. 84.
386 Mexico's response to Panel question No. 25.
387 United States second written submission, paras. 2 and 37.
388 United States second written submission, para. 43. United States response to Panel question No. 30,
para. 71.

broadly the GATT and the WTO Agreement as a whole. 389 In its opinion, Mexico's interpretation
would allow any WTO Member to invoke Article XX(d ) as a justification for actions depriving other
Members of their rights under the GATT to the extent needed to "secure compliance" with any other
international agreement.390
8.172 The United States further argues that, even if "l aws or regulations" could be read to include
obligations owed by one WTO Member to another under an international agreement, Mexico's tax
measures are not designed to "secure compliance" within the meaning of Article XX(d) of the GATT
1994. In this regard, Mexico's position presupposes th at the United States is not in compliance with
its NAFTA obligations, a matter that has not been pr oved by Mexico, that is currently being disputed
in the NAFTA forum and that would anyhow be outs ide the Panel's terms of reference. The United
States adds that Mexico has not explained how its tax measures are designed to secure compliance by
the United States, considering that the measures a pply to soft drinks and syrups and non-cane sugar
sweeteners imported from any WTO Member, and not just those from the United States. Rather, in its
opinion, those taxes protect Mexico's own cane sugar industry.
391
8.173 The Panel commences its analysis of the issue by recalling that, in order to be justified by
Article XX(d), a measure must be "necessary to secure compliance with laws or regulations that are
not inconsistent with the provisions of the GATT 1994".392
8.174 The word "compliance" may be defined as "the action of complying with a request,
command, etc.", while in that sense to "compl y" with is to "act in accordance with". 393 In turn, to
"secure" may be defined as to "make (something) certa in or dependable. Now [especially] ensure (a
situation, outcome, result, etc.)".394
8.175 The context in which the expression is used makes clear that "to secure compliance" is to be
read as meaning to enforce compliance. Firstly, the provision is addressing compliance with "laws or
regulations", and these characteristically concern oblig ations rather than requests, and compliance is
secured by enforcement through the use of force by the authorities, if n ecessary. Secondly, the
examples of measures that are given in the latter part of paragraph (d) all concern that concept (the
terms used in these examples are "enforcement" (twice), "protection", and "prevention").395
8.176 This interpretation is confirmed by consideration of the travaux préparatoires of GATT 1947.
The strong language used in the phrase "to secure co mpliance" differs from that contained in early
drafts of the Charter for an International Trade Organization (ITO), a weaker "to induce
compliance".396 There is also evidence that negotiators we re aware of the issue of countermeasures.
During the negotiations on the ITO Charter, India proposed the inclusion (in the provision that would
be the basis for Article XX of the GATT) of a pa ragraph that would allow a country "temporarily to

389 United States second written submission, paras. 44 -46. United States response to Panel question
No. 30, paras. 72-74.
390 United States second written submission, para. 48.
391 United States second written submission, paras. 56-59.
392 See, for example, GATT Panel Report on EEC – Parts and Components, para. 5.14.
393 The New Shorter Oxford English Dictionary (Clarendon Press, 1993), Vol. I, p. 461.
394 Ibid., Vol. II, p. 2754.
395 Paragraph (d) illustrates the measures that may be covered by the provision by citing measures such
as those "relating to customs enfo rcement, the enforcement of monopolies operated under paragraph 4 of
Article II and Article XVII, the protection of patent s, trade marks and copyright s, and the prevention of
deceptive practices".
396 "Preparatory Committee of the International Co nference on Trade and Employment, Committee II,
Report of the Technical Sub-Committee", Doc. E/PC/T/C.II/54/rev.1 (28 November 1946), p. 37. See also,
Panel Report on EEC – Parts and Components , para. 5.16. Suggested Charter for an International Trade
Organization of the United Nations (United States Department of State, September 1946), Article 32, p. 24.

discriminate against the trade of another Member when this is the only effective measure open to it to
retaliate against discrimination practised by that Member in matters outside the purview of the
[International Trade] Organization, pending a se ttlement of the issue through the United Nations".
397
The proposal was not accepted.398
8.177 The interpretation is also confirmed by the Appellate Body's use of the expression
"enforcement instrument" when referring to measures covere d by paragraph (d). 399 Indeed, Mexico
has also referred to measures "designed as an en forcement instrument", when referring to the
measures that would be covered by paragraph (d).400
8.178 The identification of the phrase "to secure comp liance" with the notion of enforcement has
important implications for the arguments presented by Mexico. The context of Mexico's action is
essentially international. Countermeasures have an intrinsic inter-state character, and there is no
concept of private action against a state being justifiable on this basis. On the other hand, the notion
of enforcement contains a concept of action within a hierarchical structure that is associated with the
relation between the state and its subjects, and whic h is almost entirely absent from international law
(action under Chapter VII of the United Nations Charter is arguably an exception, but it has no
relevance in the present dispute
401). The possibility for states to take countermeasures, that is to try by
their own actions to persuade other states to resp ect their obligations, is itself an acknowledgement of
the absence of any international body with enforcemen t powers. In contrast to this, the capacity to
enforce laws and regulations through the use of coerci on, if necessary, is perhaps the most important
of the features that distinguish states from other kinds of bodies.
8.179 The examples provided in Article XX(d) serve to reinforce the conclusion that this provision
is concerned with action at a domestic rather than international level. Customs, monopolies, patents,
trade marks and copyrights, and deceptive practices are in essence matters that are regulated under
domestic law. It can be argued that the topics covered by these examples are all capable of being the
subjects of international agreements.
402 However, the same point could be made of almost any aspect
of national law, and the argument does not detract from the basic point that these examples essentially
concern aspects of domestic law which make use of systems of enforcement. Thus, there could be
domestic customs laws without international agr eements, but international agreements on customs
without domestic law would be meaningless. Of course, these topics are listed in Article XX(d)
merely as examples, so they cannot of themselves be taken as providing c onclusive support for the
Panel's conclusions. Nevertheless, they provide a significant indicator of the intended interpretation.
8.180 The Panel will return to the notion of enforcement in its discussion of "laws or regulations"403,
but before leaving the current topic it is worth noting that the Draft Articles on Responsibility of States
for internationally wrongful acts adopted by the International Law Commission 404 do not speak of
enforcement when addressing the use of countermeas ures. Rather, paragraph 1 of Article 49 states
that "[a]n injured State may only take countermeasu res against a State which is responsible for an

397 Doc. E/PC/T/180 (19 August 1947), p. 97.
398 See, "Havana Charter for an International Trade Organization", United Nations Conference on
Trade and Employment, Final Act and Related Documents (Lake Success, New York, April 1948), pp. 33-34.
399 Appellate Body Report on Korea – Various Measures on Beef , paras. 162-163. See also, Panel
Report on US – Gasoline , para. 6.33. See also, GATT Panel Report on EEC – Parts and Components ,
paras. 5.17-5.18.
400 Mexico's response to Panel question No. 24.
401 A special exception for action of this kind is created by Article XXI(c) of GATT 1994.
402 Written version of Mexico's oral statement during first substantive meeting of the Panel with the
parties, para. 42. See also, Mexico's response to Panel question No. 67.
403 See para. 8.199 below.
404 "Draft Articles on Responsibility of States for internationally wrongful acts" adopted by the
International Law Commission at its fifty-third session (2001).

internationally wrongful act in order to induce that State to comply with its obligations under Part
Two." Nor is the notion of enforcement used in the Commentary on the articl es, except in regard to
procedures within the European Union, which because of its unique structures and procedures is
obviously a special case.405
8.181 For these reasons the Panel concludes that the phrase "to secure compliance" in Article XX(d)
does not apply to measures taken by a Member in order to induce another Member to comply with
obligations owed to it under a non-WTO treaty.
(ii) Whether Mexico's tax measures are designed to secure compliance
8.182 In Korea – Various Measures on Beef, the Appellate Body said that:
"For a measure, otherwise inconsistent with GATT 1994, to be justified provisionally
under paragraph (d) of Article XX, two elemen ts must be shown. First, the measure
must be one designed to 'secure compliance' with laws or regulations that are not
themselves inconsistent with some provision of the GATT 1994. Second, the
measure must be 'necessary' to secure such compliance."
406
8.183 In that case, the Appellate Body was confirming the decision of the panel which said that:
"… the dual retail system was put in place, at least in part, in order to secure
compliance with the Korean legislation against deceptive practices to the extent that it
serves to prevent acts inconsistent with the Unfair Competition Act. First, the system
was established at the time when, as stated by Korea and not refuted by the
Complaining parties, acts of misrepresenta tion were widespread in the beef sector.
Second, it must be conceded that the dua l retail system does appear to reduce the
opportunities and thus the temptations for but chers to misrepresent foreign beef for
domestic beef, when compared with the situation where all domestic and imported
beef could officially be supplied to the same shop."
407
8.184 The question of whether the measure identified by Mexico is designed to secure compliance
is therefore one that must be addressed by the Panel. The considerations that influenced the Panel in
reaching a conclusion regarding the phrase "to secure compliance" 408 are also relevant to answering
this question.
8.185 The panel additionally notes that, when enforcem ent action is taken within a Member's legal
system there will normally be no doubt, provided the action is pointed at the right target, that it will
achieve that target. At least, there is no systemic problem in arriving at that conclusion, because the
State by its very nature is usually in a position to achieve that enforcement, through the use of
coercion, if necessary. However, the situation is quite different when one considers international
relations. Mexico argues that its tax measures are designed to secure compliance by the United States
with obligations Mexico considers the United Stat es to have under the NAFTA. Regardless of the
issue of Mexico's actual intentions regarding its measures, the effectiveness of those measures in
achieving their stated goal – that of bringing about a change in the behaviour of the United States –
seems to the Panel to be inescapably uncertain.

405 "Commentaries to the draft Articles on Responsibility of States for internationally wrongful acts"
adopted by the International Law Commission at its fifty-third session (2001), p. 337.
406 Appellate Body Report on Korea – Various Measures on Beef, para. 157. See also, Appellate Body
Report on Dominican Republic – Import and Sales of Cigarettes, para. 65.
407 Panel Report on Korea – Various Measures on Beef, para. 658.
408 See para. 8.175 above.

8.186 In this regard, Mexico has not explaine d how its measures will make any significant
contribution to securing compliance on the part of the United States, and much less how they will
perforce bring about such a change of conduct. Me xico has claimed only that the measures have had
the effect of "attracting the attention" of the United States.
409 Attracting the attention of a Member is
not equivalent to securing compliance of that Member with a law or regulation. Even conceding that
the measures may have "attracted the attention of the United States", at most this would imply the
beginning of a process between the parties with uncertain results. The Panel mentions these
considerations principally in or der to reinforce its conclusion th at the outcome of international
countermeasures, such as those adopted by Mexico, is inherently unpredictable, and that they are
therefore not eligible to be considered as measu res "to secure compliance" within the meaning of
Article XX(d). However, even if the assumption were to be made in the abstract that international
countermeasures are potentially capable of qualifying as measures designed to secure compliance, the
Panel's conclusion would be that Mexico has not es tablished that its measures contribute to securing
compliance in the circumstances of this case.
8.187 Confirmation of the view that the uncertain outcome of international countermeasures is a
reason for disqualifying them as measures eligible for consideration under Article XX(d) is to be
found in the Appellate Body Report in the US – Gambling case. When considering whether a
measure could be considered to be "necessary" , the Appellate Body dismissed the idea that
consultations between the Members concerned could constitute a reasonably available alternative:
"Engaging in consultations with Antigua, with a view to arriving at a negotiated
settlement that achieves the same obj ectives as the challenged United States'
measures, was not an appropriate alternative for the Panel to consider because
consultations are by definition a process, the results of which are uncertain and
therefore not capable of comparison with the measures at issue in this case."
410
8.188 As indicated by the Appellate Body, measures th at are of uncertain outcome do not qualify as
reasonably available alternatives when consider ing whether a measure is necessary to secure
compliance with a law or regulation. Following a similar rationale, in order to qualify as a measure
"to secure compliance", it would seem that there should be a degree of certainty in the results that may
be achieved through the measure. Such certainty is inherently absent in the case of international
countermeasures.
8.189 Finally, it should be noted that, as regards the design of the measures, the Panel has already
determined that, by their design and operation, th e challenged tax measures afford protection to
Mexican domestic production.
411 The measures apply to imported soft drinks and syrups, and
particularly to those produced with non-cane suga r sweeteners, from all origins. Even Mexico
acknowledges that its measures are intended to rebalan ce its sugar market, so that surplus sugar that
could otherwise have been exported to the Unite d States could be sold in the Mexican domestic
market.412 These considerations serve to further underm ine Mexico's claim that, in the circumstances
of this case, its measures are designed to secure compliance with laws or regulations.
8.190 For these reasons, the Panel is not convinced by Mexico's argument that the challenged tax
measures are designed to secure compliance by the United States with laws or regulations.

409 Mexico's second written submission, para. 83.
410 Appellate Body Report on US – Gambling, para. 317.
411 See para. 8.86 above.
412 Mexico's first written submission, para. 84.

(iii) Laws and regulations covered by paragraph (d) of Article XX
8.191 As noted above, the United States argues that the phrase "laws or regulations" in paragraph
(d) covers only internal or domestic laws and regulations, and does not extend to international
obligations owed to Mexico by other countries unde r the NAFTA, and other international agreements.
It contends that both the ordinary meaning of the te rms "laws or regulations", as well as the context in
which the terms appear – namely, Article XX of the GATT and more broadly the GATT and the
WTO Agreements – support its interpretation that th ey are limited to domestic laws or regulations. 413
In the view of the United States, Mexico has not established that the phrase "laws or regulations" as
used in Article XX(d) means or includes "internatio nal law" or obligations owed to Mexico under an
international agreement such as the NAFTA.414
8.192 Mexico responds that international agreements that are incorporated into domestic law, and
the legal obligations arising from those agreem ents, would be covered by the phrase "laws or
regulations". It argues that "international law is no less law than domestic law". In its opinion, "[t]he
mere characterization of a rule as an obligation un der an international agreement does not mean that
such a rule is not also a 'law' within the meaning of Article XX(d)."415
8.193 The Panel commences its examination of the phrase "laws or regulations" by noting that
"law" can be defined as a "rule of conduct imposed by secular authority" or as "[a]ny of the body of
individual rules in force in a State or community" 416, while "regulation" can be defined as a "rule
prescribed for controlling some matter, or for the regulating of conduct". 417 However, these
definitions are too general to resolve the questi on of the meaning of these terms in Article XX(d), 418
and in particular whether, as argued by Mexico, th ey include the rules of international agreements,
such as those of the NAFTA. Nor does the Panel fi nd guidance in this regard from the use of the
plural form of the word "laws" in paragraph (d); nor from the different use of the word in the Spanish
and French text of the GATT 1994 and the DSU. 419 For the answer to this question it is necessary to
look at the context in which the words occur. Th is context includes the other terms of paragraph (d)
as well as the other provisions of GATT 1994, and indeed of the WTO covered agreements.
8.194 The phrase "laws or regulations" is most clo sely linked with the opening words of the
paragraph: "to secure compliance with". Furthermor e, in looking for the meaning of these words, the

413 Written version of United States' oral statement during first substantive meeting of the Panel with
the parties, para. 9. United States second written submission, paras. 37 and 41-55. United States response to
Panel question No. 30, paras. 72-78.
414 United States second written submission, paras. 42-55. Written version of United States' oral
statement during second substantive meeting of the Panel with the parties, paras. 4-12.
415 Mexico's first written submission, para.118. Written version of Mexico's oral statement during first
substantive meeting of the Panel with the parties, paras. 41-44. Mexico's second written submission,
paras. 66-73.
416 The New Shorter Oxford English Dictionary (Clarendon Press, 1993), Vol. I, pp. 1544-1545.
417 Ibid., Vol. II, p. 2530.
418 See also United States response to Panel question No. 30, para. 71.
419 The United States argues that there is a text ual difference between "laws or regulations" and
"international law". In support for its argument, it refers to the fact that one expressi on uses the singular "law"
while the other uses the plural "laws". In its view, while it is possible to speak of international "law" in the same
sense as to speak about "common law" or the "law of the sea", international law is not ordinarily used in the
plural. It also argues that the word "law", as used in the expressions "public international law" (in Article 3.2 of
the DSU) and "laws or regulations" (in Article XX(d) of the GATT 1994) has been translated differently in the
Spanish and French texts of the agreements. See, Un ited States second written submission, para. 51 and
footnote 72. Written version of United States' oral stat ement during second substantive meeting of the Panel
with the parties, para. 9. The Panel notes that the singular form of the word "law" can also be used in reference
to any particular body of rules in force in a community, such as "criminal law", "commercial law" or
"administrative law", without regard to whether it is domestic or international.

Panel found it necessary to look at the whole expression "to secure compliance with laws or
regulations". It therefore follows logically that th e conclusions reached in that analysis must also
apply in the present context. Consequently, the conclusion that these words refer to enforcement
action within a particular domestic legal system, and that they do not extend to international action of
the type taken by Mexico, necessarily applies to both parts of this expression.
8.195 Both parties have sought to invoke the use of th e terms "laws" and "regulations" elsewhere in
the GATT 1994 and in other WTO agreements in support of their respective suggested
interpretations.
420 The use of these terms in the text of the GATT 1994 421 and the WTO Agreement422
suggests that such terms relate principally to domest ic rules issued by the authorities of Members (or
of GATT contracting parties) and not to obligati ons under international agreements. At the same
time, it should be noted that in a limited number of instances, the WTO Agreement refers to
"regulations" adopted by the WTO Ministerial Conference 423, and to "financial regulations" adopted
by the General Council 424, suggesting that the term "regulation" may also be associated to acts
adopted by international bodies. The Panel does not find that this last consideration gives any
decisive indication of the meaning of "laws or re gulations" in Article XX(d) , and in particular does
not detract from the conclusion it has reached by considering the immediate context of the phrase.
8.196 The Panel does not see that the issue of the po ssible direct effect of an international
agreement in domestic law is relevant in the present context. Whether or not an agreement has that
effect, it retains its international character, and it is that character and the international character of
the obligations that arise from it which lead to the possible use of countermeasures to encourage
respect for those obligations. Thus, even if some of the rules of the ag reement become part of
national law as a result of a doctrine of direct effe ct, it remains the case that it is the international
dimension of the agreement's rules that needs to be considered when interpreting the phrase "laws or
regulations".
8.197 Finally, the Panel observes that, even if it were to assume that the expression "laws or
regulations" in Article XX(d) could include intern ational agreements such as the NAFTA, it would in
any event conclude that, on the facts of the case, be cause of the uncertainty of their consequences, the
challenged measures are not designed "to secure comp liance with laws or regulations which are not
inconsistent with the provisions" of GATT 1994.

420 United States response to Panel question No. 30, paras. 72-74. United States second written
submission, paras. 37 and 44-46. Wr itten version of United States' oral statement during second substantive
meeting of the Panel with the parties, paras. 6 and 9. Written version of Mexico's oral statement during second
substantive meeting of the Panel with the parties, para. 77. Mexico's response to Panel question No. 84.
421 See, for example, Article II:5 ("tariff laws of such contracting party"); Artic le III:1 ("internal taxes
and other internal charges, and laws, regulations and requirements"); Articles III:4 and III:8 ("laws, regulations
and requirements"); Article V:3 ("applicable customs la ws and regulations"); Article VII:1 (contracting party's
"laws or regulations relating to value for customs purposes"); Article VIII:2 (contracting party's "laws and
regulations"); Article IX:2 ("laws an d regulations relating to marks of origin"); Article IX:4 ("laws and
regulations of contracting parties relating to the marking of imported products"); Article X:1 ("Laws,
regulations, judicial decisions and administrative rulings of general application, made effective by any
contracting party "); and Article X:3(a) (contracting party's "laws, regulations, decisions and rulings").
422 See Article XVI:4 of the WTO Agreement (Mem ber's "laws, regulations and administrative
procedures").
423 See, for example, Articles VI:2 and VI:3 of the WTO Agreement.
424 Ibid., Articles VII:2, VII:3 and VII:4.

(iv) Conclusion
8.198 For the reasons indicated above, the Panel concl udes that Mexico has not demonstrated that
the challenged measures are designed "to secure comp liance with laws or regulations", within the
meaning of Article XX(d) of the GATT 1994.
(c) Necessary to secure compliance with laws or regulations
8.199 Mexico argues that the challenged tax measur es are "necessary" to secure compliance by the
United States with its own obligations under the NA FTA, a law that is not inconsistent with the
provisions of the GATT 1994.425
8.200 Mexico argues that the measures at issue have "to a large extent" contributed to the end
pursued, that is, securing the United States' complian ce with the NAFTA. In its opinion, the evidence
reveals that the adoption of the IEPS tax created a "desired dynamic to secure the United States'
compliance or otherwise arrive at a mutually satisfact ory resolution of the dispute". Mexico adds that
the measures have had the effect of "attr acting the attention" of the United States. 426 As evidence to
support its assertion, Mexico has presented a newspape r article on the effect of the IEPS tax in the
bilateral sweeteners dispute between Mexico and the United States under the NAFTA. In the article,
the president of the Mexican National Chamber of the Sugar and Alcohol Industries is quoted as
saying: "Thanks to the tax, they [American suga r and corn growers, sugar refiners, and HFCS
producers] are sitting at the negotiating table…Wit hout the tax, they would not even answer the
telephone."427
8.201 The United States responds that, even assuming arguendo that Mexico's tax measures
contributed to NAFTA compliance, they are not "necessary" to secure such compliance as required by
Article XX(d).428
8.202 Having found that Mexico, as the responding pa rty invoking the affirmative defence, has not
established that the challenged measures are designed to secure compliance with laws or regulations,
under the terms of Article XX(d) of the GATT 1994, the Panel concludes that it does not need to
determine whether such measures are "necessary" to secure such compliance by the United States. In
some disputes, where a party fails to establish one of the elements of its case, the panel, with a view to
assisting the Appellate Body may nevertheless procee d to rule on the remaining elements. However,
such an approach is not possible in the present case because the question of whether a measure is
"necessary" cannot be examined without taking into account the particular nature of that measure,
especially the way in which it secures compliance with laws or regulations. In other words, the
elements that Mexico must establish are so closel y related that the Panel, having found that the
measures do not meet the criterion that they are designed "to secure compliance", cannot
meaningfully provide any additional analysis about whether the measures are necessary "to secure
compliance".
(d) Chapeau of Article XX
8.203 As Mexico has failed to justify provisionally the challenged measures, it is not necessary for
the Panel to consider whether the measures are consistent with the chapeau of Article XX.

425 Mexico's first written submission, paras. 117 and 123-126.
426 Mexico's second written submission, para. 83.
427 Mexico's second written submission, para. 83. Exhibit MEX-8.
428 United States second written submission, paras. 60-67.

5. Conclusion
8.204 For the reasons given above, the Panel concl udes that Mexico has not established that the
challenged measures are justified under Article XX of the GATT 1994.
I. A
DDITIONAL REQUESTS BY MEXICO
1. Mexico's additional requests
8.205 Mexico requests that, if the Panel exercises its jurisdiction, it should refrain from making
certain findings that could jeopardize Mexico's abil ity to mount a proper defence in international
proceedings that are taking place in other fora. More specifically, Mexico requests that the Panel
recommend that the parties (Mexico and the United States) take steps to resolve their sweeteners trade
dispute within the NAFTA framework. Mexico also asks the Panel to employ particular care in terms
of how it formulates its findings and recommendations, making clear that its findings apply solely to
the parties' respective rights and obligations unde r the WTO agreements and cannot be taken to pre-
judge legal rights under other rules of international law. 429 In response to questions from the Panel,
Mexico has clarified that the intern ational proceedings that it is refe rring to, are three investor – State
disputes under Chapter Eleven of the NAFTA, in which claims for monetary damages have been
presented against Mexico.430
8.206 After being informed of the Panel's prelimin ary ruling regarding its decision to exercise
jurisdiction, Mexico has reiterated its view that the present dispute is one more properly dealt with
under the NAFTA and has repeated its argument that the Panel has broad powers of discretion under
the GATT and the DSU to decide whether or not to issue findings in a matter that has been brought
before it. In Mexico's opinion, this Panel does not have a legal obligation to issue findings on the
claims raised by the United States. The relevant provisions in GATT and the DSU do not say that a
panel must issue findings of breach on the merits of a claim.431
8.207 Mexico states that neither Article XXII nor Article XXIII of GATT establish an obligation for
panels to issue findings. In particular, Artic le XXIII:2 only provides that a matter (including an
alleged failure of a Member to carry out its obliga tions or a Member's application of a measure which
conflicts with the agreements) may be referr ed to the CONTRACTING PARTIES. Upon such
referral, the CONTRACTING PARTIES shall promp tly investigate the matter and shall make
appropriate recommendations to the contracting parties which they consider to be concerned, or give a
ruling on the matter, as appropriate. When dealing with a dispute, CONTRACTING PARTIES would
thus have two options, "as appropriate": ( i) to make recommendations to the contracting parties
concerned; or, (ii) to issue a ruling in the matter. Articles XXII and XXIII of the GATT would confer
this discretion upon the CONTRACTING PARTIES (and upon panels acting at their behest). Panels
would have the power to determine what is appropriate in the circumstances of each particular case,
even in situations where a breach of the agreements was alleged.
8.208 Mexico argues further that, when the WTO was created, this flexibility was preserved. The
drafters of the WTO's dispute settlement system did not amend GATT Articles XXII and XXIII when
GATT 1947 became GATT 1994. Moreover, in Article 3 of the DSU, the Members stated that they
affirmed their adherence to the principles for th e management of disputes heretofore applied under
Articles XXII and XXIII of GATT 1947, and the ru les and procedures as further elaborated and
modified herein. This flexibility is further illustrate d by Article 3.7 of the DSU: "... The aim of the

429 Mexico's first written submission, paras. 14, 104 and 110.
430 Mexico's response to Panel question No. 36.
431 Mexico's second written submission, paras. 48-64. Written version of Mexico's oral statement
during second substantive meeting of the Panel with the parties, paras. 43-52.

dispute settlement mechanism is to secure a positiv e solution to a dispute. A solution mutually
acceptable to the parties to a dispute and consistent with the covered agreements is clearly to be
preferred". The flexibility is further preserved in the same paragraph: "In the absence of a mutually
agreed solution, the first objective of the disput e settlement mechanism is usually to secure the
withdrawal of the measures concerned if these are f ound to be inconsistent with the provisions of any
of the covered agreements…" The inclusion of th e qualifying word "usually" was intentional, in case
of unusual circumstances in which the withdrawal of the measures concerned would not result in a
positive solution to a dispute. It is thus open to panels to make other findings in order to secure a
positive solution to a dispute. Article 11 of the DSU clarifies that it is within the Panel's discretion,
based on an objective assessment of the matter before it, to recommend what steps the parties should
take to "secure a positive solution to the dispute". This flexibility is confirmed by the terms of
reference of this Panel: "To examine, in the light of the relevant provisions of the covered agreements
cited by the United States in document WT/DS308/ 4, the matter referred to the DSB by the United
States in that document, and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements".
8.209 Mexico argues that, in this case, issuing find ings would not secure a positive solution to the
dispute. Findings would not lead to a mutually acc eptable solution to the parties if Mexico continues
to be blocked in having its grievance under the NAFTA resolved. The Panel should aim to treat both
parties fairly.
8.210 Mexico requests that the Panel take partic ular care in formulating its findings and
recommendations so as not to suggest that it is in terpreting the two parties' rights and obligations
under the NAFTA.432
8.211 Mexico additionally requests the Panel to ma ke the following determinations of fact,
whatever its resolution on the merits of this disput e may be. First, that Mexico and the United States
have negotiated a bilateral preferential trade regime for sweeteners, which in cludes HFCS and sugar,
products that compete in certain market segments. Second, that a legitimate broader dispute exists
between Mexico and the United States regarding ac cess of Mexican sugar to the US market. Third,
that Mexico has exhausted all efforts to resolve that dispute through diplom atic channels, bilateral
consultations and negotiations, and through NAFTA's Chapter Twenty dispute settlement mechanism.
Fourth, that, notwithstanding the fact that Mexico requested the establishment of a NAFTA arbitral
panel in 2000, to date the United States has not a ppointed panellists and has thus frustrated Mexico's
attempt to resolve its grievan ces under the NAFTA. Fifth, that the tax measures at issue are a
response to the United States' refusal to submit to NAFTA's dispute settlement; a response that seeks
to induce the United States to do so, as well as to rebalance Mexico's market which has been affected
by the sugar production surplus resulting in part from United States' HFCS imports and HFCS
production from corn imported from the United States. Sixth, that the United States has stated that
under international law it can validly adopt counter-measures when another State refuses to submit to
dispute settlement mechanisms.
433
8.212 Finally, Mexico requests the Panel, in the course of its deliberations, to give the fullest weight
to Mexico's status as a developing country and to the fact that agrarian reform entails a lengthy
process of adjustment.434

432 Mexico's second written submission, para. 86.
433 Written version of Mexico's oral statement during second substantive meeting of the Panel with the
parties, para. 36.
434 Mexico's first written submission, paras. 105-109, 137 and 139.

2. The United States response
8.213 The United States responds to Mexico's arguments in this regard, by stating that they are not
relevant to the resolution of this dispute. In the United States' opinion, Mexico's assertions that this is
a NAFTA dispute and that a finding of WTO-inconsis tency could prejudice Mexico's interests in on-
going or future NAFTA proceedings, do not bear on whether Mexico's tax measures are consistent
with Article III of the GATT 1994 or justified under Ar ticle XX(d). They are, therefore, not issues
that this Panel needs to consider further. The Un ited States adds that Mexico is incorrect in arguing
that the Panel need not limit its recommendations in this dispute to a request that Mexico bring its
WTO-inconsistent tax measures into complianc e. Panel recommendations are limited to
recommendations that WTO-inconsistent measures be brought into conformity with the covered
agreements. This limitation is explicitly provided for in Article 19.1 of the DSU.
435
8.214 Regarding Mexico's request that the Panel make certain determinations of fact, the United
States responds that most of the facts identified by Mexico involve determina tions of contested legal
issues. The United States also disputes many of the facts identified by Mexico. It additionally argues
that these determinations do not concern facts that th is Panel needs to determine in order to fulfil its
mandate in this dispute, which concerns the cons istency of Mexico's tax measures with Mexico's
WTO obligations and not the United States' acti ons under the NAFTA. The United States concludes
that the Panel should not agree to make the determinations of fact requested by Mexico.436
3. Panel's analysis
(a) The Panel's "discretion"
8.215 Mexico has made a variety of requests regard ing the findings and recommendations that the
Panel might make. Most of these requests rest on the premise that the Panel has discretion as to what
it may do in this regard, in support of which Mexico has made a number of arguments. The Panel will
commence its analysis by examining these. In essen ce, Mexico argues that the Panel has discretion to
depart from the procedure stated in Article 19.1 of the DSU:
"Where a panel or the Appellate Body concl udes that a measure is inconsistent with a
covered agreement, it shall recommend that the Member concerned bring the measure
into conformity with that agreement. In addition to its recommendations, the panel or
Appellate Body may suggest ways in which the Member concerned could implement
the recommendations." (Footnotes omitted.)
8.216 In support of its arguments, Mexico h as referred to Article 3.1 of the DSU
437, which states
that:
"Members affirm their adherence to the principles for the management of disputes
heretofore applied under Articles XXII a nd XXIII of GATT 1947, and the rules and
procedures as further elaborated and modified herein."
8.217 Mexico seems to invoke Article 3.1 of the DSU merely in order to address the text of Articles
XXII and XXIII of the GATT. Since the latter provisions are explicitly included in WTO law as part
of the GATT 1994, there is no need to invoke Article 3.1 of the DSU for this purpose. Mexico has
not referred to any other matters that would require the invocation of Article 3.1.

435 Written version of United States oral statement dur ing second substantive meeting of the Panel with
the parties, paras. 19 and 26.
436 United States response to Panel question No. 73, paras. 61-67.
437 Mexico's second written submission, para. 59.

8.218 Despite Mexico's argument438, the Panel does not find anything in Article XXII of the GATT
which suggests that panels have the discretion not to issue rulings and recommendations in disputes
where they have found measures to be inconsistent with WTO obligations.
8.219 As to Article XXIII of the GATT, Mexico point s to several features in Article XXIII:2 in
support of its contentions. This paragraph states in its relevant parts that:
"If no satisfactory adjustment is effected between the contracting parties concerned
within a reasonable time, or if the difficulty is of the type described in paragraph 1 ( c)
of this Article, the matter may be refe rred to the CONTRACTING PARTIES. The
CONTRACTING PARTIES shall promptly investigate any matter so referred to them
and shall make appropriate recommendations to the contracting parties which they
consider to be concerned, or give a ruling on the matter, as appropriate..."439
8.220 Mexico claims that the use of the phrase "as a ppropriate" gives discretion to panels whether
or not to issue rulings. In the first place, it is clear that, even if such discretion exists, it is given to
CONTRACTING PARTIES (and their equivalent under the WTO, the DSB), and not to panels. More
generally, it must be borne in mind that the use of panels in dispute settlement was not specifically
envisaged in the text of the GATT adopted in 1947, but was developed in the following years. The
topic was the subject of a number of decisions of the CONTRACTING PARTIES during this
period.
440 Many of the elements of these decisions have now been absorbed into the DSU. Terms in
Article XXIII:2 should therefore not be read in is olation. In particular, the Panel regards it as
significant that none of the DSU provisions touching on the powers of panels in regard to making
recommendations qualifies those powers with the phrase "as appropriate". The relevant DSU
provisions are considered below.
8.221 Mexico also claims support for its arguments fro m the use of the word "or" that connects the
two options open to the CONTRACTING PARTIES: to make recommendations, and to give a
ruling.441 The Panel is not aware of any authoritative inte rpretation of the term "ruling". However, it
does not find that in this context the word "or" in dicates that the two options are mutually exclusive.
The term most likely includes a panel's conclu sion that the respondent Member's measures are
inconsistent with particular WTO obligations. Su ch a conclusion would invariably be accompanied
by a recommendation. Consequently, whether in relation to the Panel in making proposals to the
DSB, or to the DSB itself, this use of the word me rely serves to present a list of the actions that may
be taken. It does not indicate that the Panel has the flexibility that is claimed by Mexico.
8.222 Apart from these specific points, Mexico argu es that Articles XXII and XXIII of the GATT
confer "discretion upon the Contracting Parties (and panels acting at their behest)". 442 The Panel does
not see how these provisions can in general be read as giving discretion to either the
CONTRACTING PARTIES or panels.
8.223 Mexico seeks support for its position from severa l provisions of the DSU. The Panel will
examine these in turn in order to determine the present legal situation.

438 Mexico's second written submission, para. 55.
439 Under the system of the GATT 1947, the ex pression "CONTRACTING PARTIES" in capital
letters, meant the Contracting Parties "acting jointly". GATT, Article XXV:1.
440 See, for example, Understanding Regarding Notification, Consultation, Dispute Settlement and
Surveillance (1979), BISD 26S/210. Doc. L/4907. See also, Decision on Improvements to the GATT Dispute
Settlement Rules and Procedures (1989), Doc. L/6489.
441 Mexico's second written submission, para. 57.
442 Mexico's second written submission, para. 58. Wr itten version of Mexico's oral statement during
second substantive meeting of the Panel with the parties, para. 48.

8.224 Mexico claims that Article 3.7 of the DSU confirms the flexibility accorded to panels.
443 This
provision states that:
"Before bringing a case, a Member shall exercise its judgement as to whether action
under these procedures would be fruitful. The aim of the dispute settlement
mechanism is to secure a positive solution to a dispute. A solution mutually
acceptable to the parties to a dispute and c onsistent with the covered agreements is
clearly to be preferred. In the absence of a mutually agreed solution, the first
objective of the dispute settlement mechanism is usually to secure the withdrawal of
the measures concerned if these are found to be inconsistent with the provisions of
any of the covered agreements. The provision of compensation should be resorted to
only if the immediate withdrawal of the measure is impracticable and as a temporary
measure pending the withdrawal of the measur e which is inconsistent with a covered
agreement. The last resort which this Understanding provides to the Member
invoking the dispute settlement procedures is the possibility of suspending the
application of concessions or other obliga tions under the covered agreements on a
discriminatory basis vis-à-vis the other Memb er, subject to authorization by the DSB
of such measures...."
8.225 Mexico refers in particular to the second and fourth sentences. Regarding the former, the
Panel's view is that the statement that "[t]he ai m of the dispute settlement mechanism is to secure a
positive solution to the dispute" is too general to be set against the precise rules that define the role of
panels. Regarding the fourth sentence ("[i]n the absence of a mutually agreed solution, the first
objective of the dispute settlement mechanism is us ually to secure the withdrawal of the measures
concerned if these are found to be inconsistent with the provisions of any of the covered
agreements"), the Panel notes that it simply d escribes the desired outcome of dispute settlement
proceedings, when a finding of in consistency has already been made by the DSB and no other
mutually acceptable solution has been reached between the parties. The word "usually" in the phrase
"is usually to secure the withdrawal of the measur es concerned" does not have the implications given
to it by Mexico. This phrase must be read in conj unction with the remainder of the paragraph, which
addresses the fall-back solutions to be adopted wh en immediate withdrawal of the measure is not
achieved. These in effect state what should ha ppen in other-than-usual cases. Consequently,
Article 3.7 of the DSU does not confer a gene ral discretion on panels to make any kind of
recommendations they might think appropriate in a particular case.
8.226 Mexico has also invoked Article 11 of the DSU in support of its contentions.
444 T h a t
provision reads:
"The function of panels is to assist th e DSB in discharging its responsibilities under
this Understanding and the covered agreements. Accord ingly, a panel should make
an objective assessment of the matter before it, including an objective assessment of
the facts of the case and the applicability of and conformity with the relevant covered
agreements, and make such other findi ngs as will assist the DSB in making the
recommendations or in giving the rulings pr ovided for in the covered agreements.
Panels should consult regularly with the parties to the dispute and give them adequate
opportunity to develop a mutually satisfactory solution."
8.227 Mexico points to the use of the word "should" ra ther than "shall" as an indication that panels
have a discretion in these matters. 445 It acknowledges that "should" can mean "shall" 446, but says that

443 Mexico's second written submission, para. 60.
444 Mexico's second written submission, para. 50.
445 Ibid.

this interpretation cannot be assumed. In fact, the obligatory nature of the panels' duties under
Article 11 has been repeatedly emphasized by the Appellate Body. 447 Indeed, the importance of the
topics covered by this provision would not allow for any other interpretation.
8.228 Mexico has also argued that the terms of refere nce of this Panel confirm the notion that the
Panel has flexibility to decide whether to issue findi ngs on the claims. Mexico has recalled the terms
of reference of this Panel: "[t]o examine... the ma tter referred to the DSB by the United States... and
to make such findings as will assist the DSB in making the recommendations or in giving the rulings
provided for in those agreements" (emphasis added by Mexico). 448 The Panel notes that this
formulation follows the standard terms of reference st ated in Article 7.1 of the DSU, and that in its
mention of recommendations and rulings it directly reflects the terms of Article XXIII:2 of the GATT,
which also refers to the making of r ecommendations "or" the giving of a ruling. 449 Consequently, the
explanation that the Panel gave above in order to show that Article XXIII:2 provides no basis for
Mexico's argument is also applicable in regard to the terms of reference.
8.229 Finally, the Panel returns to Article 19.1 of the DSU:
"Where a panel or the Appellate Body concl udes that a measure is inconsistent with a
covered agreement, it shall recommend that the Member concerned 450 bring the
measure into conformity with that agreement. 451 In addition to its recommendations,
the panel or Appellate Body may suggest ways in which the Member concerned could
implement the recommendations."
8.230 While Article 19.1 allows pane ls (and the Appellate Body) to suggest ways in which the
Member concerned can implement the appropriate recommendations, this provision also confirms the
Panel's earlier conclusion452 that it is a legal obligation for pane ls (and for the Appellate Body), once
they have concluded that a measure is inconsistent with a covered agreement, to recommend that the
Member concerned bring the measure into conform ity with that agreement. Since the Panel has
concluded that it does not have discretion to depart fr om the procedure stated in Article 19.1, there is
no occasion for it to consider the various ways in wh ich Mexico requested that such discretion should
be exercised. Mexico does not request the Panel to make suggestions of the kind described in the
second sentence of Article 19.1. In any event, sinc e Mexico's interest lies in having the Panel issue
recommendations directed at what the United States should do, such a step would serve no purpose.
(b) Determinations of fact requested by Mexico
8.231 As for the factual determinations requested by Mexico, the Panel notes that some of the facts
included in its request have been taken into account and noted in the findings, to the extent that those
facts are relevant for the resolution of the matter put before this Panel.

446 Mexico cites in its support the Appellate Body Report on Canada – Aircraft , para. 187. See
Mexico's second written submission, para. 50.
447 See, for example, Appellate Body Report on EC – Hormones, para. 133. See also, Appellate Body
448 Mexico's second written submission, para. 63.
449 See paras. 8.219 to 8.222 above.
450 (f ootnote original ) The "Member concerned" is the party to the dispute to which the panel or
Appellate Body recommendations are directed.
451 (footnote original) With respect to recommendations in cases not involving a violation of GATT
1994 or any other covered agreement, see Article 26.
452 See para. 8.225 above.

8.232 Both parties acknowledge that there is a dis pute between them concerning the United States'
commitments under the NAFTA regarding the access of Mexican sugar to the United States market.
453
However, that is a separate dispute from the one that has been brought before this Panel. First, it is a
dispute regarding obligations under a different in ternational agreement, the NAFTA. Second, the
DSU and the terms of reference appr oved by the DSB define the limits of the matter that is before of
this Panel. Article 3.10 of the DSU states th at WTO Members understand that "complaints and
counter-complaints in regard to distinct matters should not be linked". Consequently, even if,
arguendo, the dispute between Mexico and the United States regarding access of Mexican sugar in the
United States market were a matter under the WTO covered agreements, a Panel could not link the
complaints and counter-complaints related to distinct matters in one single case.
(c) Mexico's status as a developing country
8.233 Mexico requests the Panel, in the course of its deliberations, to give the fullest weight to
Mexico's status as a developing country and to the f act that agrarian reform entails a lengthy process
of adjustment.454
8.234 The Panel is aware of the crucial importance of the provisions on special and differential
treatment in the WTO agreements in general, and of Article 12.11 of the DSU in particular. During
the Panel proceedings, the Panel has taken into account Mexico's status as a developing country, inter
alia, when establishing the timetable for the panel process, and has accorded flexibility within that
timetable for the receipt of Mexico's submissions and responses. In the course of these proceedings,
however, Mexico has raised no specific provisions on differential and more-favourable treatment for
developing country Members that require additional consideration.455
4. Conclusion
8.235 In light of the above considerations, the Pane l will follow Article 19.1 of the DSU as regards
the recommendations that it makes.
IX. CONCLUSIONS AND RECOMMENDATION
9.1 For the reasons indicated in this report, the Panel has determined that, under the DSU, it has
no discretion to decline to exercise its jurisdiction in the case that has been brought before it.
9.2 With respect to the United States' claims, the Panel concludes as follows:
(a) With respect to Mexico's soft drink tax and distribution tax:
(i) As imposed on sweeteners, imported beet sugar is subject to internal taxes in
excess of those applied to like domestic sweeteners, in a manner inconsistent
with Article III:2, first sentence, of the GATT 1994;
(ii) As imposed on sweeteners, imported HFCS is being taxed dissimilarly
compared with the directly competitiv e or substitutable products, so as to
afford protection to the Mexican domest ic production of cane sugar, in a
manner inconsistent with Article III:2, second sentence, of the GATT 1994;

453 Mexico's first written submission, paras. 1-8, 12 , and 27-77. United States' response to Panel
question No. 73, paras. 62-64.
454 Mexico's first written submission, paras. 105-109, 137 and 139. Mexico's response to Panel
question No. 24.
455 Mexico's response to Panel question No. 39.

(iii) As imposed on sweeteners, imported beet sugar and HFCS are accorded less
favourable treatment than that accorded to like products of national origin, in
a manner inconsistent with Article III:4 of the GATT 1994;
(iv) As imposed on soft drinks and syrups , imported soft drinks and syrups
sweetened with non-cane sugar sweeteners (including HFCS and beet sugar)
are subject to internal taxes in excess of those applied to like domestic
products, in a manner inconsistent with Article III:2, first sentence, of the
GATT 1994.
(b) With respect to Mexico's bookkeeping requirements : As imposed on sweeteners,
imported beet sugar and HFCS are accorded less favourable treatment than that
accorded to like products of national or igin, in a manner inconsistent with
Article III:4 of the GATT 1994.
9.3 With respect to Mexico's invocation of Article XX(d) of the GATT 1994, the Panel concludes
that the challenged tax measures are not justified as measures that are necessary to secure compliance
by the United States with laws or regulations whic h are not inconsistent with the provisions of the
GATT 1994.
9.4 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitute a case of
nullification or impairment. The Panel concludes that , to the extent that the measures listed above are
inconsistent with the GATT 1994, they have nullif ied or impaired benefits accruing to the United
States under that agreement.
9.5 Having concluded that it has no discretion to depa rt from the procedure stated in Article 19.1
of the DSU, the Panel recommends that the Disput e Settlement Body request Mexico to bring the
inconsistent measures as listed above into conformity with its obligations under the GATT 1994.

ANNEX A

REQUEST FOR THE ESTABLISHMENT OF A PANEL

11 June 2004

 (04-2542)
 Original: English

Request for the Establishment of a Panel by the United States

 The following communication, dated 10 June 2004, from the delegation of the United States
to the Chairperson of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU.

The United States considers that certain tax me asures of the Government of Mexico on soft
drinks and other beverages as well as on syrups, con centrates, powders, essences or extracts that can
be diluted to produce such products (hereinafter "b everages and syrups") that use any sweetener other
than cane sugar are inconsistent with Mexi co's commitments and obligations under the General
Agreement on Tariffs and Trade 1994 ("GATT 1994"). Those measures include:

(1) Law on the Special Tax on Production and Services ( Ley del Impuesto Especial sobre
Producción y Servicios or "IEPS") published on 1 January 2002 and its subsequent
amendments published on 30 December 2002 and 31 December 2003
456; and

(2) any related or implementing measures, including the Reglamento de la Ley del Impesto
Especial sobre Producción y Servicios published on 15 May 1990, the Resolucion Miscelanea
Fiscal Para 2004 (Title 6) published on 30 April 2004, and the Resolucion Miscelanea Fiscal
Para 2003 (Title 6) published on 31 March 2003 which identify, inter alia , details on the
scope, calculation, payment and bookkeeping and recording requirements of the IEPS.

 Mexico's tax measures impose a 20 per cent tax on beverages and syrups that use sweeteners
other than cane sugar. Mexico's tax measures al so impose a 20 per cent tax on services related to the

456 Ley del Impuesto Especial sobre Producción y Servicios (1 Jan. 2002); Se Reforman Y Adicionan
Reforman, Adicionan y Derogan Diversas Disposiciones de la Ley Del Impuesto Al Valor Agregado, de la Ley
(31 Dec. 2003).

transfer of beverages and syrups, including the commissioning, mediation, agency, representation,
brokerage, consignment and distribution of such products. Beverages and syrups sweetened only with
cane sugar, and services related to their transfer, are not subject to these measures.

 Mexico's tax measures also impose severa l bookkeeping and reporting requirements on
beverages and syrups, and services related to the tr ansfer of such products, that are not similarly
imposed on beverages and syrups sweetened only w ith cane sugar, or on services related to the
transfer of beverages and syrups sweetened only with cane sugar.

 The United States considers that Mexico's tax measures discriminate against imported
sweeteners other than cane sugar (including high -fructose corn syrup ("HFCS")), and imported
beverages and syrups made with such sweetener s, because Mexico's tax measures do not apply to
cane sugar, or beverages and syr ups made solely with cane sugar. The United States considers
imported sweeteners other than cane sugar, and im ported beverages and syr ups made with such
sweeteners, including HFCS and beverages and syr ups made with HFCS, to be like and directly
competitive or substitutable with Mexican cane suga r and beverages and syrups made with Mexican
cane sugar.

 The United States considers that Mexico's ta x measures are inconsistent with Mexico's
obligations under Article III of the GATT 1994. In pa rticular, Mexico's tax measures appear to be
inconsistent with Article III:2, first and second sentences, and Article III:4 of the GATT 1994.

 On 16 March 2004, the United States requested c onsultations with the Government of Mexico
pursuant to Articles 1 and 4 of the Understanding on Rules and Procedures Governing the Settlement
of Disputes ("DSU") and Article XXII:1 of the GA TT 1994 concerning Mexico's tax measures on
beverages and syrups, and services related to the tr ansfer of such products. The United States held
consultations with Mexico on these measures in Geneva on 13 May 2004. Unfortunately, these
consultations did not resolve the dispute.

Accordingly, the United States respectfully requ ests the Dispute Settlement Body to establish
a panel pursuant to Article 6 of the DSU to examine this matter with standard terms of reference as set
out in Article 7.1 of the DSU.

ANNEX B

FAX DATED 18 JANUARY 2005 FROM THE CHAIRMAN OF THE PANEL
TO THE PARTIES AND THIRD PARTIES CONCERNING
MEXICO'S REQUEST FOR A PRELIMINARY RULING

 As you know, Mexico, as the responding party in these proceedings, has asked the Panel to
decline to exercise its jurisdiction in the case in favour of an Arbitral Panel under Chapter Twenty of
the North American Free Trade Agreement (NAFTA ). Mexico asked that the Panel make this
decision through a preliminary ruling.

 The Panel has had the opportunity to consider Me xico's request, as well as the arguments on
the matter presented by the United States - the compla ining party in these proceedings -, and by third
parties, including the arguments presented in the responses to questions formulated by the Panel.

 After careful consideration of the matter, the Panel has decided to reject Mexico's request.
The Panel considers that, under the Understanding on Rules and Procedures Governing the Settlement
of Disputes (DSU), it does not have the discretion, as argued by Mexico, to decide not to exercise its
jurisdiction in a case that has been properly brought before it. In any event, even if it had such
discretion, the Panel does not consider that the circ umstances of this case would justify it declining to
exercise its jurisdiction in the present dispute.

 The Panel will provide the parties with a fully detailed reasoning for this decision in its report.
The decision in no way affects the merits of the subs tantive claims brought by the United States in the
present case, nor the defences to these claims raised by Mexico.