Authored By: Yonas Wondaferew Menilshewa
Japan- Taxes on Alcoholic Beverages (European Communities, Canada, and the United States Vs Japan [1996] WT/DS10/R, WT/DS11/R, WT/DS8/R)
The World Trade Organization (WTO) Dispute Settlement Body
The Panel Final Decision of WTO Dispute Settlement Bodies
11 July 1996 – The Panel Final Decision
Complaints: The European Communities, Canada and the United States.
Respondent: Japan
Fact of the Case
When it comes to the main issue of this case review on JAPAN – TAXES ON ALCOHOLIC BEVERAGES, in this case, the panel was established to consider Complaints by the European Communities, Canada, and the United States against Japan concerning the internal taxes levied by Japan on certain alcoholic beverages pursuant to Japan’s Liquor Tax Law (WT/DS8/1). Parties, before governing by the rules and procedures of the dispute settlement body of the organization, try to solve the problem through consultation jointly and separately. However, they did not reach a mutually acceptable resolution of the matter. For this dispute settlement parties (both the respondent and the complaints) use the legal provisions of General agreement on tread and tariff (GATT) 1994, dispute settlement Understanding (DSU) and also a panel use Vienna convention law of treaties for purpose understood the dispute among the parties over the appropriate legal analysis to be applied in this case required it to interpretation. Such dispute comes from the amended Japanese Liquor Tax Law (Shuzeiho), which took effect and expressed the internal law of the tax system for all alcoholic drinks produced by distillation of grains, fruits, vegetables, or sugar, that have already gone through alcoholic fermentation (liquors). Which are domestically produced or imported beverages having an alcohol content of not less than one degree and which are intended for consumption in Japan? On this amended Japan’s tax law has various types of alcoholic beverages into ten categories and additional categories, but this dispute involved shochu, whisky/brandy, spirits, and liqueurs. In this Japanese liquor tax law, the terminology and definition of each alcoholic beverage are stipulated, not only the definition, but also express different tax rates are applied to each of the various tax categories and sub-categories defined by the Liquor Tax Law. The rates are expressed as a specific amount in Japanese Yen per liter of beverage. For each category or sub-category, the Liquor Tax Law lays down reference alcohol content per liter of beverage and the corresponding reference tax rate. For whisky/brandy, the reference rate uses alcohol strength of 40 per cent.
- For spirits, the alcohol strength is 37 per cent.
- For liqueurs, the alcohol strength is 12 per cent.
- For both shochu sub-categories (shochu A: which are distilled with a continuous still and Shochu B: Shochu other than Shochu A), an alcohol strength of 25 per cent is used.
Issue of the Case
- Address the issue of which product is a like product and which products are directly competitive, substitutable products from the international trade perspective?
- The other issue of this case is that the spirits (in particular vodka) is like a product in the category of shochu?
- Alcoholic products, such as Shochu, whisky, brandy, rum, gin, genever, and liqueurs, are directly competitive or substitutable products or not?
Arguments of the Parties
Due to the enactment of this liquor tax, the following Argument raise against Japan:
The European Community claimed that Japan’s Liquor Tax Law violates Article III:2 GATT 1994 by applying a higher tax rate on the category of spirits (in particular vodka, gin, (white) rum, genever) are like products to the two categories of shochu, not only like product the Community also claimed that the Liquor Tax Law violates second sentence of article III:2 of GATT 1994, by applying a higher tax rate on some of the liquors falling within the category of spirits than on each of the two directly competitive and substitutable products, the two sub-categories of shochu.
The other complaint Canada claimed that a higher tax rate on the categories of whisky/brandy of Japan’s liquor tax is inconsistent with Article III: 2, second sentence, of GATT 1994 because whisky/brandy is a directly competitive and substitutable product to both categories of shochu.
Just like the European community and Canada, the United States also claimed that the Japanese tax system applicable to distilled spirits has been devised so as to afford protection to the production of shochu. For this reason and because white spirits (gin, vodka and rum) and brown spirits (Scotch whisky, Japanese whisky, Japanese brandy, cognac, North American whisky) have similar physical characteristics and end users, due to this the United States claimed that white spirits and brown spirits are like products in the sense of the first sentence of Article III:2, and therefore the difference in tax treatment between shochu and vodka, rum, gin, other white spirits, whisky/brandy and other brown spirits is inconsistent with Article III:2, first sentence.
Whereas, the complaining parties stipulated and express their claim regarding on the legal provisions of GAAT 1994, in which stipulated above statement, the defending party, Japan responded to the claims for those three complaining parties that the purpose of the tax under the Liquor Tax Law is does not have to protecting domestic production and Japan argued that the Liquor Tax Law does not violate Article III:2 of GATT 1994, According to Japan, spirits, whisky/brandy and liqueurs are not “like products” to either category of shochu.
Judgment / Final Decision of the Panel
The Panel noted that the complainants are essentially claiming that the Japanese Liquor Tax Law is inconsistent with GATT Article III paragraph 2, and the Panel understood the dispute among the parties over the appropriate legal analysis to be solved this issue of the case requires Interpretation, that the customary rules of interpretation of public international law are those incorporated in the Vienna Convention on the Law of Treaties (VCLT). The VCLT expresses that to address this kind of problem, Interpretation should be in the context and in the light of the object and the purpose of the treaty; however, the Panel noted that no formal subsequent agreement as to the interpretation of Article III:2 exists among the WTO Members. The panel tries to use another way of interpretation that the panel reports adopted by the GATT contracting parties and the WTO Dispute Settlement Body constitute subsequent practice in a specific case by virtue of the decision to adopt them as subsequent practice; however, a panel could nevertheless find useful guidance in the reasoning of an panel report that it considered to be relevant.
The panel proceeded to interpret by the rule of VCLT, first by addressing different factual situations stipulated in the legal provision of GATT Article III: 2, which are like products and concerned with the treatment of directly competitive or substitutable products.
The previous panel used criteria in order to establish the likeness of a product through the product’s properties, nature, and quality, and its end-uses; consumers’ tastes and habits, however, the new panel says that this kind of criteria varies from country to country. The panel noted that the term like product shall not be interpreted in a uniform or similar way; it shall be interpreted through finding the discrepancy between Article III: 2 on the one hand and Article III:4 on the other. Article III: 2 refers to Article III: 1 and to like, as well as to directly competitive or substitutable products, and Article III: 4 refers only to a like product. The panel view, regarding Article III:2 of GATT, is that directly competitive or substitutable products are a much larger category of products than like products; therefore, the former should be interpreted broadly than the latter.
The panel’s view suggests that for two products to fall under the like products category, they must share, apart from commonality of end use, essentially the same physical characteristics. In the Panel’s view, its suggested approach has the merit of being functional, the panel examination to determine whether the product is like or not. About the vodka and shochu, which are complained of by European communities, the Panel noted that vodka and shochu shared most physical characteristics, except for filtration, and the Panel noted that a difference in the physical characteristics of alcoholic strength of two products did not preclude a finding of likeness. Then the panel decided vodka could be considered as a like product with shochu in terms of Article III: 2 because they were made of similar raw materials and the end-uses were virtually identical. Then the Panel proceeded to examine Taxation in Excess of that Imposed on Like Domestic Products, whether vodka is taxed in excess of the tax imposed compared to shochu under the Japanese Liquor Tax Law. It noted that vodka was taxed at 377,230 Yen per kilolitre, whereas shochu A was taxed at 155,700 Yen per kilolitre. Consequently, the Panel concluded that, by taxing vodka in excess of shochu, Japan violates its obligation under Article III: 2, first sentence.
The Panel then turned to an analysis of the issues arising under Article III: 2, second sentence of GATT, which addressed whether the products concerned are directly competitive or substitutable. The Panel noted that the extent to which two products are competitive in economics is measured by the responsiveness of the demand for one product to the change in the demand for the other product (cross-price elasticity of demand). From the initiation of the statement of claim of compliant, the Panel expresses that the complainants had submitted a study that concludes that there is a high degree of price-elasticity between shochu on the one hand and brown spirits (Scotch whisky, Japanese whisky, Japanese brandy, cognac, North American whisky) and white spirits (gin, vodka and rum) on the other.
Conclusion
After several dispute settlement procedures, reached the following conclusion, and this final decision of the panel report was circulated to the members of the World Trade Organization (WTO)
- Shochu and vodka are like products, and Japan, by taxing the vodka in excess of the tax on shochu, violates its obligation under Article III: 2, first sentence, of the General Agreement on Tariffs and Trade 1994.
- Shochu, whisky, brandy, rum, gin, genever, and liqueurs are directly competitive or substitutable products, and Japan, by not taxing them similarly, violates its obligation under Article III: 2, second sentence, of the General Agreement on Tariffs and Trade 1994.
- The Panel recommends that the Dispute Settlement Body request Japan to bring the Liquor Tax Law into conformity with its obligations under the General Agreement on Tariffs and Trade 1994.
Recommendation
Currently, in our world, international trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want for goods or services. In most countries, such trades represent a significant share of gross domestic product. The objective of the organization is to promote free trade by reducing tariffs and other trade barriers and eliminating discriminatory treatment in international trade relationships. It serves as an institutional forum for trade negotiation and addresses various trade-related issues. Besides setting international trade rules, it also administers a specialized dispute settlement system. When come to the DSB panel Decision, I appreciate the decision of the panel to address the means of like products and the means of directly competitive or substitutable products in the international trade arena cumulatively by using the international instrument known as the General Agreement on tread and Tariffs 1994. But I believed that there were some gaps in a case that the panel did not address. The panel tries to address the question of what a ” like product means by the ways of economic interpretation, the likeness of products under Article III: 2 of the GATT 1994, but the panel remains silent about the degree of similarity in the physical characteristics of a product, because there are several products with similar physical characteristics, but different general purpose.
Reference(S) / Biography
Japan – Customs Duties, Taxes and Labeling Practices on Imported Wines and Alcoholic Beverages, BISD 34S/83 (Nov. 10, 1987)
General Agreement on Tariffs and Trade, Oct. 30, 1947, 55 U.N.T.S. 194, available at World Trade Organization, Full text of GATT 1947 (PDF), https://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf
Vienna Convention on the Law of Treaties, May 23, 1969, 1155 U.N.T.S. 331, available at United Nation Treaty Collection, United Nation, Treaty series, vol. 1155, https://legal.un.org/ilc/texts/instruments/english/conventions/1969.pdf
Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994
Japan – Customs Duties, Taxes, and Labeling Practices on Imported Wines and Alcoholic Beverages, BISD, 34S/83 (1988)
United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/9 (adopted May 20, 1996)
