Korea-Taxes on Alcoholic Beverages Wang, Xiao Juan Cho, Myunghoon Tao, Dongdong 2008.4.16

Facts Complainant European Communities and U.S. Respondent Korea Third Parties Canada, Mexico Request for Consultations received 2 April 1997 Panel Report Circulated 17 September 1998 Appellate Body Report Circulated 18 January 1999

Facts Soju is the most famous traditional Korean alcoholic beverage, the price is the cheapest among alcoholic beverage in Korea. However, The European Communities (EC) brought a complaint against Korean liquor tax policy on Soju for unfair competition. They insisted that Korea offer a preference to tax on Soju as compared with certain imported western-style alcoholic beverage.

Facts

Facts

Issue(1) *Complaint country insisted ① Soju and imported liquors are the like products. ② If not so, they are directly competitive and substitutable products.  Violation of GATT Article III:2 First and Second sentence

GATT Art. III GATT Art. III:2 (Tax Discrimination) First Sentence (Tax Discrimination of Like Product) Second Sentence (Tax Discrimination of Directly Competitive or Substitutable Products)

Issue(2) * Korea insisted ① Korea’s liquor tax rate are not subject to protecting the Soju. ② Soju and imported liquors are not the like products. So they can be not similarly taxed.

Issue(3) 1. Violation of GATT Article III:2 ? 2. Price relationships (cross-price elasticity) 3. Is the data from the different market like Japanese one available? 4. Is it right to consider only directly competitive products or potential competition?

Issue(4) 5. Tax over the de minimis or not? 6. Purpose of protecting domestic products? 7. Like product or not?

Decisions & Reasons WTO DSB gave a conclusion that Korean government should harmonize existing 35% tax rate of Soju with 100% in that they accord preferential tax treatment to diluted Soju as compared with certain imported “western-style” alcoholic beverages. (unavoidable decision ) Minor differences in taste, color and other properties (including differences in alcohol contents) do not prevent products from qualifying as like products. International regulation on Liquor tax rate is based on the principle of 'High amount of tax rate on high proof, low amount of tax rate on low proof'

Korea’s Response (1) It is difficult to switch from ad valorem tax system to specific tax system only for Liquor case. Korean Liquor Tax Law imposes an ad valorem tax on all alcoholic beverages and it is different from the Liquor tax law imposing a specific tax of most WTO member countries include the U.S. and the EU Major legal error in wrongly defining the comparison it had to undertake. The Panel grouped together products that are not physically identical

Korea’s Response (2) Used different ways by different manufacturers using different raw materials; taste differently; are used differently; are marketed and sold differently at considerably different prices and are subject to different tax rates in Korea. The Korean government made a declaration of performing it step by step. In July 2000, Korea government increased tax rate on Liquor from 35% to 80%.

What Happened Finally? Soju had been ranked first in the world diluted alcohol market for 2 years. In Japan, Jinro Soju has been ranked first for 5 years in Japan alcohol market.

Comparative table between distilled and diluted soju Division Distilled Soju Diluted Soju Raw Materials Cereals (rice, wheat, barley) Cereals, sweat potatoes Alcohol-proof 30-35% 21-30% Smell Strong Weak Distilled way Single distillation Chain distillation Impurities A little None Information from http://www.jinro.co.kr

Delivered Quantity of Alcohol in Korea by year (Million bottles) Imformation from http://www.kalia.or.kr

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