European communities

1. Introduction

In 1995, the European Communities, the United States, and Canada complained to the Dispute Settlement Body that Japan's Liquor Tax Law violated the WTO's regulations. At first, the parties had resorted to negotiations, which did not turn to be successful (Wille, 1998). As a result, a Panel was established by the WTO that resolved the matter and issued certain rulings and recommendations. Most of the Panel's rulings were in favour of the complaining parties (Petersmann and Pollack, 2003). However, Japan appealed the decisions of the Panel, and the plaintiff parties appealed in turn. The EC, the U.S., and Canada disagreed with certain decisions of the Panel, and an Appellate Body was set up. The Appellate Body concluded that the Panel had erred in several of its rulings and conclusions (WT/DS8/AB/R). In the appeal, all parties to the litigation presented certain arguments, which were taken into consideration by the Appellate Body. Furthermore, certain issues from the Panel Report were also discussed. The final rulings and recommendations of the Appellate Body were binding on Japan, and the country's government agreed to bring its Liquor Tax Law into conformity with its obligations under the GATT 1994. However, Japan did not specify the period in which it would do so, and an arbitrator was appointed to decide on the period of time.

2. The Panel and Its Conclusions

The Panel established by the Dispute Settlement Body reviewed the case Japan - Taxes on

Alcoholic Beverages and issued its rulings and recommendations based on the presented facts and arguments of the litigating parties. The Panel Report was circulated to the Members of the World Trade Organization on July 11, 1996 (WT/DS8/15). It contained several conclusions. First, according to the Panel, Japanese shochu and vodka were ‘like products' and Japan, by taxing the latter in excess of the former, was in violation of its obligation under Article III:2, first sentence, of the GATT 1994. Second, shochu, whisky, brandy, rum, gin, etc. were ‘directly competitive or substitutable products' and Japan, by not taxing them similarly, was in violation of its obligation under Article III:2, second sentence, of the GATT 1994. And third, the Panel concluded that "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" (WT/DS8/R). Based on these findings, the Panel recommended 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 (August, 2004).

On August 8, 1996, Japan notified the Dispute Settlement Body of the WTO of its decision to appeal certain issues of law covered in the Panel Report and legal interpretations developed by the Panel, pursuant to paragraph 4 of Article 16 of the Understanding on Rules and

Procedures Governing the Settlement of Disputes and filed a Notice of Appeal with the

Appellate Body, pursuant to Rule 20 of the Working Procedures for Appellate Review (WT/DS8/AB/R). On August 19, 1996, Japan filed an appellant's submission. On August 23,

1996, the United States filed an appellant's submission pursuant to Rule 23(1) of the Working Procedures. The European Communities, Canada, and the United States submitted appellees' submissions pursuant to Rule 22 of the Working Procedures, on September 2,

1996. That same day, Japan submitted an appellee's submission pursuant to Rule 23(3) of the Working Procedures (WT/DS8/AB/R).

3. The Arguments in the Appeal

Japan appealed from the Panel's findings and conclusions, as well as from certain of its legal interpretations (Matsushita, 2003). Japan argued that the Panel erred in its interpretation of

Article III:2, first and second sentences of the GATT 1994. In addition, with respect to the points of appeal raised by the United States in its appellant's submission, Japan responded that the arguments advanced by the U.S. were not based on a correct understanding of the

Japanese liquor tax system. Japan argued that the Liquor Tax Law had the legitimate policy purpose of ensuring neutrality and equity, and that it had neither the aim nor the effect of protecting domestic production (Schaffer et al., 2002).

The United States supported the Panel's overall conclusions, but appealed nonetheless (Matsushita, 2003). The U.S. alleged several errors in the findings of the Panel and the legal interpretations developed in reaching its conclusions in the Panel Report. The United States maintained that the Panel erred in its interpretation of Article III:2, first and second sentences. The United States contended as well that the Panel erred in not addressing the full scope of the products subject to the dispute and that there was inconsistency between the Panel's conclusions in certain paragraphs of the Panel Report. Finally, the United States claimed that the Panel erred in incorrectly characterizing adopted panel reports as "subsequent practice" within the meaning of Article 31(3)(b) of the Vienna Convention on the Law of Treaties (Wille, 1998).

The European Communities supported the Panel's conclusions, and largely agreed with the legal interpretations of Article III:2, first and second sentences, employed by the Panel (Matsushita, 2003). With respect to the status of adopted panel reports, the European

Communities concluded that the Panel's characterization of them as "subsequent practice in a specific case" was intrinsically contradictory, since the essence of subsequent practice is that it consists of a large number of legally relevant events and pronouncements. The European Communities' view was that one adopted panel report "would merely constitute part of a wall of the house that constitutes subsequent practice" (Miller and Jentz, 2004).

Canada confined its submissions and arguments on appeal to Article III:2, second sentence.

Canada supported the Panel's legal interpretations of Article III:2, second sentence, as well as the conclusion of the Panel that the Liquor Tax Law was inconsistent with Article III:2, second sentence (Matsushita, 2003).

4. The Issues Raised in the Appeal

The appellants, Japan and the United States, raised, among others, the following important issues in the appeal (Petersmann, 1997):

1. whether the Panel erred in failing to interpret Article III:2, first and second sentences, in the light of Article III:1;
2. whether the Panel erred in interpreting and applying Article III:2, second sentence, by equating the language "not similarly taxed" in Article III:2, second sentence, with "so as to afford protection" in Article III:1;
3. whether the Panel erred in failing to examine the effect of affording protection to domestic production from the perspective of the linkage between the origin of products and their treatment under the Liquor Tax Law;
4. whether the Panel erred in failing to find that all distilled spirits were "like products";
5. whether the Panel erred in placing excessive emphasis on tariff classification as a criterion for determining "like products"; and
6. whether the Panel erred in its characterization of panel reports adopted by the GATT

Contracting Parties and the WTO Dispute Settlement Body as "subsequent practice in a specific case by virtue of the decision to adopt them" (WT/DS8/AB/R).

5. Appellate Body Rulings and Recommendations

For the reasons and issues reviewed and the parties' arguments examined in the appeal, the Appellate Body reached, among others, the following conclusions (Matsushita, 2003):

1. the Panel erred in its conclusion that "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"; and
2. the Panel erred in failing to take into account Article III:1 in interpreting Article III:2, first and second sentences (WT/DS8/AB/R).

With the modifications to the Panel's legal findings and conclusions, the Appellate Body affirmed the Panel's conclusions that shochu and vodka were like products and that Japan, by taxing imported products in excess of like domestic products, was in violation of its obligations under Article III:2, first sentence, of the GATT 1994. Moreover, the Appellate

Body concluded that shochu and other distilled spirits and liqueurs, except for vodka, were "directly competitive or substitutable products", and that Japan, in the application of the

Liquor Tax Law, did not similarly tax imported and directly competitive or substitutable domestic products and afforded protection to domestic production in violation of Article

III:2, second sentence, of the GATT 1994 (WT/DS8/AB/R).

The Appellate Body, in line with the Panel, recommended 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.

6. Arbitrator Decision

On November 1, 1996, the Dispute Settlement Body adopted the Appellate Body Report and the Panel Report, as modified by the Appellate Body Report, in Japan - Taxes on Alcoholic Beverages (WT/DS8/15). Japan indicated that it would not be able to implement the rulings and recommendations immediately but only within a ‘reasonable period of time'. Since Japan did not propose to the DSB a ‘reasonable period of time,' it indicated that it would initiate negotiations with the EC, the U.S., and Canada, the other parties to the dispute, on what constitutes ‘a reasonable period of time'. These negotiations did not succeed, and no mutual agreement was reached. However, the negotiations with the European Communities did lead to an agreement on an accelerated reduction of the tariff rates on whisky and brandy as compensation for delayed implementation; nevertheless, this agreement did not prejudge their position on the issue of a ‘reasonable period of time'. In the absence of an agreement under Article 21(3)(b) of the DSU, the United States requested on December 24, 1996, that the ‘reasonable period of time' should be determined through binding arbitration as is provided for by Article 21(3)(c) (WT/DS8/15). As stated in Article 3(2) of the DSU, the dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. Therefore, all WTO members have a strong interest in prompt compliance with and full implementation of the recommendations and rulings of the DSB (Dennin, 1995). This interest is clearly reflected in the provisions of the DSU, and in particular in Article 21(3)(c), which stipulates that a ‘reasonable period of time' for implementation should not exceed 15 months unless there are ‘particular circumstances' justifying a longer or shorter period (Petersmann, 1997). In this case, the arbitrator concluded that the ‘reasonable period of time' within the meaning of Article 21(3)(c) of the DSU for Japan to implement the recommendations and rulings of the DSB of November 1, 1996 in Japan - Taxes on Alcoholic Beverages was 15 months (WT/DS8/15).

7. Conclusions

7.1. Consequences of the Case

The WTO's Dispute Settlement Body is comprised of panels of corporate and trade lawyers and officials with no education or training in social or economic issues, who preside in secret hearings as final judges and arbiters of disputes among members, having a profound impact on workers, society, and nature in all countries (Ford, 2003). The WTO also has extraordinary enforcement powers by means of disciplines, penalties, and trade sanctions which can be so economically severe that even the largest nations must yield (Garrett and Smith, 1999). This particular case is no different, and the consequences of its rulings have certainly affected a large number of people and communities in the countries of all parties involved.

7.2. Socioeconomic Factors

Social, cultural, and economic considerations do not seem to influence WTO priorities and decision making as much as they should (Taylor and Thomas, 1999). The WTO often claims to deal solely with trade liberalisation, with all else falling outside its authorization. However, this position ignores the inherent relationship between social, cultural and economic issues, which is only likely to increase in today's globalising world. The fact is that any trade, particularly non-regulated trade, ultimately impacts on these areas and as such, the WTO is a major determinant of the impact of trade on communities and the economy (Chang, 2002).

7.3. Dispute Settlement Body Criticisms

Global corporate interests come first for the WTO, and suppressing any obstacles to the smooth operation and rapid expansion of global corporate activity is essential (Ziegler,

2002). These obstacles are national, provincial, state, and community laws and standards on behalf of labor rights, environmental protection, human rights, consumer rights, local culture, social justice, national sovereignty, and democracy. To expand the free movement and access for corporations, the WTO often diminishes the rights and options of nation-states and citizen movements concerned primarily with human rights, social structures, and the natural environment (Reinhard, 1999). In order to have a more positive impact on the entire global community, the WTO and its organs must take into consideration a wider scope of factors when settling international trade disputes.

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