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Philippines – Taxes on Distilled Spirits: Like Products and Market Definition


This paper provides a legal–economic analysis of the Appellate Body decision in Philippines – Taxes on Distilled Spirits (Philippines–Spirits). In Philippines–Spirits, the Panel and the Appellate Body had an opportunity to consider again the scope of ‘like products’ and of ‘directly competitive or substitutable products’ under Article III:2 of GATT. The Panel and Appellate Body followed the Border Tax Adjustments factors in order to determine whether the products were sufficiently similar. The Appellate Body explicitly extended its jurisprudence from other areas of Article III to a like-products determination under the first sentence of Article III:2: this analysis is to be focused on the degree of competition between the imported and domestic products. We observe that the effect of different taxation on domestic products is affected by the degree of substitution between products as well as competitive conditions, whereas the Appellate Body seems to focus on the former and ignore the latter. We also question some of the Panel and Appellate Body interpretations of the evidence regarding the degree of substitution between products. Overall, we find that even if there may be a segment in which foreign and domestic products compete, the reported evidence in this case would seem to be consistent with the view that for the bulk of the market, foreign and domestic items are distant substitutes.

Putting aside the jurisprudence, a methodologically sound finding regarding substitution (and competition) seems necessary, but not sufficient, for a finding of inefficient discrimination. In order to find inefficient discrimination, there must also be a finding that the nonprotectionist benefits that may arise from the national regulation are not sufficient to justify the discriminatory action, otherwise, rational regulation that is globally efficient might be invalidated, inappropriately restricting the national right to regulate. In the present case, the Philippines articulated no nonprotectionist rationale for its distinctions. Existing WTO jurisprudence in this area prior to the Appellate Body decision in US–Clove Cigarettes (in the context of Article 2.1 of the technical barriers to trade agreement) has only hinted at the additional focus on the justificatory role of nonprotectionist regulatory benefits, yet an explicit and appropriately contextualized reference to the nonprotectionist rationale, if any, of regulation seems to be a necessary part of decision-making.

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1 Appellate Body Report, Philippines – Taxes on Distilled Spirits, WT/DS396/AB/R, WT/DS403/AB/R, adopted 20 January 2012 (hereafter Philippines–Spirits).

2 For an excellent legal and economic analysis of the jurisprudence in this area, see Horn Henrik and Mavroidis Petros C. (2004), ‘Still Hazy after All These Years: The Interpretation of National Treatment in the GATT/WTO Case-law on Tax Discrimination’, 15:1, European Journal of International Law, 39.

3 Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, p. 16 (citations omitted) (hereafter Japan–Alcoholic Beverages).

4 Appellate Body Report, Philippines–Spirits, para. 13.

5 Ibid., paras. 100–103.

6 Japan–Alcoholic Beverages, at 21 (‘The width of the accordion in any one of those [provisions] must be determined by the particular provision in which the term ‘like’ is encountered as well as by the context and the circumstances that prevail in any given case to which that provision may apply.’)

7 Appellate Body Report, Korea – Taxes on Alcoholic Beverages, WT/DS75/AB/R, WT/DS84/AB/R, adopted 17 February 1999, para. 134 (hereafter Korea–Alcoholic Beverages).

8 Appellate Body Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/AB/R, adopted 30 July 1997, pp. 22–23 (hereafter Canada–Periodicals).

9 Japan–Alcoholic Beverages, pp. 19–20.

10 Appellate Body Report, Philippines–Spirits, para. 110.

11 Report of the Working Party, Border Tax Adjustments, L/3464, adopted 2 December 1970.

12 The original Border Tax Adjustments factors did not include tariff classification, but the Appellate Body confirmed that tariff classification is an additional criterion in Japan–Alcoholic Beverages, at 23.

13 Appellate Body Report, Philippines–Spirits, para. 131.

14 Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos Containing Products, WT/DS135/AB/R, adopted 5 April 2001 (hereafter EC–Asbestos).

15 Korea–Alcoholic Beverages.

16 Appellate Body Report, Philippines–Spirits, para. 119, citing EC–Asbestos.

17 Appellate Body Report, Korea–Alcoholic Beverages, paras. 130–131.

18 Panel Report, Korea – Taxes on Alcoholic Beverages, WT/DS75/R, WT/DS84/R, adopted 17 February 1999, as modified by Appellate Body Report WT/DS75/AB/R, WT/DS84/AB/R, para. 10.42.

19 Hudec Robert E. (1998), ‘GATT/WTO Constraints on National Regulation: Requiem for an “Aim and Effects” Test’, 32:3The International Lawyer 619, 620 [hereafter ‘Aim and Effects’]; reprinted in Hudec R. E. (1999), Essays on the Nature of International Trade Law, London: Cameron May, at 359–395, and at (last visited 25 July 2012). See also Porges Amelia and Trachtman Joel P. (2003), ‘Robert Hudec and Domestic Regulation: The Resurrection of Aim and Effects’, 37:4, Journal of World Trade, 783799.

20 Appellate Body Report, Philippines–Spirits, para. 113.

21 Ibid., para. 115.

22 Ibid., para. 122.

23 Ibid., para. 125.

24 Panel Report, Philippines–Spirits, para. 7.62.

25 Euromonitor International, ‘Consumer Perceptions Regarding Substitutability in the Philippines Distilled Spirits Market’ (August 2010) (submitted by complainants); and M. J. Abrenica and J. Ducanes, ‘On Substitutability Between Imported and Local Distilled Spirits’ (University of Philippines School of Economics Foundation, 10 October 2010) (submitted by the Philippines).

26 Appellate Body Report, Philippines–Spirits, para. 146, citing Panel Report, para. 7.57.

27 Ibid., para. 148, citing Canada–Periodicals.

28 Ibid., para. 149.

29 Ibid., para. 153.

30 Ibid., para. 156, quoting Panel Report, Philippines–Spirits, para. 7.59.

31 Panel Report, Philippines–Spirits, para. 7.71.

32 Appellate Body Report, Philippines–Spirits, para. 163.

33 Ibid., para. 164.

34 Ibid., paras. 167–168.

35 Ibid., para. 174.

36 Ibid., para. 179 (emphasis in original).

37 Ibid., para. 181 (emphasis in original).

38 Japan–Alcoholic Beverages, at 25.

39 Appellate Body Report, Philippines–Spirits, para. 197, citing Panel Report, Philippines–Spirits, para. 7.118.

40 Panel Report, Philippines–Spirits, para. 7.121 (emphasis in original).

41 Ibid., para. 7.100, citing Korea–Alcoholic Beverages, para. 114; United States – Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan, WT/DS192/AB/R, adopted 5 November 2001, para. 91 (hereafter US–Cotton Yarn).

42 Appellate Body Report, Philippines–Spirits, para. 201, citing Philippines' appellant's submission, para. 88, citing Korea–Alcoholic Beverages.

43 Ibid., citing US–Cotton Yarn.

44 Appellate Body Report, Korea–Alcoholic Beverages, para. 114.

45 Ibid., para. 116.

46 Panel Report, Philippines–Spirits, para. 7.101.

47 Appellate Body Report, Philippines–Spirits, para. 204.

48 Panel Report, Philippines–Spirits, para. 7.113.

49 Appellate Body Report, Philippines–Spirits, para. 207, citing Appellate Body Report, Korea–Alcoholic Beverages, paras. 130, 131, 134.

50 Appellate Body Report, Philippines–Spirits, para. 213.

51 Ibid., para. 215.

52 Ibid., paras. 226, 228.

53 Ibid., para. 232.

54 Ibid., para. 236.

55 Panel Report, Philippines–Spirits, para. 7.113.

56 Japan–Alcoholic Beverages, at 18–19.

57 Ibid., at 27–28.

58 Ibid., at 29.

59 Canada–Periodicals, at 27–28.

60 Appellate Body Report, Philippines–Spirits, para. 246.

61 Ibid., para. 256.

62 Korea–Alcoholic Beverages, paras. 119, 153.

63 Appellate Body Report, Philippines–Spirits, quoting Korea–Alcoholic Beverages, para. 153.

64 Appellate Body Report, Philippines–Spirits, para. 255, quoting Panel Report, Philippines–Spirits, para. 7.182 (emphasis in Panel Report).

65 Appellate Body Report, Chile – Taxes on Alcoholic Beverages, WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, para. 55 (hereafter Chile–Alcoholic Beverages).

66 Ibid., para. 66.

67 Ibid., para. 71.

68 EC–Asbestos, para. 100.

70 See Japan–Alcoholic Beverages, at 19–20 (definition of ‘like products’ for purposes of Article III:2 (first sentence) should be construed narrowly); Aim and Effects, supra note 19.

71 Appellate Body Report, Philippines–Spirits, para. 131.

72 Japan–Alcoholic Beverages, at 21.

73 Neven Damien (2001), ‘How Should ‘Protection’ be Evaluated in Article III GATT Disputes?’, 17 European Journal of Political Economy, 421.

74 The framework used in Neven (2001) assumes symmetric product differentiation among domestic firms and foreign firms. In that framework, a foreign firm is identified by its greater level of cost. A richer model would allow for a different level of product differentiation among domestic firms and between domestic and foreign firms. The effect of domestic competition on the level of protection would also obtain in that framework.

76 Commission notice on the definition of relevant market for the purposes of Community competition law [Official Journal C 372 of 9.12.1997].

77 US Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines, 19 August 2010, available at (last visited July 26, 2012).

78 Note, however, that there is a direct parallel between the objective pursued under Article III and the objective of assessing the ‘distortions of competition’ induced by state aids under Article 107 of the Treaty of Rome (which instructs the Commission to identify to what extent competitors of the recipients of state support may be affected).

79 See Panel Report, Philippines–Spirits, section on factual aspects, paras. 2.31 to 2.45.

80 Ibid., para. 2.45.

81 Ibid., para. 7.55.

82 Ibid., paras. 7.53 and 7.110.

83 Ibid., note 507.

84 Ibid., para. 7.113.

85 Appellate Body Report, Philippines–Spirits, para. 120.

86 Ibid., para. 125.

87 Ibid., para. 131.

88 Ibid., para. 132.

89 Panel Report, Philippines–Spirits, para. 7.59.

90 It is unclear from this perspective why the Philippines argued that there are different consumer groups. Its argument may have been that discrimination is not feasible and the weight of elastic consumers is such that the aggregate own-price elasticity of demand for domestic items is high and that the aggregate elasticity of demand for domestic items with respect to the price of foreign items is low.

91 Appellate Body Report, United States – Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/AB/R, adopted 24 April 2012, para. 182.

We would like to thank J. Wouters, P. Mavroidis, M. Ruta, K. Maskus, and participants in the June 2012 ALI workshop in Florence for useful comments on an earlier draft of this paper.

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