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.