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Legal Issues of Economic Integration 32(4): 369415, 2005. Same Same Different? 2005 Kluwer Law International.

. Printed in the But Netherlands.

Same Same But Different? Fiscal Discrimination in WTO Law and EU Law: What Are Like Products?
By Adrian Emch*

1. Introduction Although the extent of integration in the European Union (EU) goes much further than the integration scheme of the World Trade Organization (WTO), both in the field of economic integration as well as in its extension into non-economic fields, the two systems have certain common features. Both create areas for the exchange of goods and services beyond the boundaries of the nation-state. In the field of trade of goods, both regimes aim at abolishing non-tariff restrictions to imports (and exports). One explicit goal of both WTO and EU law is to create a level playing field for domestically produced goods and imported goods. Once imported goods have passed the border and lawfully1 circulate in the country of import, they should be treated on an equal footing as domestic products in the market. This requirement is named national treatment and means, in the context of trade in goods, that national regulation should not intervene to create distinct conditions for imported and domestic products. In other words, as this paper will argue on the pages that follow, the importing states authorities should refrain from intervening and leave the decision on whether imported and domestic goods are equivalent to the appropriate decision-maker: the marketplace. Provisions of both WTO and EU law guaranteeing the principle of national treatment do not prescribe that the state authorities must adopt certain types of measures, but instead lay down rules which limit the states freedom to adopt measures. This restriction of regulatory freedom takes the form of prohibitions upon WTO and EU member states to discriminate between imported and domestic products by means of adopting fiscal and non-fiscal regulation. The principle of national treatment in the field of fiscal regulation, on
* 1. Lawyer, Clifford Chance. The author thanks Miguel Rato and Cyril Ritter for their comments on earlier drafts. Imports lawfully circulate in the country of import if they have passed the necessary administrative formalities at the border and, in the WTOs case only, if they have paid the required customs duties. They must also comply with national legislation in areas where the importing country maintains unfettered prerogatives which can in principle not be challenged under WTO law (e.g., national security).

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which this paper will exclusively focus, is contained in Article III:2 GATT2 and Article 90 EC.3 Viewed from a broad perspective, these two articles in the GATT and in the EC Treaty aim to prevent municipal4 tax legislation5 from discriminating between imported and domestic products, which show a sufficient degree of similarity, with the effect that domestic production receives more favourable treatment. More specifically, this paper attempts to analyse in detail how similar two products must be in order to fall under Article III:2 GATT and Article 90 EC. Both WTO and EU law provide some, limited guidance on the relationship between domestic and imported goods. While the first sentence of Article III:2 GATT requires products to be like, Article 90 EC, first paragraph, speaks of similar products. The text of Article III:2 GATT, first sentence, in the Spanish and French versions of the GATT, which, as its English version, are equally recognised as official,6 read similar and similaire, respectively.7 In WTO law, the Working Party Report on Border Tax Adjustments8 (Border Tax Adjustments) set out some criteria to define likeness and held that analysis of like or similar products must be made on a case-by-case basis. Prior to the establishment of the WTO,9 panels generally relied quite strongly on that report. Panels frequently used the criteria contained in the report, and they adopted a case-by-case approach so much so that the GATT case law does not appear particularly consistent. The establishment of the WTO, with its judicialization of the dispute settlement, inverted that tendency. The Appellate Body the highest adjudicatory organ in the dispute settlement body (DSB) has defined the obligations of Article III:2 GATT in greater detail, and established a more coherent structure for the analysis to be undertaken under that article. The Appellate Body (AB) has also addressed the issue of the criteria for determining whether products are like or directly competitive or substitutable.
2. GATT stands for General Agreement on Tariffs and Trade, and is attached in Annex 1A to the Agreement Establishing the World Trade Organization (WTO Agreement). 3. Treaty Establishing the European Community, consolidated version OJ 2002 C 325, p. 33. 4. The term municipal measures refers to domestic law in a broad sense including, for the purposes of this paper, measures adopted by the institutions of the European Union. 5. This category may include constitutionally lower ranked regulations even ad hoc or informal measures. Generally throughout this paper, the word measures will be used, but sometimes the term legislation is meant to encompass this broader category of governmental measures. 6 . Signature Details of the WTO Agreement; Article 33 of the Vienna Convention on the Law of Treaties (VCLT), 8 I.L.M. 679 (1969). The EC Treatys versions in Spanish and French, among others, are recognised as official, as is the English version. 7. The Spanish and French versions are available at www.wto.org/spanish/docs_s/legal_s/ gatt47.doc and www.wto.org/french/docs_f/legal_f/gatt47.doc. 8. Working Party Report on Border Tax Adjustments, BISD, 18th Supp. (1972). 9. The WTO was created by the WTO Agreement, and became operational as from 1 January 1995.

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In EU law, there has been a flood of judgments by the European Court of Justice (ECJ or Court of Justice) dealing with Article 90 EC.10 Again, however, it cannot be said that the whole body of case law is particularly consistent. While the first paragraph of Article 90 EC prohibits taxation in excess of that imposed on similar domestic products, the second paragraph of Article 90 EC only mentions other products without further specification. ECJ case law has interpreted the second paragraph of Article 90 EC as meaning competing products similar to the notion of directly competitive or substitutable products of GATT Article III:2, second sentence.11 Strongly resembling the ABs approach in the WTO system, the ECJ has developed two separate tests under Article 90 EC. Under the analysis of similarity, the Court pursues an examination equivalent to that of the WTO body under the first sentence of Article III:2 GATT. The second paragraph of Article 90 EC is interpreted in an equivalent fashion to mean products in competition.12 WTO and EU adjudicators have used multiple factors to ascertain whether two products can be considered as like, similar or competitive. This papers argument is that a market-based approach should be taken as the methodology to assess likeness,13 and that only the criterion of consumers tastes and habits should be considered. These suggestions will be discussed in the two following sections. The central issue of how these tastes and habits are investigated and measured will follow. Finally, the benefits and drawbacks of other criteria used by adjudicators will be subject to analysis. 2. Focus on Marketplace This paper argues, first, that the economic relationships between products should not only be a fundamental factor but should be the exclusive or, at

10.

11. 12.

13.

According to Demaret, more than 200 judgments have been issued by the ECJ. See Paul Demaret, The Non-Discrimination Principle and the Removal of Fiscal Barriers to Intra-Community Trade, in Cottier et al. (Ed.), Regulatory Barriers and the Principle of Non-Discrimination in World Trade Law, p. 172. See Pieter Jan Kuyper, Booze and Fast Cars: Tax Discrimination Under GATT and the EC, 129, 140 LIEI (1996). Despite having clarified the meaning of the second paragraph of Article 90 EC and having established a two-test approach, the Court of Justice frequently fails to state whether it analyses a case under the first or the second paragraph. See, for example, case 168/78, Commission v. France, [1980] ECR 347, at 39; and case 169/78, Commission v. Italy, [1980] ECR 385, at 33. By avoiding a ruling on that question, the Court is, however, compelled to prove not only that the products in question are, at least, in competition with each other and that taxation is excessive, but also that the tax measure affords protection to the domestic industry. For the sake of simplicity, the term likeness will cover analyses of like, similar and directly competitive or substitutable products.

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least, decisive factor in the likeness analysis. Second, it is argued here that the exclusive focus for analyzing these economic relationships should lie on the demand side. As a result, an adjudicators main investigation should focus on the criterion of consumers tastes and habits which responds to both these concerns. 2.1. Focus on Economic Factors Articles III:2 GATT and 90 EC feature a clear-cut prohibition of discrimination between imported and domestic products. They establish a level playing field for imports and domestic produce. A level playing field for products must focus on economic conditions in the market. The goal for shipping products to other countries is to sell them in their markets. Thus, the prohibition of discrimination ensures that products enjoy equality of conditions in the market whatever their origin. In WTO law, this focus on the market has been recognised in the Japan Alcoholic Beverages case. The panel in that case stated that the appropriate test to define whether two products are like or directly competitive or substitutable is the market place.14 The Appellate Body endorsed this view in Japan with regard to Article III:215 and in EC Asbestos with regard to Article III:4.16 In particular, the wording in EC Asbestos seems unequivocal. A concurring opinion by a member of the Appellate Body in Asbestos confirms that the Appellate Body relies heavily on economic factors in the likeness determination. The opinion reveals certain Appellate Body members conception of the fundamental, perhaps decisive, role of economic competitive relationships in the determination of the likeness of products under Article III:4.17 In the EU, this focus on the market has been less explicit. However, some of the ECJs case law can be seen as moving into that direction. In the French Spirits case, for example, the Court of Justice held that economic analysis was important declaring that [i]t will be necessary to examine within this frame14. 15. Japan Taxes on Alcoholic Beverages, Panel Report, WT/DS8/R; WT/DS10/R; WT/DS11/R, 11 July 1996, at 6.22. Japan Taxes on Alcoholic Beverages, Appellate Body Report, WT/DS8/AB/R; WT/DS10/AB/ R; WT/DS11/AB/R, 4 October 1996, p. 16: ([T]he Panel emphasized the need to look not only at such matters as physical characteristics, common end-uses, and tariff classifications, but also at the market place. This seems appropriate. The GATT 1994 is a commercial agreement, and the WTO is concerned, after all, with markets.) European Communities Measures Affecting Asbestos and Asbestos-Containing Products, Appellate Body Report, WT/DS135/AB/R, 12 March 2001 (Asbestos), at 103. See, also, Robert E. Hudec, Like Products: The Differences in Meaning in GATT Articles I and II, Cottier et Al. (Ed.) Regulatory Barriers and the Principle of Non-Discrimination in World Trade Law (2000), at 104: (Since GATT is a commercial agreement, it seems reasonable to start with the assumption that likeness is (or should be) a commercial concept) Asbestos, Appellate Body, supra note 16, at 153.

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17.

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work the economic relationships between the products concerned.18 However, the ECJ has not yet stated with the same conviction as the Appellate Body that the focus should predominantly, if not exclusively, lie on the marketplace.19 This paper further proposes that a market-based analysis should be followed to the same extent under both the first and the second sentences of Articles III:2 GATT and 90 EC. The analytical tools for the economic tests, with their focus on the marketplace, should be the same for both sentences. The only difference between the two sentences, in both articles, should be the degree of economic relationship required. This seems to be the approach taken by the panel in Japan, which undertook the same analysis for both like and directly competitive or substitutable products.20 The Appellate Body in Japan, nevertheless, accepted the focus on the marketplace in its analysis of directly competitive and substitutable products,21 although it did not exclude that its reasoning also applied to the first sentence of Article III:2 GATT. A corollary of the finding that the market-based approach should be predominant, if not exclusive, is that other factors, such as physical characteristics, should only provide subsidiary means in a likeness analysis. This is not to say, however, that other factors cannot be taken into account. Simply, while they should not have authoritative value on their own, other factors could be indicators for the economic relationships in the marketplace. Products with identical physical characteristics, for example, are likely to have a very close economic relationship. 2.2. Focus on Demand Side The marketplace is where buyers and sellers meet.22 Conditions in the marketplace may be analysed both by looking at the demand side and at the supply side. In the context of Article III:2 GATT and Article 90 EC, however, the exclusive focus should lie on the demand side. The basic reason for this lies in the fact that these articles establish a level playing field for products. The supply side, i.e., the products, is therefore given as a constant. Thus, the effect of the internal tax on the given products must be assessed with regard to the variable: demand.

18. 19.

20. 21. 22.

Commission v. France, supra note 12, at 13. Most recently, several Advocates General in fact recommended that the ECJ rely on the criterion of objective characteristics. Opinion of the Advocate General, case C-302/00, Commission v. France, [2002] ECR I-2055, at 72, in fine; Opinion of the Advocate General, case C475/01, Commission v. Greece, [2004] ECR I-0000, at 89. Japan, Panel, supra note 14, at 6.22. Japan, Appellate Body, supra note 15, p. 16. Korea Taxes on Alcoholic Beverages, Appellate Body Report, WT/DS75/AB/R; WT/DS84/AB/ R, 18 January 1999, at 114: (The context of the competitive relationship is necessarily the market place since it is the forum where consumers choose between different products.)

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Supply-side considerations, in a strict sense, are not warranted for the following reasons. First, the text of the GATT does not seem to permit a contrary viewpoint. Second, the rationale for considering the supply side in competition law is not present in trade law. Third, practical matters speak against such considerations. 2.2.1. Lack of Textual Basis Chois arguments in favour of supply-side considerations are based, in part, on the wording of Note to Ad Article III:2. Choi finds, with the help of dictionaries, that the word competitive implies that producers perspective has to be taken into account. According to that author, substitutable suggests a perspective from the consumers viewpoint, and competitive makes sense if viewed from the suppliers angle.23 The Appellate Body, however, rejected this argument in Cotton Yarn from Pakistan, where it found that it had previously used the terms directly competitive and directly substitutable without implying any distinction between them in assessing the competitive relationship between products.24 Choi maintains that Article III:2 GATT may be concerned with the effects on foreign producers.25 He argues that, under certain circumstances, high supply-side substitutability could be invoked to determine the overall relationship between the products as being not like or directly competitive or substitutable.26 However, this finding does not seem accurate. First, such a finding cannot be supported by the text of Articles III:2 GATT and 90 EC. Admittedly, Articles III:2 GATT and 90 EC do not state from whose viewpoint, i.e., buyer or seller, the assessment should be made. Nonetheless, unlike GATS non-discrimination articles,27 they do not mention producers, but only mandate that products be alike. This finding seems to be confirmed by WTO/ GATT case law. The panel in the Gas Guzzler case, for example, noted: The Panel () observed that Article III prescribes in general the treatment to be accorded to imported products in relation to domestic products. In particular, Article III:1, which sets out the principle underlying
23. 24. 25. Won-Mog Choi, Like Products in International Trade Law Towards a Consistent GATT/ WTO Jurisprudence, Oxford University Press (2003), at 36 et seq. United States Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan, Appellate Body Report, WT/DS192/AB/R, 8 October 2001, at 94. Choi states that the primary focus of [GATTs] non-discrimination provisions is on the competitive relationship between producers of the products. Choi, supra note 23, at 35 (emphasis in original) (footnote omitted). Id. at 45. GATS Article XVIII on national treatment, for example reads: [E]ach Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers (emphasis added).

26. 27.

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Article III, refers to treatment resulting from measures, applied to products. Article III:4 refers only to laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products. The Panel noted that these activities relate to the product as a product, from its introduction into the market to its final consumption. They do not relate directly to the producer. The Panel further noted that a similar principle underlies the treatment of taxes under Art. III:2.28 Second, discrimination against imported products does not only affect foreign producers but also importers from the country of import. The same focus on products seems to exist in the EU, although case law is less explicit. In Kortmann, the ECJ implicitly found that Article 90 EC is concerned with products, not with producers.29 2.2.2. Competition Law Generally, competition law takes into account both demand-side and supplyside substitutability. However, competition law primarily focuses on demand. In U.S. competition law, and to a somewhat lesser extent in EU competition law, only demand-side considerations are taken into account for the purposes of defining the relevant market. Supply-side considerations are addressed not at the stage of the definition of the relevant market per se. Rather, supply-side substitutability and potential competition30 are dealt with in the inquiry of dominance over, or unilateral effects in, the already defined relevant market:31

28. 29.

30.

31.

United States Taxes on Automobiles, Panel Report, DS31/R, 29 September 1994, at 5.52 (emphasis in original). In Kortmann, the Court rejected arguments that an internal tax would place a higher burden on foreign undertakings, which sold smaller amounts of products on the domestic markets. The Court found that Article 95 [now 90 EC] is complied with where a tax of the same amount affects the cost prices of different undertakings unequally by reason of particular features of their economic structure. It is sufficient that the internal tax applies in accordance with the same criteria, objectively justified by the purpose for which the tax was introduced, to domestic products and imported products so that it does not result in the imported products bearing a heavier charge than that borne by the similar domestic product. Case 32/80, Criminal Proceedings against Kortmann, [1981] ECR 251, at 28. Also, in Rewe, the ECJ found that the analysis of products also must focus, inter alia, on whether they meet the same needs from the point of view of the consumers. Case 45/75, Rewe Zentrale v. Hauptzollamt Landau/Pfalz, [1976] ECR 181, at 12 (emphasis added). Potential competition differs from supply-side substitutability in that market entry would be more costly and take more time. In US terminology, these concepts correspond to the notions of uncommitted entry and committed entry. U.S. Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines, infra note 32, at 1.0 and 3.0. Commission Notice on the definition of relevant market for purposes of Community competition law, OJ 1997 C 372, pg. 3, at 1314 and 23.

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Market definition focuses solely on demand substitution factors i.e., possible consumer responses. Supply substitution factors i.e., possible production responses are considered elsewhere in the (Horizontal Merger) Guidelines in the identification of firms that participate in the relevant market and the analysis of entry.32 In other words, demand-side substitutability determines the degree of competitive relationship existing between the products, while supply-side substitutability is mainly concerned with the exercise of market power on the defined market.33 2.2.3. Practical Reasons Apart from the theoretical perspective, Chois proposals seem unrealistic in practical terms. In the first place, much of the information that Choi requires to develop his model of supply-side substitution will not be available to the parties to a dispute. Panels already have great difficulties in gathering information relating to demand. Furthermore, sending questionnaires to foreign producers is likely to prove less reliable than consumer surveys. Foreign producers of imported goods may be more biased than domestic consumers as their interest in the resolution of a case is often more articulated. In any event, although this paper favours a more economics-based approach to international trade law, Chois proposals are overly complicated for the decision-making capabilities of WTO panels and Appellate Body as well as the EU courts. 2.3. Rejection of Future Competition At the outset, the notion of potential competition and that of future competition must be differentiated. Under competition law, the concept of potential competition includes analysis of the question of whether new entry, by existing producers or newcomers, is likely to occur in the medium term in the event of a small non-transitory increase in price. The analysis examines the capability of suppliers to switch production, from product A to product B, in the medium term without incurring excessive switching costs.34 The concept
32. U.S. Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines, available at http://www.usdoj.gov/atr/public/guidelines/horiz_book/toc.html (last visited on 9 May 2005), at 1.0. For similar reasons, Horn and Mavroidis approach regarding supply-side substitutability is inadequate. Their analysis relies on the protective effect and on the harm caused by discriminatory taxation. Henrik Horn and Petros C. Mavroidis, Still Hazy after all These Years: The Interpretation of National Treatment in the GATT/WTO Case-law on Tax Discrimination, 39, 61 Eur. J. Intl L. (2004). However, this author takes the view that, like the analysis of the exercise of market power in competition law, examination of the effects of protection and/or discrimination is a different step, which should be undertaken after the market has been defined. For a more elaborate delimitation of the concept of potential competition and potential

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34.

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of future competition, however, focuses on the likely evolution of demand even if supply remains constant. Under both WTO and EU law, existing case law seems to promote the concept of future competition, at least to a certain extent. Even though it speaks of potential rather than future competition, the Appellate Body endorsed the panels look into the future in the Korea case.35 The Appellate Body found: The context of the competitive relationship is necessarily the market place since it is the forum where consumers choose between different products. Competition in the market place is a dynamic, evolving process. Accordingly, the wording of the term directly competitive or substitutable implies that the competitive relationship between products is not to be analyzed exclusively by reference to current consumer preferences. In our view, the word substitutable indicates that the requisite relationship may exist between products that are not, at a given moment, considered by consumers to be substitutes but which are, nonetheless, capable of being substituted for one another.36 The ECJ may be interpreted as accepting a look into the future in assessing likeness of products in the Danish Fruit Wine case. The Court held:

35.

36.

competitor, see European Commission, DG COMP, Glossary of Terms Used in EU Competition Policy, http://europa.eu.int/comm/competition/publications/glossary_en.pdf, (last visited on 9 May 2005), at 37. Korea Taxes on Alcoholic Beverages, Panel Report, WT/DS75/R; WT/DS84/R, 17 September 1998, at 10.4710.49: (Another question that has arisen is the temporal nature of the assessment of competition. All parties agree that the Panel should look at both actual and potential competition. However, Korea argues that potential competition does not include future competition. They argue that at most, the Panel must make a but for decision. That is, but for the taxes would the products be directly competitive or substitutable at the present moment. () Koreas arguments in this regard are not persuasive. We, indeed, are not in the business of speculating on future behaviour. However, we do not agree that any assessment of potential competition with a temporal aspect is speculation. It depends on the evidence in a particular case. Panels should look at evidence of trends and changes in consumption patterns and make an assessment as to whether such trends and patterns lead to the conclusion that the products in question are either directly competitive now or can reasonably be expected to become directly competitive in the near future. It is not evident why such an assessment is any more speculative in nature than the but for analysis itself. Such an analysis also requires making an assessment about what would happen in the theoretical case of the tax differentials being removed. In our view, the approach suggested by Korea is too static. It would be a profoundly troubling development in GATT/WTO jurisprudence if Members were forced to return to dispute settlement on the same laws over and over only because the market in question had not yet changed enough to justify a finding at a particular moment.) Korea, Appellate Body, supra note 22, at 114 (emphasis in original).

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The question whether they [imported and domestic products] meet the same needs must be assessed on the basis not of existing consumer habits but of the prospective development of those habits and essentially, on the basis of objective characteristics which ensure that a product is capable of meeting the same needs as another product form the point of view of certain categories of consumers.37 In the British Wine/Beer I case, the Court ruled that for the determination of a competitive relationship under Article 90 EC, second paragraph: it is necessary to consider not only the present state of the market but also the possibilities for development within the context of free movement of goods at the Community level and further potential for the substitution of products for one another which may be revealed by intensification of trade 38 The concept of future competition has also received some support among scholars. Choi, for example, understands future competition to refer to the question of what would happen, in a designated future time frame, to current demand substitution if the contested tax measures were removed.39 Choi cautiously favours such an approach,40 since he finds that the future competition analysis might prove useful in product sectors with short life cycles.41 He further argues that a future competition examination would have additional practical advantages. Choi seems to suggest that reasons of procedural economy support the adequacy of the future competition test.42 The concept of future competition, however, does not seem appropriate. First, the corollary of the finding that consumer habits change in time and space43 does not only imply that each geographic market must be analysed
37. 38. 39. 40. Case 106/84, Commission v. Denmark, [1986] ECR 833, at 15 (emphasis added). Case 170/78, Commission v. United Kingdom, [1980] ECR 417 (Interlocutory judgment), at 6. Choi, supra note 23, at 75. One could question whether it is desirable for international tribunals to intervene and issue orders about future relationships between products, about which it is only possible to speculate. Choi, supra note 23, at 76. This should not be to argue, however, that any future competitiveness or substitution aspect should be excluded from the consideration of likeness. () Examination of future substitution or competition should proceed only in order to confirm the validity of the contemporary or potentiality analysis, or to complement it. Id. at 77 (emphasis in original). Choi speaks of high-tech, short shelf-life product sectors, such as semiconductors, in which current competitive relationships between products may predictably be transitory. Choi, supra note 23, at 77. Id. at 78. Both the Court of Justice and the GATT panel in Japan Wine and Liqueur recognized that consumer habits are variable in time and space Commission v. United Kingdom (Interlocutory judgment), supra note 38, at 13; Japan Customs Duties, Taxes and Labeling on Imported Wines

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42. 43.

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separately,44 a view Choi subscribes to, but also that two moments in time must be subject to separate analyses. In other words, at each point in time, consumers likelihood of switching must be newly established. This approach has the advantage, moreover, to be consistent with the market definition analysis under competition law. In Coca-Cola, the EUs Court of First Instance held: Moreover, in the course of any decision applying Article 86 of the Treaty [on abuse of dominant position], the Commission must define the relevant market again and make a fresh analysis of the conditions of competition which will not necessarily be based on the same considerations as those underlying the previous finding of a dominant position.45 The rejection of the future competition approach, however, does not entail that it is necessary that the products in question compete in the present. Simply, it should be examined whether products would be in competition but for the existence of the governmental tax measures. The relevant question is whether these products would be in competition if the tax measures had never been adopted. As to whether products will, in the future, be in competition after the measures are removed is a different question.46 Second, matters of convenience, as proposed by Choi, cannot override obligations in the text of the law. Third, this paper argues that a prospective analysis under future competition is not only conceptually erroneous, but that it should also be discarded to ensure legal certainty.

3. Consumers Tastes and Habits 3.1. Consumers Tastes and Habits as a Criterion This paper argues that the only reliable method to ascertain consumers tastes and habits is to measure their purchases. As a result, the criterion of consumers tastes and habits responds directly to the two aforementioned requirements that the relationship between products be economic and that it be determined by demand.
and Alcoholic Beverages, Panel Report, L/621634S/83, 10 November 1987, at 5.7 (Japan Taxes on Wine and Liqueur). See infra, under 4.8. Joined cases T-125/97 and T-127/97, Coca-Cola v. Commission, [2000] ECR II-1733, at 82 (emphasis added). Yet another question is whether the competitive relationship between two products is not merely fortuitous, but lasting, i.e. the competitive relationship must be stable and consistent over a certain period of time. Case 2667, Fink-Frucht v. Hauptzollamt Muenchen-Landsbergerstrasse, [1968] English Special Edition 223, p. 232.

44. 45. 46.

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GATT and WTO tribunals have recognised the usefulness of considering the products end-uses in a given market and consumers tastes and habits in the likeness determination.47 These two concepts clearly focus on the behaviour on the demand side and must be seen as closely interrelated with the question of demand-side substitutability. The predominance of the consumer perspective in WTO law was recently affirmed in the Asbestos case. The Appellate Body found that health risks inherent in the products at issue might have an effect on consumers habits.48 The underlying rationale was that a health risk associated with one product would cause consumers to consider it unlike from an otherwise identical product. Accordingly, the Appellate Body found the evidence to be insufficient to demonstrate that the products in question were like.49 The ECJ adopted a market-based approach by examining whether products were capable of fulfilling the same needs from the point of view of the consumers50 and by examining consumer habits.51 3.2. Problems with Consumers Tastes and Habits The ECJ recognised early the possibility of distortion of consumer habits as a result of the tax measures in place. The Court of Justice feared that giving weight to existing consumer habits would lead to their entrenchment and, thus, to protection of national preferences. In the British Wine/Beer I case, the Court noted: For the purpose of measuring the possible degree of substitution, it is impossible to restrict oneself to consumer habits in a Member state or in a given region. In fact, those habits, which are essentially variable in time and space, cannot be considered to be a fixed rule; the tax policy of a Member state must not therefore crystallize given consumer habits so as to consolidate an advantage acquired by national industries concerned to comply with them.52 This anxiety has been echoed in GATT and WTO case law in virtually identical words for example in Japan Wine and Liqueur.53
47. 48. 49. 50. 51. 52. 53. See Border Tax Adjustments, supra note 8; and, for example, Canada Periodicals, Appellate Body Report, WT/DS31/AB/R, 30 June 1997, at 101102. Asbestos, Appellate Body, supra note 16, at 122. Id. at 126 and 131. See concurring opinion by one of the Appellate Bodys members, finding that the health risks do indeed make products unlike. Id. at 152 and 153. Rewe, supra note 29, at 12. See, for example, Commission v. United Kingdom (Interlocutory judgment), supra note 38, at 14. Id. at 13. Japan Taxes on Wine and Liqueur, Panel, supra note 43, at 5.7.

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The solution to this problem is to develop a method for assessing hypothetical consumer habits in the absence of the tax measure. This is the but for approach alleged, among others, by Korea in the Korea Alcoholic Beverages case.54 The but for approach does not only cover the hypothetical situation where no tax differential exists between the products in question, but should also presume that no such differential has ever existed. This requirement is necessary because the consumer habits might be significantly entrenched, and only slowly follow changes in prices of the products (as a result of the elimination of tax differentials). As the Appellate Body found, this is particularly relevant for experience goods: We note, however, that actual consumer demand may be influenced by measures other than internal taxation. Thus, demand may be influenced by, inter alia, earlier protectionist taxation, previous import prohibitions or quantitative restrictions. Latent demand can be a particular problem in the case of experience goods, such as food and beverages, which consumers tend to purchase because they are familiar with them and with which consumers experiment only reluctantly.55 Presumably because the Appellate Body is sceptical whether the but for approach works in practice, it stated that elasticity of demand cannot be the decisive criterion to establish likeness.56 However, it would be an erroneous approach to disregard the criterion of consumer habits altogether, as was done by the ECJ in the French Spirits case.57 It would also be inappropriate to replace the criterion with a uniform standard of consumer habits, as suggested by Advocate General Reischl in the same case: Whilst Article 95 [now 90 EC] prohibits the national legislature from pursuing extra-fiscal objectives in the taxation of foreign goods it would certainly be easy for the Member States otherwise to justify different tax treatment of imported products by reference to the domestic economic structure different from the country of origin or to different consumer behaviour. To recognize such objections would inevitably bring about

54.

55. 56. 57.

See case 319/81, Commission v. Italy, [1983] ECR 601, at 16: (For that purpose it is necessary to take into consideration the potential market of the products in question in the absence of protectionist measures and to ignore comparisons of consumption and import figures.) (Emphasis added.) Korea, Appellate Body, supra note 22, at 123 (references omitted). Japan, Appellate Body, supra note 15, p. 16. The Court found that consumer habits which also differ from region to region and even according to social environment, so that they cannot supply appropriate differentiating criteria for the purpose of Article 95 [now 90 EC]. Commission v. France, supra note 12, at 37.

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the danger that nine [number of Member States at that time] different definitions of similarity would in fact result and that as a result of this the provision would be deprived of its scope. Similarity must therefore be uniformly defined () [T]he concept of similar products must be given a uniform interpretation, without in so doing taking into consideration national habits.58 This approach was explicitly accepted by the ECJ for example in COGIS.59 Such an approach is based on the assumption that, in the absence of distorting tax measures, consumer habits do not vary in different regions within the EU. However, this paper takes the view that tastes of consumers may vary, independent of the fiscal regime, from country to country.60 Choi finds, correctly, that different consumer habits are not necessarily a consequence of regulatory intervention.61 4. Methodology for Assessing Consumers Tastes and Habits The degree of demand-side substitutability, in essence, unveils the relationship purchasers find to exist between two competing products. The most effective indicator of the degree of demand-side substitutability is elasticity of demand. There are, however, other methods for assessing demand-side substitutability. Competition law envisages the utilisation of various quantitative methods to define economic relationships between products.62 4.1. Use of Competition Law Tools Competition law has long dealt with economic relationships between products in particular, in the analysis of the relevant product market. Such an analysis is similar to that proposed for trade law. The relationship between competition and trade law has been the object of proceedings before WTO panels and the Court of Justice. In Korea Alcoholic Beverages, the question regarding the relationship between trade law and com-

58. 59.

60. 61. 62.

Opinion of the Advocate General, case 168/78, Commission v. France, [1980] ECR 347, at 376 and 382 (emphasis added). Case 216/81, COGIS v. Amministrazione delle Finanze dello Stato, [1982] ECR 2701, at 8: (With regard to spirits for human consumption it should be remembered whether, having regard to distinguishing criteria such as the origin and method of manufacture, their possible application and the habits of consumers throughout the Community as a whole, the products display a sufficient degree of similarity.) (Emphasis added). In fact, tastes vary from consumer to consumer. Choi, supra note 23, at 25. Choi gives the example that it is not higher taxation on beef, which crystallises Hindus preference for pork. See, for example, Commission Notice, supra note 31, at 39.

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petition law was raised before the panel. The panel noted that while the specifics of the interaction between trade and competition law are still being developed, we concur that the market definitions need not be the same.63 In Chile Alcoholic Beverages, the panel indirectly utilised competition law. Prior to the proceedings under WTO law, the Chilean competition authorities had made a finding regarding the relevant product market in a merger case. The panel found it to be logical that competitive conditions sufficient for defining an appropriate market with respect to anti-trust analysis would a fortiori suffice for an Article III analysis.64 Thus the Panel appeared to have taken this as a piece of evidence to determine likeness under Article III:2 GATT, second paragraph.65 The ECJ, however, has been more reluctant regarding this issue. While, in Aquavit, the ECJ was confronted with the defendants argument that market definition according to competition rule should be undertaken, it did not reply to that claim.66 In the French Tobacco case, the Advocate General found that the defendants assessment of light-tobacco and dark-tobacco cigarettes for competition-law purposes can only be of limited importance. Although competition decisions can contain arguments that are also relevant in a tax context, that is not necessarily true of the findings made. Each area of law is subject to its own rules, the application of which must be examined separately.67 Nonetheless, in a case regarding the imposition of a sales tax on medicinal products,68 the Court of Justice followed the defendants view finding that its arguments were in line with EU competition law.69 The reluctance to utilise certain techniques used in competition law70
63. Korea, Panel, supra note 35, at 10.81: (Trade law generally, and Article III in particular, focuses on the promotion of economic opportunities for importers through the elimination of discriminatory governmental measures. Antitrust law generally focuses on firms practices or structural modifications which may prevent or restrain or eliminate competition. It is not illogical that markets be defined more broadly when implementing laws primarily designed to protect competitive opportunities than when implementing laws designed to protect actual mechanisms of competition. In our view, it can thus be appropriate to utilize a broader concept of markets with respect to Article III:2, second sentence, than is used in antitrust law.) Chile Alcoholic Beverages, Panel Report, WT/DS87/R; WT/DS110/R, 15 June 1999, at 7.87. Id. at 7.87. Case 171/78, Commission v. Denmark, [1980] ECR 447, at 28. Opinion of the Advocate General, case C-302/00, Commission v. France, [2002] ECR I-2055, at 63 (footnotes omitted). A very generous reading of this statement would not conflict with the findings of this paper. See infra, under 4.9. Although the case was based on a Directive instead of Article 90 EC, this judgment may nonetheless be relevant to an analysis under Article 90 EC as the Court appears to have relied on the case law on Article 90 EC. See, also, Opinion of the Advocate General, case C-481/98, Commission v. France, [2001] ECR I-3369, at 36. Case C-481/98, Commission v. France, [2001] ECR I-3369, at 29. Michael J. Trebilcock and Shiva K. Giri, The National Treatment Principle in International Trade Law (2003), available at www.law.berkeley.edu/cenpro/ils/conference/Trebilcock%20 paper.pdf, last visited on 28 April 2005, at 60.

64. 65. 66. 67.

68.

69. 70.

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some WTO decisions apart does not seem justified. The following pages demonstrate that such techniques could equally be applied in trade law. 4.2. Cross-price Elasticity Substitutability between two products is concerned with the degree of consumer switching between them. Price elasticity estimates the degree of switching between products. The relevant method to measure elasticity, for the purposes of the likeness analysis, is cross-price elasticity. Cross-price elasticity of demand refers to the percentage change in quantity demanded for a good that results from a one percent increase in the price of a second good.71 Own-price elasticity cannot provide the same information, as it examines the degree of switching from a given product to all possible substitutes. In WTO law, panels and the Appellate Body have recognised the usefulness of an analysis based on elasticity of demand. In Japan Alcoholic Beverages, the panel noted that [u]nder national antitrust and trade law regimes, the extent to which products directly compete is measured by the elasticity of substitution.72 The ECJ, however, has not directly ruled on the use of demand elasticity as evidence of the competitive relationship between products. As early as in Aquavit, the Danish government argued that cross-elasticity should be taken into account, and proposed that the rules of competition law should be used to delimit the relevant product market.73 The Court of Justice, however, failed to reply to these arguments. Similarly, in the Belgian Wine/Beer case, Advocate General Vilaa argued that cross-elasticity of demand could be used as evidence.74 Again, the Court did not explicitly take up the argument. It is difficult to establish at which threshold of cross-price elasticity products should be considered as being like, similar or directly competitive or substitutable. The Appellate Body in Canada Periodicals stated that perfect substitutability was not necessary for a finding of a competitive relationship under Article III:2, second sentence.75 The panel in Chile was somewhat more elaborate, finding that an elasticity of 0.26 was low.76 The panel further noted: A high coefficient of cross-price elasticity would of course lend more credence to a claim of direct competitiveness or substitutability, although a low coefficient of cross-price elasticity is not necessarily fatal to a claim of direct competitiveness or substitutability. Indeed, a low coefficient of
71. 72. 73. 74. 75. 76. Robert S. Pindyck & Daniel L. Rubinfeld, Microeconomics (1998), at 34. Japan, Panel, supra note 14, at 6.31 (emphasis added). Commission v. Denmark, supra note 66, at 28. Opinion of the Advocate General, case 356/85, Commission v. Belgium, [1987] ECR 147, at 122. Canada Periodicals, Appellate Body, supra note 47, p. 17. Chile, Panel, supra note 64, at 7.71.

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cross-price elasticity may be due to the very measures in question in the dispute.77 Arguably, this statement could be interpreted as creating a presumption of likeness if a high cross-price elasticity is evidenced. The examination of cross-price elasticity raises, however, a number of questions. 4.2.1. Reverse Cellophane Fallacy One problem with elasticity of demand is that reliable data is difficult to obtain.78 This is even more so when the demand-side substitutability is distorted as a result of the internal tax measure in question. Therefore, elasticity can be expected to differ from the situation that would exist in normal conditions of competition. This distortion could be described as a reversed form of the cellophane fallacy.79 This theory says that the SSNIP-test,80 or comparable test, may, under certain circumstances, deliver a distorted degree of elasticity of demand. If prices in the potential relevant market are above the competitive level, consumers may switch to another product more easily than where prices are at the competitive level. Thus, elasticity of demand would appear inflated, and as a result, the relevant market would be defined too broadly.81 In a likeness analysis, however, governmental tax measures, not behaviour by companies, distort the degree of elasticity of demand. While in Cellophane the original product, from which switching would occur, was priced above competitive levels, in this case the alternative product, to which consumers would switch, is overpriced (as a result of higher taxation). Thus, the elasticity of demand, for the domestic product, understates the degree of willingness of consumers to switch to other products.82 The solution to this problem lies in estimating the cross-price elasticity in a but for situation. 4.2.2. Which Elasticity? For any two products there are always two cross-price elasticities, and these are independent of each other. The question thus arises whether the cross-price elasticity of the imported good or that of the domestic should be measured.

77. 78. 79. 80. 81. 82.

Id. at 7.70. Recent developments, such as the bar code system, have increased the availability of reliable data. The phenomenon of cellophane fallacy obtained its name from a case in the United States. United States v. DuPont de Nemours, 351 U.S. (1956). See infra, under 4.3. This analysis would thus benefit the undertaking concerned, which has supra-competitive prices, because its market share would appear more limited. Elasticities differ along a market demand curve. See, for example, Robert B. Ekelund & Robert D. Tollison, Economics: Private Markets And Public Choice (2000), at 111.

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The text of Articles III:2 GATT and 90 EC fails to indicate which elasticity should be considered. At first sight, it seems tempting to focus on the domestic products elasticity, because the important question seems to be how many consumers switch from national to imported goods. But this would be misinterpreting the question of how much substitutability exists between two products. The focus of the national treatment obligation in trade law is on the interchangeability of goods from the consumers perspective. This includes both switching from product A to product B, as well as in the inverse direction. One solution to resolve this uncertainty would be, in the event that both cross-price elasticities in a but for situation are known, to take the average of the two elasticity measures.83 A different, but related, issue is the level at which cross-price elasticities should be measured. The but for approach requires that cross-price elasticity should be measured in a hypothetical situation with no tax differential. There are three ways to eliminate the tax differential in order to establish the but for situation. First, taxes on imported products can be lowered to the level of the domestically produced goods. Second, the defendant state may raise the tax level of domestic products to that of imports. Third, the taxes on imports could be reduced and those on domestic goods increased until they are levelled somewhere in between. Although they could be expected to be quite similar, all options may yield different cross-price elasticities, even in a perfect but for situation.84 Again, a solution might be to average the different elasticities by measuring the arc elasticity.85 4.2.3. Use of Surveys EU competition law provides for the use of surveys to ascertain the degree of elasticity between products in particular when quantitative information on elasticity is not available.86 However, surveys must be applied with caution. Consumer surveys can be distorted by a framing bias depending on how the questions are phrased.87 Also, even though surveys generally involve the assessment of hypothetical behaviour on the part of the consumer, questions asking respondents to quantify their preference are often less reliable than those which ask respondents to rank their preferences or to state what they would do if a

83.

84. 85. 86. 87.

This averaging approach would have the further advantage of resolving the problem of the cellophane fallacy, to a certain extent, because the switching from the imported to the domestic product might be relatively high as a result of the tax measures. See supra, mainly under 3.2. Arc elasticity measures the average elasticity along any given segment of a demand curve. Ekelund & Tollison, supra note 82, at 114. Commission Notice, supra note 31, at 3334. Lexecon, An Introduction to Quantitative Techniques in Competition Analysis, available at http:/ /www.lexecon.co.uk/publications/media/quantitative_techniques.pdf, last visited on 28 April 2004, at 24.

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certain product or service were not available.88 For these reasons, competition authorities are cautious when taking into account information from surveys. The European Commission (Commission), for instance, is reluctant to accept surveys made ad hoc for a particular case.89 4.2.4. Practical Problems in the Use of Cross-price Elasticity The critique that [a]s a methodology, cross-price elasticity is too problematic, hard to use and easy to manipulate90 should not be accepted. The analysis below shows that a variety of techniques exist to measure the elasticity of demand reasonably well, provided that certain minimum information is available. First, while it is true that quantitative techniques more broadly speaking may raise complicated technical issues, this does not mean that they are prone to abuse. More sophisticated techniques simply require considerable expertise on the part of the body making the assessment. As a result, more reliance on economists, to the detriment of lawyers, would be required a phenomenon which has already occurred in competition law. Second, adjudicators seem to acknowledge that quantitative techniques are not always reliable. It may well be for this reason that the Appellate Body in Japan found that cross-price elasticity is an important, though not decisive criterion.91 Therefore, quantitative techniques only provide useful conclusions if they are based on sound data and methodology. Accordingly, only in that case, would they be taken into account by adjudicators. 4.3. SSNIP-test Competition law typically uses the SSNIP-test92 to assess the elasticity of demand. Regulators both in the United States and the EU use this tool. The U.S. Horizontal Merger Guidelines93 and the Commission Notice on the definition of the relevant market94 refer to this test. The use of the SSNIP-test in trade law is not appropriate for the following reasons. First, its aim caters more towards the analysis under competition law, which differs from the analysis undertaken in trade law. The SSNIP-test en88. 89. 90. Id. Commission Notice, supra note 31, at 41. Serena B. Wille, Recapturing a Lost Opportunity: Article III:2 GATT 1994 Japan Alcoholic Beverages 1996, 9 Eur. J. Intl L. 182 (1998), available at http://www.ejil.org/journal/Vol9/ No1/sr1b.rtf, p. 16. Japan, Appellate Body, supra note 15, p. 16. SSNIP stands for Small But Significant Non-transitory Increase in Price. U.S. Department Of Justice & Federal Trade Commission, Horizontal Merger Guidelines, supra note 32. Commission Notice, supra note 31, at 1519.

91. 92. 93. 94.

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ables competition authorities to discover a hypothetical way in which a monopolist could profitably raise prices. In trade law, however, the profitability of consumer switching is not an issue. As a result, the notional situation of a hypothetical monopolist constructed by the SSNIP-test is not useful for the examination under trade law, which looks at the real life situation. Second, the SSNIP-test undertakes a unidirectional analysis of consumer switching. As stated above, this paper proposes that both price elasticities between two products be taken into consideration. 4.4. Absolute Price Differences In competition law analyses, differences in the absolute prices of products may be important for determining whether products are part of the same relevant market.95 Substantial price differences may be seen as an indication that the products are not close competitors96 to a certain degree.97 In the Korea Alcoholic Beverages case, the defendant noted that price differences between imports and domestic goods were substantial. The panel acknowledged that there were significant price differences,98 but found, nonetheless, that these differences were not decisive. [A]bsolute differences are less important than behavioural changes that occur due to relative price movements.99 In EU law, the question of pre-tax price differences has generally not been dealt with in the determination of the likeness of products. However, in the Belgian Wine/Beer case, the Court of Justice was confronted with a similar situation as the panel in Korea Alcoholic Beverages. As in Korea, the prices of imported products were found to be approximately four times the price of domestic products.100 Unlike the Korea panel, the ECJ found that a minimal tax differential applied to products with substantial price differences does not afford protection of the domestic industry. While the Courts finding is not necessarily erroneous, the substantial price difference may well indicate that

See, for example, Commission Notice, supra note 31, at 39. See, for example, the merger cases before the European Commission: Case IV/M.53, Arospatiale/Alenia/De Havilland, OJ 1991 L 334, pg. 42; case IV/M.214, DuPont/ICI, OJ 1993 L 7, pg. 13; case IV/M.190, Nestl /Perrier, OJ 1992 L 356, pg. 1. 97. Motta, for example, takes the view that absolute price differences are not a good indicator for market definition. Massimo Motta, Competition Policy Theory and Practice 106 (2004). 98. For example, Vodka was four times the price and standard whisky four and a half times the price of premium diluted soju, and eight and nine times, respectively, the price of standard diluted soju. Korea, Panel, supra note 35, at 10.94. 99. Id. at 10.94. 100. The ECJ examined the prices including tax. Case 356/85, Commission v. Belgium, [1987] ECR 147, at 16.

95. 96.

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the products at issue were not directly competing in the first place.101 This paper proposes that price differences should first and foremost be examined in the likeness determination. As with competition law, substantial divergence of pre-tax prices may be an element indicating dissimilarity. However, it should nonetheless be possible, in the second place, to examine pre-tax price differences in the analysis of affording protection to domestic production.102 Even if a tax differential were found to be more than de minimis, it would still be possible for the defendant to argue that the difference was insignificant compared to the pre-existing price difference, so that no protective effect would be found. The Appellate Bodys rejection of such an argument at the stage of so as to afford protection seems too stringent.103 More accurate seems to be the view of Advocate General Vilaa: [T]he difference in the prices of these two beverages which, of course, reflects their different characteristics and production costs whilst itself constituting a factor liable to attenuate the competitive relationship between them is nevertheless something which must be taken into account in assessing to what extent the difference in rates distorts consumer preferences.104 4.5. Price Correlation In competition law, not just absolute prices can indicate the degree of competition between products, but price movements of one product relative to those of another may also prove useful.105 Price correlation is independent of the analysis of absolute price levels of products. It is possible for two products to compete in the same relevant product market despite being priced at different absolute levels, because demand-side substitution depends on the willingness of consumers at the fringes to switch from one product to another as the

101.

102. 103. 104. 105.

In another exception to the general rule that it would not examine absolute prices as a factor for assessing likeness, the ECJ held in Roders that [i]n that connection, the national court must have regard to the difference between the selling prices of the products in question and the impact of that difference on the consumers choice, as well as to changes in the consumption of those products. Joined cases C-367/93 to C-377/93, Roders v. Inspecteur der Invoerrechten, [1995] ECR I-2229, at 39. This step should not be confused with the analysis of levels of taxation to determine whether the products in question are not similarly taxed. Korea, Appellate Body, supra note 22, at 152. Commission v. Belgium, Advocate General, supra note 74, at 111. Commission Notice, supra note 31, at 38. It is clear that the analysis of price correlation may suffer from certain defects. There are, however, methods to reduce or avoid those complications. Lexecon, An Introduction to Quantitative Techniques in Competition Analysis, supra note 158, at 78.

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relative price changes.106 The main hypothesis is that the more parallel the movements in price of two products are, the higher the elasticity between them. The goal of a price correlation analysis is to examine the extent to which the prices of two products move together. If the price of one good constrains the other, the two price series should move together.107 In the field of internal fiscal measures, however, the utility of this analysis may be more limited. In fact, the tax measure itself may influence the price movements of the products. In other words, an imported goods price might be raised, through higher taxation, above that of domestic products as a result of which the degree of substitutability would be diminished. As a result, relative price movements would be less accentuated. If, on the other hand, price movements were relatively parallel, that should be taken as a strong indicator of a high elasticity between products.108 4.6. Shock Analysis The shock analysis test can be used to define relevant product markets in competition law. The Commission Notice in EU law, for example, explicitly envisages the use of evidence of substitution deriving from past experiences: In certain cases, it is possible to analyse evidence relating to recent past events or shocks in the market that offer actual examples of substitution between two products. When available, this sort of information will normally be fundamental for market definition.109 By extension, the shock analysis test could also shed light on the competitive relationship between products in an analysis under international trade law. The idea, on which this test is based, is that a large unanticipated change in a market can provide the basis for a natural experiment.110 A change, especially a sudden and unexpected change, to either supply or demand can give a key insight into the competitive conditions in a market on the basis of how customers and/or competitors have reacted to the event.111 These shocks can affect a range of industry, or concern one market or even one firm only:
106. 107. Lexecon, An Introduction to Quantitative Techniques in Competition Analysis, supra note 138, at 5. Lexecon, Competition Memo: Dont Throw Out Your Numbers (1998), available at http:// www.lexecon.co.uk/publications/media/1998/numbers.pdf, last visited on 28 April 2004. A further improvement of the method of price correlation is the so-called stationary analysis. See, also, Lexecon, An Introduction to Quantitative Techniques in Competition Analysis, supra note 158, at 913. Such a finding would be analogous to the panels reasoning in Chile Alcoholic Beverages with regard to cross-price elasticity. Chile, Panel, supra note 64, at 7.70. Commission Notice, supra note 31, at 38. Lexecon, Competition Memo: Dont Throw Out Your Numbers, supra note 158, pg. 2. Lexecon, An Introduction to Quantitative Techniques in Competition Analysis, supra note 138, at 34.

108. 109. 110. 111.

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Such shocks cover a wide array of possible events: they include strikes, unexpected plant shutdowns, stock shortages, promotion and advertising activity, trade frictions, sudden exchange rate movements, technological change and regulatory intervention.112 The common element of these events is that they may give rise to sudden shifts of supply or demand in a given market. This method of analysis has the advantage that it does not require large amounts of data.113 Market share While movements in market shares are not generally used as an instrument to define the relevant market in competition law,114 they may prove useful under the shock analysis test. In Japan Alcoholic Beverages, the EU argued that the Japanese tax reform in 1989, which raised taxes of one alcoholic beverage, led to higher market shares115 of two other products.116 The panel accepted that the fact that both these products captured market shares lost by the product, which was the object of the tax rise, was evidence that they were competing for the same market. Accordingly, the panel found elasticity of substitution between them.117 On the European level, the ECJ examined a similar claim when deciding whether a tax measure had a protective effect. The Commissions argument in the Belgian Wine/Beer case was very similar to the situation in Japan Alcoholic Beverages. The Commission alleged that tax increases first for wine and then for beer led to changes in consumer pattern (and, as a result, relative market shares). The ECJ was sceptical in general as regards the use of shock analysis type of evidence. There, the Court implicitly addressed and rejected the argument on market share evolution: Whilst these figures [on beer and wine consumption] show the general trends in the consumption of the products in question, they do not show with any certainty that there is any causal connexion between the patterns of consumption described and the introduction in 1977 of a higher rate of VAT [value-added tax] for wine.118
112. 113. 114. 115. 116. Id. Id. at 37. In that field of law, market share evolution might be relevant for other purposes, such as establishing collusion. Market shares in the examination under trade law do not necessarily mean market in the meaning of relevant product market under competition law. As the Lexecon report indicates, tax changes are among the events triggering the shock analysis test. Lexecon, Competition Memo: Dont Throw Out Your Numbers, supra note 158, pg. 2. Japan, Panel, supra note 14, at 6.30. Commission v. Belgium, supra note 100, at 20.

117. 118.

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Nonetheless, the Court highlighted that between 1978 and 1983 the rate of VAT applicable to beer was increased on three occasions without there being in the medium term any restrictive effect on the consumption of beer to the advantage of wine.119 In any event, in the evaluation of the impact of shock events on market shares, caution must be applied. As was stated in the sections on elasticity of demand and price correlation, the tax measure itself may influence market share changes. It is thus not surprising that the Appellate Body rejected arguments that stable market shares prevented the finding of a competitive relationship. In Canada Periodicals, it stated: We are not impressed either by Canadas argument that the market share of imported and domestic magazines has remained constant over the last 30plus years, and that one would have expected some variation if competitive forces had been in play to the degree necessary to meet the standard of directly competitive goods. This argument would have weight only if Canada had not protected the domestic market of Canadian periodicals through, among other measures, the excise tax 120 Overall, market share movements cannot be used as conclusive evidence, but may prove useful, under certain circumstances, as evidence of the economic interrelationship between two products. 4.7. Different Customer Groups In EU competition law, the Commission Notice on the definition of the relevant market finds that [a] distinct group of customers for the relevant product may constitute a narrower, distinct market when such a group could be subject to price discrimination.121 However, this possibility to distinguish relevant markets according to customer groups should not be used in trade law. The issue in competition law concerns the profitability of the price rises, as the sellers are able to establish price discrimination. This issue is not present in trade law.122 The assessment of likeness in trade law only looks at the products in question, not at the ultimate purchasers. The key feature of the possibility to distinguish separate
119. 120. 121. Id. Canada Periodicals, Appellate Body, supra note 47, at p. 1718. Commission Notice, supra note 31, at 43. According to the Notice, the finding of a separate product market for a given customer group requires two conditions to bet met. First, it must be possible to identify clearly which group an individual customer belongs to at the moment of selling the relevant products to him, and, second, trade among customers or arbitrage by third parties should not be feasible. Id. See supra, under 4.3.

122.

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relevant markets, in of competition law, is that, by definition, the products purchased by the various groups of customers are identical. If, however, the products are not identical, the fact that the different products are purchased by different categories of consumers is a strong indication against their likeness. Seen in this light, the ECJs reasoning in the French Tobacco case is hard to follow. The Advocate General in that case had found that light-tobacco cigarettes and dark-tobacco cigarettes had different consumer groups.123 Although it acknowledged that the age of the two customer groups differed substantially,124 the ECJ held that the two types of cigarettes were similar. This seems deficient, as the separation into two different groups of customers means that each group prefers one product and may not consider the other product to be substitutable. 4.8. Evidence from Outside the Market Concerned In an analysis under competition law, the relevant market is defined both for products and for its geographical extent. The competitive conditions in each geographic region must be assessed separately. It is thus perfectly possible that two products are directly competitive in one market, and not in another geographically different market. An authentic market-based approach should take into account the particularities of the markets. Both WTO and EU adjudicators found that consumer habits change in time and space.125 The corollary of this finding is that information gathered regarding the patterns of consumption should be limited to the country concerned. This is the position the panel in Japan adopted: [C]onsequently, two products could be considered to be directly competitive or substitutable in market A, but the same two products would not necessarily be considered to be directly competitive or substitutable in market B.126 In the Belgian Wine/Beer case, the Court of Justice seemed to acknowledge, implicitly, that each geographical market has to be examined separately. In that case, the ECJ transposed its conclusions about the economic relationship between beer and wine found in the earlier Commission/United Kingdom cases after noticing that nothing in the documents before the Court indicates any

123. 124. 125. 126.

Commission v. France, Advocate General, supra note 67, at 71 and 75. Commission v. France, supra note 19, at 26. Commission v. United Kingdom (Interlocutory judgment), supra note 38, at 13; Japan Taxes on Wine and Liqueur, Panel, supra note 43, at 5.7. Japan, Panel, supra note 14, at 6.22.

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feature specific to the Belgian market which might justify a different approach from that in the United Kingdom case.127 However, these cases appear isolated. In Korea, the appellant challenged the panels assertions that it could look at the Japanese market for additional information.128 The Appellate Body, however, endorsed the findings of the panel: It is also true that consumer responsiveness to products may vary from country to country. This does not, however, preclude consideration of consumer behaviour in a country other than the one at issue. It seems to us that evidence from other markets may be pertinent to the examination of the market at issue, particularly when demand on that market has been influenced by regulatory barriers to trade and competition. Clearly, not every other market will be relevant to the market at issue. But if another market displays characteristics similar to the market at issue, then evidence of consumer demand in that other market may have some relevance to the market at issue. This, however, can only be determined on a case-by-case basis, taking into account of all relevant facts.129 In EU law, as stated above, the Court of Justice has accepted Advocate General Reischls approach of uniformity of consumers tastes and habits throughout the Community.130 These approaches should be considered erroneous. Consumer patterns differ from country to country and should, therefore, be assessed separately. 4.9. Conclusion This paper argues that international trade law could benefit from incorporating the methodology used for determining the relevant product market in competition law. While the Court of Justice seems more reluctant, WTO adjudicators are moving in that direction. The fact that the same or similar methods and techniques are used does not, however, entail that the outcomes of the analyses under trade and competition law are, or indeed should be, necessarily the same. While the inquiries are essentially the same, that is, to ascertain demand substitution between products, the examinations consider different degrees of such substitution. As a result, it would not be surprising that, for example, a competition authority finds two products to belong to separate markets, while under trade law they would be considered like. A

127. 128. 129. 130.

Commission v. Belgium, supra note 100, at 11. Korea, Appellate Body, supra note 22, at 137. Id. See supra, under 5.2.2.

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striking example of such a divergent interpretation resulted from the bananas cases.131 The ECJ found bananas to be in competition with other table fruit in an examination under the second paragraph of Article 90 EC,132 but in United Brands, applying competition rules, it found them not to form part of the same relevant product market.133

5. Other Criteria 5.1. General GATT and WTO panels have frequently used the criteria expressed in the Working Party Report on Border Tax Adjustments. It should be recalled, however, that this report should only be seen as persuasive, never authoritative text. The report does not have the value of primary international treaty law, nor is it likely to be considered as binding subsequent practice.134 The Appellate Body in EC Asbestos held: These criteria [of the Working Party Report] are, it is well to bear in mind, simply tools to assist in the task of sorting and examining the relevant evidence. They are neither treaty-mandated nor a closed list of criteria that will determine the legal characterization of products.135 This paper does not argue that the criteria in Border Tax Adjustments, and the similar criteria used by the ECJ, are not valuable in the analysis of likeness between products. Simply, it is argued that these criteria should only be used as subsidiary means of the analysis of actual demand-side substitutability in a given market. In EC Asbestos, the Appellate Body found:
131. 132. 133. 134. Paul Demaret and Raoul Stewardson, Border Tax Adjustments under GATT and EC Law and General Implications for Environmental Taxes, Journal of World Trade 5, 50 (1994). Case 184/85, Commission v. Italy, [1987] ECR 2013, at 12. Case 27/76, United Brands v. Commission, [1978] ECR 207, at 35. VCLT, art. 31(3)(b). The Appellate Body found in Japan Alcoholic Beverages that panel decisions do not amount to subsequent practice. Japan, Appellate Body, supra note 15, at p. 810. While the Working Party Report is not a panel decision, it is likely that the same reasoning applies. Asbestos, Appellate Body, supra note 16, at 102. Similarly, Hudec finds that [i]t is difficult to understand why so much respect is accorded to this passage [of Border Tax Adjustments], given that it is discussing the term like or similar, whereas the key words of Article I, III:2 and III:4 are like product. Moreover, the criteria listed in the report were just suggestions from one or more members of the Working Party, and even at that are merely an illustrative list of some criteria that might be applied. The suggestions are merely reported by the Working Party, but in no way officially recommended by it. Hudec, supra note 16, at 102, at 113 (emphasis in original).

135.

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[W]hether the Border Tax Adjustments framework is adopted or not, it is important under Article III:4 to take account of evidence which indicates whether, and to what extent, the products involved are or could be in a competitive relationship in the marketplace.136 In other words, the Border Tax Adjustments criteria, and similar criteria used by the ECJ, should be functionally subordinated to the market-based approach. They should be a means to determine likeness according to the main criterion that of consumers tastes and habits. This proposal finds support both in WTO and EU case law. For example, the Appellate Body in EC Asbestos not only ordered panels to fully examine the physical properties of the products in question, as suggested by the Border Tax Adjustments report, but also declared: In particular, panels must examine those physical properties of products that are likely to influence the competitive relationship between products in the market place.137 Similarly, though less explicitly, the ECJ found in the Danish Fruit Wine case that the question of whether two products meet the same needs must be assessed essentially on the basis of objective characteristics which ensure that a product is capable of meeting the same need as another product from the point of view of certain categories of consumers.138 This wording seems to suggest that the ultimate goal of the analysis of objective characteristics should be to assess their effects on consumer behaviour. Similarly, in the Belgian Wine/Beer case, the Court held that commonly consumed wines have enough characteristics in common with beer to constitute an alternative choice for consumers.139 This study proposes that this subordinate relationship should, by analogy, extend to other criteria used by the Court of Justice or contained in the Border Tax Adjustments report. That approach would be consistent with the procedure under competition law. The Commission Notice on the definition of the relevant market, with regard to general end-uses, states:
136. 137. 138. 139. Asbestos, Appellate Body, supra note 16, at 103. Id. at 114. Commission v. Denmark, supra note 37, at 15 (emphasis added). Commission v. Belgium, supra note 100, at 11 (emphasis added). In the French Cars case, the Court seemed to suggest that there is a link between objective characteristics of products and consumer habits. The Court ruled that products such as cars are similar for the purposes of the first paragraph of Article 95 of the Treaty [now 90 EC] if their characteristics and the needs which they serve place them in a competitive relationship () It is thus clear that vehicles of different makes [of cars], whether or not they are fitted with a six-speed manual gearbox or a five-speed automatic transmission, may in the eyes of the consumers, constitute similar vehicles for the purposes of the first paragraph of Article 95 of the Treaty [now 90 EC] Case C-265/99, Commission v. France, [2001] ECR I-2305, at 43 and 44 (emphasis added).

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An analysis of the product characteristics and its intended use allows the Commission, as a first step, to limit the field of investigation of possible substitutes. However, product characteristics and intended use are insufficient to show whether two products are demand substitutes. Functional interchangeability or similarity in characteristics may not, in themselves, provide sufficient criteria, because the responsiveness of customers to relative price changes may be determined by other considerations as well.140 5.2. Physical Characteristics WTO law uses slightly different terminology than EU law. In the WTO system, while the Border Tax Adjustments report mentions products properties, nature and quality,141 WTO tribunals frequently refer to the concept of physical properties.142 The European Court of Justice, on the other hand, in its analysis under Article 90 EC, generally examines objective characteristics.143 The ECJs terms seem to be broader than the terms used in WTO law.144 Examination of products characteristics is equally important for the determination of the relevant product market under EU competition law.145 5.2.1. Varying Importance of Physical Characteristics under the First and Second Sentence of Articles III:2 GATT and 90 EC? Both WTO tribunals and the ECJ have consistently found that under the first sentences of Article III:2 GATT and Article 90 EC, physical and objective characteristics, respectively, play a more important role than under the second sentences of those articles. Under WTO law, the issue of physical characteristics arose mainly in the context of the first paragraph of Article III:2 GATT, and WTO tribunals generally held that this aspect was more relevant under that paragraph than under the second paragraph of Article III:2.146 Legal
140. 141. 142. Commission Notice, supra note 31, at 35. Border Tax Adjustments, supra note 10, at 101102. Asbestos, Appellate Body, supra note 16, at 110: (We see the first criterion, properties, nature and quality, as intended to cover the physical qualities and characteristics of the products.) Japan, Appellate Body, supra note 15, p. 20. The John Walker court, somewhat confusingly, speaks of intrinsic characteristics. Case 243/ 84, John Walker v. Ministeriet for Skatter og Afgifter, [1986] ECR 875, at 13. The ECJ includes the products origin, the method of manufacture and their properties in the concept of objective characteristics. See, for example, Commission v. Denmark, supra note 37, at 12. Commission Notice, supra note 31, at 7. See, for example, Chile Alcoholic Beverages, where the Panel said that an examination of the physical characteristics of products is more critical in determining whether two products are like than in the determination of whether two products are directly competitive or substitutable. Chile, Panel, supra note 64, at 7.51.

143. 144.

145. 146.

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writers support this interpretation. Hudec, for example, finds that it would appear that the concept of like product in Article III:2 GATT may in fact be referring to similarity of physical characteristics147 This paper, however, argues that examination of physical characteristics plays an equivalent role under both sentences of Article III:2 GATT and Article 90 EC.148 A textual interpretation of those articles does not support the conclusion that objective characteristics are necessarily more relevant under the first sentences of Articles III:2 GATT and 90 EC. Furthermore, analogies to definitions of like products, such as that in Article 2.6 of the Anti-Dumping Agreement, are not particularly useful.149 Accordingly, this study finds that differences between the two sets of paragraphs are simply a matter of degree of closeness in economic relationships. 5.2.2. Focus on Marketplace The focus of the likeness analysis, both under the first and second sentences of Articles III:2 GATT and 90 EC, should lie predominantly, or even exclusively, on the marketplace. Physical characteristics or properties, as well as other factors, should only be taken into account in the likeness analysis insofar as they complement or supplement indicia of actual consumer behaviour. An indication that WTO jurisprudence on physical characteristics moves towards assessing the impact of these characteristics upon consumer patterns can be detected in the Appellate Bodys reasoning in EC Asbestos.150
147. Hudec, supra note 16, at 105. Similarly, Choi argues that physical characteristics are important for the determination of likeness under the first sentence but not for the analysis of directly competitive or substitutable products under the second sentence of Article III:2. Choi, supra note 23, at 1920. Therefore, the panel in Korea Alcoholic Beverages seemed to be correct in asserting that [i]t would be an incorrect reading of the law to argue that products physical similarities were somehow less relevant for the category of directly competitive or substitutable products than for the subcategory of like products. Korea, Panel, supra note 35, at 10.66. Article 2.6 of the Anti-Dumping Agreement reads as follows: Throughout this Agreement the term like product (produit similaire) shall be interpreted to mean a product which is identical, i.e., alike in all respects to the product under consideration, or in the absence of such a product, another product which, although not alike in all respects, has characteristics closely resembling those of the product under consideration. First, it may be argued that the Anti-Dumping Agreement speaks of identical products, which may go beyond the concept of likeness under Article III:2. In the alternative expressed in Article 2.6 of the Anti-Dumping Agreement, when there are no identical products, the two products must have closely resembling characteristics. However, the Agreement does not say that these must be physical characteristics. It may well be argued that the Article is concerned with functional characteristics. Second, and more importantly, the criteria here are that the products be alike in all respects or that they have closely resembling characteristics. They do not state, however, from which perspective the criteria should be assessed. It might be argued that alike in all respects may be perceived from the viewpoint of the consumer only. In that case, it may suffice that two products are capable of fulfilling the needs of the consumer and are, therefore, alike in all respects, although they may be physically different. Asbestos, Appellate Body, supra note 16, at 114.

148.

149.

150.

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Same Same But Different?

Generally, ECJ case law supports such a finding.151 Also in EU competition law, the criterion of physical characteristics of products is of limited relevance if consumers behaviour is not also examined.152 The Court of Justices case law, however, is not uniform.153 5.2.3. Visual Impact? In todays consumer society, dominated by wide-scale advertising, visual impact of products may be increasingly important. Accordingly, visual similarities would be important under a likeness analysis. In WTO law, reliance on visual similarities seems, however, limited. That is implied in the Asbestos case where the AB held that a health risk, which cannot be perceived visually, rendered products physically unlike. Conversely, in the Korea Alcoholic Beverages case, the defendant placed considerable emphasis on the differences in bottle sizes and labelling of the different alcoholic beverages. The panel, however, found that the differences were not substantial and did not affect the finding of likeness.154 5.2.4. Case Studies The general inquiry on product characteristics in the likeness determination includes two steps. First, it must be examined which characteristics or qualities are important in assessing likeness of products.155 Second, the degree or extent to which products must share qualities or characteristics in order to be like products must be determined.156 The fact that the solutions to these questions are particularly difficult in the field of physical characteristics will be highlighted with examples in two specific areas of human activity: drinking and driving.
151. See, for example, Commission v. France, supra note 12, at 5: (It is therefore necessary to determine the scope of the first paragraph of Article 95 [now 90 EC] on the basis not of the criterion of the strictly identical nature of the product but on that of their similar or comparable use.) (Emphasis added.) Commission Notice, supra note 31, at 35. In John Walker, for example, the Court put the focus on the element of objective characteristics: The contention that scotch whisky may be consumed in the same way as fruit wine of the liqueur type, as an aperitif with water or with fruit juice, even if it were established, would not be sufficient to render scotch whisky similar to fruit wine of the liqueur type, whose intrinsic characteristics are fundamentally different. John Walker, supra note 143, at 13 (emphasis added). Most recently, Advocate General Tizzano maintained that similarity under the first paragraph of Article 90 EC requires that the products have certain objective characteristics in common. Commission v. Greece, Advocate General, supra note 19, at 88. In that vein, Advocate General Alber even goes further, by explicitly maintaining that consumer habits are, according to the case-law, only of secondary importance. Commission v. France, Advocate General, supra note 67, at 72. Korea, Panel, supra note 35, at 10.67 note 380. Asbestos, Appellate Body, supra note 16, at 92. Id.

152. 153.

154. 155. 156.

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Case study I: Alcohol


The ECJ and WTO adjudicators have long struggled when confronted with arguments alleging similarity and dissimilarity of alcoholic beverages. The dilemma the Court of Justice faced in the French Spirits case is particularly illustrative for the difficulty of finding common and distinct properties of the various products. In response to the defendants argument that a number of organoleptic properties combining taste, aroma and smell157 would render products unlike,158 the ECJ set out a series of general rules: It is impossible, first of all, to disregard the fact that all the products in question, whatever their specific characteristics in other respects, have common generic features. All are the outcome of the distillation procedure; all contain, as a principal characteristic ingredient, alcohol suitable for human consumption at a relatively high degree of concentration. It follows that within the largest group of alcoholic beverages spirits form an identifiable whole united by common characteristics;159 It continued, however: In spite of those common characteristics, it is possible to distinguish within that whole products[160] which have their own more or less pronounced characteristics. Those characteristics spring either from the raw materials used (in this connexion it is possible to distinguish in particular spirits distilled from wine, fruit, cereals and sugar-cane)[161], or from manufacturing processes or, again, from the flavourings added. Typical varieties of spirits may in fact be defined by these particular characteristics, so much so that some of them are even protected by registered designations of origin; 162 WTO and EU adjudicators sometimes make broad generalisations regarding products characteristics. Other times, they go into considerable detail, finding numerous differences. As an example of a bold, generalising approach, the Court of Justice found in Aquavit beverages to fall under the first paragraph of Article 90 EC simply because they were normally manufactured from neutral alcohol and

157. 158.

159. 160.

161. 162.

Commission v. France, supra note 12, at 32. The ECJ stated, oddly, that this criterion is too variable in time and space to supply by itself a sufficiently sound basis for distinction for the definition of categories which may be recognized throughout the Community. Commission v. France, supra note 12, at 37. Id. at 11. The beverages concerned were spirits obtained from wine and fruit for example cognac, as the domestic products, and Geneva and other alcoholic beverages resulting from distillation of cereals for example whisky, as imported products. The substances contributing to the distinct flavours of spirits even after distillation are known as congenerics. See Cedric Austin, The Science Of Wine (1968), at 116. Commission v. France, supra note 12, at 11.

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owe[d] their characteristic flavour to added flavouring extracts.163 Similarly, in WTO law,164 the complainants in Korea Alcoholic Beverages argued before the panel that at the point of distillation, all spirits were nearly identical, which means that the raw materials and methods of distillation had almost no impact on the final product.165 The panel, agreeing with the complainants, ruled that ethyl alcohol was the base ingredient of the distilled alcoholic beverages at issue.166 It found that the differences due to the filtration or aging processes of the beverages described are not so important as to render the products non-substitutable.167 The panel further noted that, in the case at hand, the differences in flavour or colour were relatively minor.168 Finally, the panel rejected the argument raised by the defendant that differences in bottle sizes and labelling were relatively minor.169 The facts were similar in the Chile case,170 where the defendant argued that the various products shared virtually no common physical characteristics other than containing alcohol and water.171 The panel found that the products had a significant common feature, that is being a potable distilled spirit with a high alcohol content.172 The Court of Justice also took a very broad approach in Fruit Wine. It noted that table wine, made of grapes, and liquor wine, made of other fruit, were manufactured from the same kind of basic product, namely agriculture produce, and by the same process, namely natural fermentation.173 Under such an approach, one might wonder how the common ingredient should be defined. The Court could equally have held that the ingredients were different: grapes on the one hand, and other fruit on the other hand. If such generalisation or grouping is allowed, it is unclear where the line should be drawn. Bread and wine, for example, are both produced from agriculture produce. Would that mean that they are similar or in competition? In John Walker, decided on the same day as Fruit Wine, the Court found that the products174 objective properties were different.175 The test it applied regarding ingredients was much more stringent. The Court,

163. 164.

165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175.

Commission v. Denmark, supra note 66, at 32. The panel in Japan Alcoholic Beverages proceeded to an examination of physical characteristics only under the first paragraph of Article III:2 GATT. Its analysis examined the media used for filtration, the use of additives, the use of ingredients and appearance without explaining in depth the conclusions it drew. Japan, Panel, supra note 14, at 6.23. Korea, Panel, supra note 35, at 10.62. The beverages concerned were soju, as the domestic products, and vodka, whisky brandy, cognac, rum, gin, tequila and liqueurs, as imported products. Korea, Panel, supra note 35, at 10.67. Id. at 10.67. Id. at 10.67 note 380. The products involved were pisco, as the domestic product, and whisky, brandy, rum, gin, Geneva, vodka, liqueurs, aquavit, ouzo, tequila and other spirits, as imported products. Chile, Panel, supra note 64, at 7.50. Id. at 7.53. Commission v. Denmark, supra note 37, at 14. The products concerned were (domestic) fruit wine and (imported) scotch whisky. John Walker, supra note 143, at 12.

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citing Rewe,176 found that the fact that the same raw material is found in the two products is not sufficient for the products to be regarded as similar, but also the raw material must be present in more or less equal proportions in both products.177 While it is true that the Court was referring to a broad concept of raw material, namely alcohol as such, it must be emphasised that it stated alcohol as an example.178 In other cases, the examination of products characteristics was more detailed. In Roders, for example, the Court found that vermouth is not made from the same kind of basic products as fruit wines since not only is ethyl alcohol added to grape wine but also a small quantity of mixed herbs which give vermouth its special flavour.179 Similarly, although not followed by the Court of Justice, the Advocate Generals opinion in the Ouzo case entailed a detailed examination of the raw materials used in the production of ouzo using aniseed and possibly fennel seed, mastic from a lentiscus indigenous to the island of Chios and other aromatic seeds, plants and fruits180 Organoleptic properties The concept of organoleptic is defined as relating to perception by a sensory organ.181 Alcoholic beverages generally display organoleptic properties either as a result of the flavour of the raw material persisting even after distillation process or as a result of processes after distillation, for example the addition of flavour.182 The panel in Chile rejected reliance on such processes: [T]he post-distillation differences due to the filtration, colouring or aging processes of the beverages are not so important as to render the products non-substitutable.183 In the Danish Fruit Wine case, the Court of Justice noted that the organoleptic properties, in particular their taste and their alcohol content, are similar.184 This last statement explicitly mentions the taste of the beverage. The concept of taste is, however, a subjective notion and should be addressed in the analysis of consumers tastes and habits. This issue highlights the superficial nature of the concept of organoleptic properties more generally. The fact that organoleptic is defined as relating to perception by a sensory organ entails that these characteristics do not have an autonomous existence. They must be perceived with the senses by those who are to pass judgment on them: mainly the buyers.

176. 177. 178. 179. 180. 181. 182. 183. 184.

Rewe, supra note 29. John Walker, supra note 143, at 12. Id. Roders, supra note 101, at 33. Commission v. Greece, Advocate General, supra note 19, at 92. Thesaurus, available at www.dictionary.com. This last category of products is named compounded beverages. See Harold J. Grossman, Grossmans Guide To Wine, Spirits And Beers (1974), at 5. Chile, Panel, supra note 64, at 7.54. Commission v. Denmark, supra note 37, at 14.

402

Same Same But Different?

Alcohol strength In the Fruit Wine case, organoleptic properties were found to cover the element of alcohol content.185 In John Walker, the Court confirmed that alcoholic strength is a distinguishing factor.186 In Roders, the Court did not explicitly state but seems to imply187 that even marginal differences in alcoholic strength188 are indicia against likeness.189 However, heavy reliance on differences in alcoholic strength seems inadequate, in particular when these differences are minimal. Minimal differences are not perceptible to most people.190 In sum, adjudicators are faced with the difficult task of deciding which characteristics should be taken into account, and which degree of differentiation has an impact on likeness. In the case of alcoholic beverages, as this case study has shown, they have resolved these tasks rather arbitrarily. They sometimes resolve the cases by generalising, while in other cases they engage in a detailed analysis of individual aspects of the beverages. This paper argues that this lack of consistency on the part of adjudicators is the result of the erroneous assumption that physical or objective characteristics provide a reliable and theoretically sound basis for determining likeness.

Case study II: Cars In Indonesia National Car, an argument brought by the EU before the panel exemplifies the problematic question of determining physical characteristics in the automobile industry. The EU contended that:

185.

186. 187.

188. 189. 190.

Id. at 14: (Their organoleptic properties, in particular their taste and their alcohol content, are similar. The fact that the final alcohol content in fruit wine is achieved by addition of ethyl alcohol must be regarded as irrelevant, since the alcohol content of wine made from grapes may also be increased, particularly in order to improve wine with a low natural alcohol content.) John Walker, supra note 143, at 12. In that case, the Court noted that Scotch whisky has 40% alcohol by volume, whereas fruit wines alcohol content does not exceed 20%. The Court of Justice did not make a definitive resolution of the case, but referred it back to the national court, in accordance with the preliminary reference procedure under Article 234 EC. The differences amounted to only 2% and 3% respectively. (The tax rate for sherry was 17%, and 18% for madeira compared to 15% for fruit wine.) Roders, supra note 101, at 32. Arguing that differences in alcoholic strength are important, if consumers do not perceive the differences through their senses, implies that they purchase the beverages for a different motive. The adjudicators reasoning seems to imply that people would consume alcoholic beverages mainly for their intoxicating effect. Such a view should not be endorsed. The Court of Justice itself recognizes that it is true that alcoholic strength is only a secondary factor in the consumers choice. Case 170/78, Commission v. United Kingdom (Final Judgment), [1983] ECR 2265, at 20.

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there are virtually limitless variations with respect to passenger cars, and that any effort to divide passenger cars into two or more like products would inevitably yield arbitrary results because the Panel would be required either to choose among the continua of products with respect to many of these criteria, and drawing lines along those continua would be arbitrary regardless of where the lines were drawn.191 In WTO law,192 the Indonesia National Car case examined the likeness of passenger cars both under Article III:2 GATT, first sentence, and Article 6.3. of the Agreement on Subsidies and Countervailing Measures.193 While Japan argued that physical properties essentially related to engine size,194 the United States focused on size, weight, height, engine size.195 In response, the panel first acknowledged that passenger cars may differ greatly in terms of size, weight, engine power, technology, and features. The significance of these extensive physical differences, both in terms of the cost of producing the cars and in consumer perceptions regarding them, is manifested in huge differences in price between brands and models.196 The panel then accepted that two of these factors, on the basis of which a study had been drafted, were sufficient for the physical characteristics analysis: the size of the vehicle and the price/market position.197 However, the panel did not stop at that point, but further examined the defendant states arguments. Indonesia argued that there were four basic physical characteristics that differentiate passenger cars: passenger compartment, power plant, steering and suspension and safety features.198 After examining these factors, the panel found that the cars that were the subject of the dispute were indeed like products. Although the panels analysis seemed quite thorough, several of the alleged distinguishing factors, namely weight and height, were not examined at all without appropriate explanations from the panel. While this failure might not have been material to the outcome of the case, it illustrates that the choice of physical characteristics, in particular, can be quite an arbitrary exercise.

191. 192.

193.

194. 195. 196. 197. 198.

Indonesia Certain Measures Affecting the Automobile Industry, Panel, WT/DS54/R; WT/ DS55/R; WT/DS59/R; WT/DS64/R, 2 July 1998, at 14.166. In WTO law, apart from the Indonesia National Car case, the Gas Guzzler case featured an analysis of likeness of passenger cars. In that case, the panel applied the aim-and-effect test, and did not, as a result, apply the traditional criteria of the Border Tax Adjustments report. United States Taxes on Automobiles, Panel, supra note 28. Under the Agreement on Subsidies and Countervailing Measures, the panel was required to find whether the products displayed closely resembling characteristics. Note 46 to Article 15.(1) of the Agreement on Subsidies and Countervailing Measures, attached in Annex 1A to the WTO Agreement. Indonesia Automobile, Panel, supra note 191, at 14.110. Id. at 14.167. Id. at 14.175. Essentially, the panel focused on the price and on whether a car can be considered a luxury car. Indonesia Automobile, Panel, supra note 191, at 14.184.

404

Same Same But Different?

In EU law, the ECJ was requested to decide on the likeness of passenger cars in the Humblot case. The Court did not address the question of likeness head on, but examined first whether the progressive taxation, based on engine power, had a discriminatory of protective effect.199 Subsequently, the Court mentioned that cars could be comparable from a consumers viewpoint as regards such matters as size, comfort, actual power, maintenance costs, durability, fuel consumption and price200 without undertaking any further analysis of these factors.201 In Tarantik, the Court found that, in accordance with Humblot, price, size, comfort, performance, fuel consumption, durability, reliability and other matters were differentiating factors.202 Somewhat incongruently, the Court then only considered the difference in price between certain categories of cars203 and referred the case back to the national court without further ado.204 In the French Cars case, however, the Court was more explicit. First, it restated its finding in Tarantik, sustaining that: products such as cars are similar for the purposes of the first paragraph of Article 95 [now 90] of the Treaty if their characteristics and the needs which they serve place them in a competitive relationship and, second, that the degree of competition between two models depends on the extent to which they meet various requirements regarding price, size, comfort, performance, fuel consumption, durability, reliability and other matters.205 The Court continued: Since the tests of similarity developed by the case-law do not relate exclusively to the technical equipment of vehicles, other characteristics may also be taken into consideration. It is thus clear that vehicles of different makes, whether or

199.

200. 201.

202. 203. 204. 205.

Case 112/84, Humblot v. Directeur des Services Fiscaux, [1985] ECR 1367, at 13 and 14. The Court proceeded in a similar fashion in Feldain, in the Commission v. Greece Cars cases and in Casarin. Case 433/85, Feldain v. Directeur des Services Fiscaux, [1987] ECR 3521; case C132/88, Commission v. Greece, [1990] ECR I-1567; case C-113/94, Casarin v. Directeur Gnral des Impts, [1995] ECR I-4203; case C-375/95, Commission v. Greece, [1997] ECR I5981. Humblot, id. at 15. See also case 200/85, Commission v. Italy, [1986] ECR 3953. In that case, the Italian valueadded tax system established a higher tax rate for cars exceeding a particular cubic capacity. The Commission challenged the Italian legislation alleging that imported diesel-engined cars were discriminated against due to the more favourable treatment of domestic diesel-engined cars. The Court did not express any differentiating criteria to establish likeness, but simply asserted that the competitive relationship which must be taken into consideration in order to assess whether a protective effect exists cannot be limited to diesel-engined cars but must extend to all cars whether they are diesel- or petrol-engined. Id. at 8. Case C-421/97, Tarantik v. Directeur des Services Fiscaux, [1999] ECR I-3633, at 28. Id. at 29. Id. at 31. Commission v. France, supra note 239, at 43.

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not they are fitted with a six-speed manual gearbox or a five-speed automatic transmission, may in the eyes of the consumers, constitute similar vehicles for the purposes of the first paragraph of Article 95 of the Treaty [now 90 EC] 206 In a series of cases, the ECJ was further confronted with the question regarding of whether imported second-hand cars were similar to domestic second-hand cars.207 As the answer was quite obviously affirmative,208 the Court did not examine any differentiating factors. In sum, while EU case law has long been vague on the specific relevant criteria for distinguishing passenger cars according to their objective characteristics, the ECJ recently presented a series of factors for this analysis. In practice, however, the Court has not proceeded to a factor-by-factor analysis. In line with previous assertions, this paper advocates that examination of physical characteristics should only be held as valid evidence if it can reliably indicate existing consumer behaviour. The panel in Indonesia National Car seemed to acknowledge this necessity. Indeed, it appeared to establish a link between the physical characteristics and their impact on consumer habits. The panel found factors such as brand loyalty, brand image/reputation, status and resale value reflect, at least in part, an assessment by purchasers of the physical characteristics of the cars being purchased.209 Similarly, some of the ECJ case law could be interpreted in an equivalent fashion. The French Cars case, for example, concluded, probably as a result of similarity of characteristics, that vehicles may in the eyes of the consumers, constitute similar vehicles for the purposes of the first paragraph of Article 95 of the Treaty [now 90 EC] 210

In conclusion, from these cases it becomes clear that products, such as alcoholic beverages or passenger vehicles, display a great number of physical and objective characteristics. WTO and EU case law illustrates, this paper argues, that, first, the choice of which characteristics should be examined and, second, the degree to which the characteristics may vary before being considered as different, are used in a rather arbitrary fashion, at least to a certain extent.211

206. 207.

208. 209.

210. 211.

Id. at 44. Case C-345/93, Fazenda Publica v. Nunes Tadeu, [1995] ECR I-479; Commission v. Greece, supra note 266; case C-393/98, Ministerio Publico and Gomes Valente v. Fazenda Publica, [2001] ECR I-1327; case C-101/00, Tulliasiamies and Siilin, [2002] ECR I-7486; case C387/00, Weigel v. Finanzlandesdirektion fr Vorarlberg, [2004] ECR I-0000. It is possible that the domestic second-hand car and the imported second-hand car are not only similar but virtually identical. Indonesia Automobile, Panel, supra note 191, at 14.173 (emphasis added). As a result, the panel found that it must endeavour to find some reasonable way to assess the relative importance of the various differences in the minds of consumers and to devise sensible means to categorize passenger cars. Commission v. France, supra note 239, at 44 (emphasis added). Wille, for different reasons, also strongly objects to an excessive reliance on physical character-

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Adjudicators are granted an excessive margin of discretion that even goes beyond the unavoidable element of individual, discretionary judgment.212 It should not be that adjudicators personal inclinations decide which characteristics should be relevant, and to what extent. This judgment should be left to consumers preference in the market at issue. 5.3. Production Process Both in WTO and EU law, production processes can be seen as forming part of a wider category of objective characteristics.213 However, while in the WTO system the assessment of differences in production methods, and their relevance, is generally addressed under the rubric of physical characteristics, the ECJ usually mentions production methods as an autonomous factor. In EU law,214 manufacturing processes arguably constitute one of the autonomous criteria for establishing similarity of products. In COGIS, for example, the ECJ held that one of the determining criteria is the origin and method of manufacture of the beverages.215 Similarly, in Fruit Wine, the Court found that the fact that the products at issue were made through natural fermentation was an indication that they were similar.216 In John Walker, issued on the same day, the ECJ highlighted that fruit wine and whisky are objectively distinguishable because the former is obtained by natural fermentation and the latter by distillation.217 In Roders, the Court found that champagne and sparkling fruit wines were not made by the same process.218 Finally,
istics. Wille asks: But why does one physical characteristic determine likeness and another does not? Is the color of the alcohol most important or the distillation process? Does the type of sugar used in the process determine the likeness or is it more pertinent to know if the alcohol is usually diluted before consumption? Wille, supra note 90, p. 5. Japan, Appellate Body, supra note 15, p. 14. Japan Wine and Liqueur, Panel, supra note 43, at 5.7: ([L]ikeness of products must be examined taking into account not only objective criteria (such as composition and manufacturing processes of products) but also the more subjective consumers viewpoint ) (Emphasis added). While in EU law the production process seems not only be a separate criterion for determining whether two products are in competition with each other, it may also provide justification for a differential tax treatment between two products found to be in competition. See Demaret and Stewardson, supra note 131, at 60. COGIS, supra note 59, at 8. As a further example, in the British Wine/Beer I case, the ECJ found that the manufacturing processes for wine and for beer differed. According to the Court [w]ine is an agricultural product, which is the outcome of intensive farming methods, whereas beer is obtained by methods of industrial manufacture. Commission v. United Kingdom (Interlocutory judgment), supra note 38, at 15. Commission v. Denmark, supra note 37, at 14. John Walker, supra note 143, at 12. Roders, supra note 101, at 35. While champagne is made sparkling by a natural method involving a second alcoholic fermentation in the bottle, sparkling fruit wines require the addition of carbon dioxide a fermentation process which is not natural.

212. 213.

214.

215.

216. 217. 218.

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Advocate General Tizzanos opinion in the Ouzo case found that ouzo was produced by distillation in traditional discontinuous copper stills with a capacity of 1000 litres or less219 one element why the Advocate General considered ouzo not to be similar to the allegedly competing liqueurs. This approach taken by the ECJ seems deficient. First, the alcohol cases before the Court of Justice, and to a minor extent those before the WTOs dispute settlement bodies, demonstrate that distinctions between production processes tend to be rather arbitrary. While in the aforementioned cases the Court of Justice distinguished between production methods, it seemed to have recognised earlier in the alcohol cases of February 1980 that differences in the production process of alcoholic beverages were rather superficial.220 If each variation in the production of alcoholic beverages221 mainly concerning the steps of starch saccharification, fermentation distillation, and addition of flavourings222 were used as distinguishing criteria, many alcoholic beverages could not be considered as being in competition while in practice, consumers might actually consider them as substitutes. Second, the various steps in the production process are often not relevant when consumers consider the various end products to be substitutable. Therefore, this paper argues, as with the other factors, that differences in the production process should only be taken into account as evidence for proving unlikeness when these differences influence consumer behaviour. If the end product is considered to be substitutable from the viewpoint of the purchaser, then the manufacturing process should be of no significance for the purposes of the likeness analysis.223
219. 220. Commission v. Greece, Advocate General, supra note 19, at 92. Advocate General Reischl in Commission v. France, for example, noted: All types of spirits are however characterized, as far as consumers are concerned, by the following common characteristics: they are liquids containing alcohol obtained by distillation after previous alcoholic fermentation of raw materials which produce alcohol. Distilled spirits differ from beverages produced by simple fermentation, as for example beer and wine, by the presence of a relatively high alcohol content which reaches the limit of the alcohol content which is still suitable for human consumption. They differ from ethyl alcohol, as we have heard, by the existence of organoleptic properties valued by consumers owing to the presence of secondary substances. As this Court was told at the hearing, it is impossible for consumers to determine whether the organoleptic properties displayed by the individual spirits are attributable to the distilled raw materials or to the flavourings added during or after distillation. Commission v. France, Advocate General, supra note 58, at 381. Grossman, supra note 182, at 5: (All alcoholic beverages fall into one of the three basic categories: 1) fermented beverages which are made from grains and fruits with alcoholic strengths ranging from 7 to 14 percent; 2) distilled or spirit beverages which result from a pure distillation of fermented beverages; and 3) compounded beverages which are made by combining either a fermented beverage or spirit with flavoring substances.) Id. at 98121. Reinhard Quick and Christian Lau, Environmentally Motivated Tax Distinctions and WTO Law: The European Commissions Green Paper on Integrated Product Policy in Light of the Like Product- and PPM- Debates, Journal of International Economic Law 419, 431 (2003).

221.

222. 223.

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In WTO law, the Appellate Body seems to be moving into this direction. Previously, it did not seem that production methods could be taken into account when determining likeness to the extent that the differences in production were not reflected in varying physical characteristics of the products. Today, the Appellate Body seems more inclined to recognise the importance of production methods for determining likeness of products. In the Korea Alcoholic Beverages case, the panel seemed to examine the effects that differences in production methods had on the degree of similarity of products as judged from the consumers perspective. It found that the differences due to the filtration or aging processes of the beverages described are not so important as to render the products non-substitutable.224 Similarly, the Chile panel found post-distillation differences in production methods not to be so important as to render the products non-substitutable.225 Moreover, the ABs finding in Asbestos may, quite easily, be interpreted as opening the door to taking non-product related processes and production methods (PPMs) into account with a limit, however: PPMs matter, but only insofar as they influence consumer behaviour. In Asbestos, the Appellate Body found that the toxicity of input material appearing in the end product led to a finding of unlikeness of products, in particular because the health risks associated with the input material would influence consumers behaviour.226 This finding could, by analogy, be applied to PPMs.227 5.4. General End-uses General end-uses228 can be distinguished from the criterion of consumers tastes and habits in that they refer to the question of whether two products in general, irrespective of the consumer pattern in a given region, can fulfil the same functions. Consequently, similar general end-uses are a prerequisite for finding that consumers tastes and habits consider two products to be interchangeable. Conversely, however, two products may have common end-uses but may not be substitutable from the consumers viewpoint. This approach is
224. 225. 226. 227. Korea, Panel, supra note 35, at 10.67 (emphasis added). Chile, Panel, supra note 64, at 7.54. Asbestos, Appellate Body, supra note 16, at 122. Several scholars argue that PPMs, to the extent that they influence consumers purchasing patterns, should be relevant in the likeness analysis. Thaggert had earlier advocated that the concept of consumers tastes and habits could be interpreted as encompassing PPMs, provided that the consumers take them into account when purchasing the product. Henry L. Thaggert, A Closer Look at the Tuna/Dolphin Case: Like Products and Extrajurisdictionality in the Trade and Environment Context, in James Cameron, Paul Demaret & Damien Geradin (Eds.), Trade & The Environment: The Search For Balance, 69, 73 (1994). See also Trebilcock & Giri, supra note 18, at 57. In some decisions, end-use seems to be equated with what in this paper is understood by consumer tastes and habits.

228.

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followed in EU competition law: The criterion of intended use [is] insufficient to show whether two products are demand substitutes. Functional interchangeability may not, in [itself], provide sufficient criteria, because the responsiveness of customers to relative price changes may be determined by other considerations as well.229 Therefore, an analysis of general end-uses of products can only provide an initial, and limited, insight into the competitive relationship of products.230 If two products have only one end-use, this would be an indication that they might be substitutable from the consumers perspective. In such a case, the next analytical step would be to determine whether, in the country concerned, consumers perceive the two products in question to fulfil this end-use equally efficiently in terms of price and quality so that they can be considered as substitutes. Overlap in end-use determines to a great extent direct competitiveness or substitutability.231 When two products have more than one end-use, it must first be examined how many general end-uses of the two products overlap. However, it is not necessary that two products end-uses overlap entirely. The panel in Japan Wine and Liqueur correctly held that [i]n the view of the Panel there existed even if not necessarily in respect of all the economic uses to which the product may be put direct competition or substitutability among the various distilled liqueurs 232 In the event that products have overlapping end-uses, the second step would be to analyse how intensive the various end-uses are, and the importance of common end-uses must be compared to that of other end-uses. Common end-uses must not be negligible. The Appellate Body noted: Although we [the Appellate Body] agree that it is certainly relevant that products have similar end-uses for a small number of ... applications, or even for a given utilization, we think that a panel must also examine the other, different end-uses for products. It is only by forming a complete picture of the various end-uses of a product that a panel can assess the significance of the fact that products share a limited number of enduses.233 Nonetheless, it is not necessary that the overlap in end-uses is very substantial. A product may be employed to perform various functions and for different
229. 230. Commission Notice, supra note 31, at 35. Accordingly, this author does not share Horn and Mavroidis contention that if two products satisfy the same need in all respects, they are perfect substitutes from the consumers point of view. Horn and Mavroidis, supra note 33, at 63. (Their concept of same need seems to be equivalent to the concept of general end-use in this paper. ) Chile, Panel, supra note 64, at 7.31. Japan Wine and Liqueur, Panel, supra note 43, at 5.7 (emphasis added). Asbestos, Appellate Body, supra note 16, at 119 (footnote omitted).

231. 232. 233.

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reasons. What matters is that two products have at least one common end-use, and that at least some consumers consider the products to fulfil similar enduse(s) (although the importance of these consumers cannot be negligible). The panel in Chile correctly found that [p]roducts do not have to be substitutable for all purposes at all times to be considered competitive. It is sufficient that there is a pattern that they may be substituted for some purposes at some times by some consumers.234 While assessing the degree of substitutability between products rather than their end-uses, the panel in Korea found it not necessary that consumers would permanently change drink preferences. The willingness to occasionally substitute one product for another when there is a relatively high frequency of purchase should be sufficient.235 In EU trade law, the Court of Justices analysis is similar. In the French Spirits case, the defendant alleged that the different alcoholic drinks should be distinguished according to their different end-uses as digestives and aperitifs.236 The Court, however, did not accept that argument, finding that the products in question constitute[d] at least in certain circumstances an alternative choice for consumers.237 In Roders, nonetheless, the Court found it to be material that liqueur wines, sherry and madeira were consumed as aperitifs or as dessert wines, which distinguished them from table wines. However, the Court reached this conclusion rather in its analysis of consumer habits.238 In this regard, it should be noted that end-uses are determined not only by the strict functionality of the products, but that they can also be based on other, for example cultural, factors. The ECJ in Roders, for instance, implied that the end-use for champagne differs from that of fruit wine because the consumption of champagne is usually associated with special occasions.239 Similarly, the Advocate General in the Ouzo case found it relevant to the case that ouzo was generally consumed during the main course of the meal, while the other liqueurs were usually consumed quite apart from meals or immediately before or after them.240 In WTO law, however, the Korea panel rejected a similar argument by the defendant that different end-uses existed as a result

234. 235. 236. 237. 238. 239. 240.

Chile, Panel, supra note 64, at 7.43. Korea, Panel, supra note 35, at 10.91. Commission v. France, supra note 12, at 33 Id. at 40. In the same vein, the WTO panel in Korea rejected equivalent arguments. Korea, Panel, supra note 35, at 10.76. Roders, supra note 101, at 32 (emphasis added). Id. at 35. Commission v. Greece, Advocate General, supra note 19, at 95.

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of cultural phenomena.241 As in the Ouzo case, Korea had alleged that traditional alcoholic drinks would be served with traditional meals.242 Finding general end-uses In order to find common end-uses, the Court of Justice has sometimes resorted to very general interpretations of the concept of end-uses. In the Danish Fruit Wine case, for example, the Courts perspective was very broad. The Court found that the alcoholic drinks at issue could meet the same needs from the point of view of consumers inasmuch as they can be consumed in the same way, namely to quench thirst, as refreshments and at meals.243 In the same vein, the panel in Chile very broadly stated that distilled alcoholic beverages are used for relaxation and socialization in appropriate settings.244 Under that approach, many products would have common end-uses. In other cases, the analysis has been more nuanced. In the French Tobacco case, for example, the Court of Justice held that the dark- and light-tobacco cigarettes had the same end-use i.e., being intended for tobacco consumption in the typical form of cigarettes, that is ready-made cylinders of tobacco rolled in sheets of paper,245 while the Advocate General in Brinkmann I noted that Westpoint tobacco rolls could not be smoked directly but had first to be covered by cigarette paper. He concluded that Westpoint lacked a key characteristic of a cigarette i.e., being ready to smoke, and that it could not, therefore, serve the same need as an industrially produced cigarette.246 The Courts relatively restrictive interpretation in French Tobacco is all the more interesting, as the Advocate General had adopted a very general approach finding that both types of cigarettes serve the same need, namely satisfaction of the desire for nicotine.247 5.5. Tariff Classifications Tariff classification has somewhat regained importance after the introduction of the Harmonized System (HS) of tariff classification.248 The spread of this
241. 242. 243. Korea, Panel, supra note 35, at 10.76. Id. at 10.70 and 10.76. Commission v. Denmark, supra note 37, at 15. In EU competition law, however, the European Commission, in the field of soft drinks, rejected a market definition on the basis that all beverages have as a basic function to quench the consumers thirst. Nestl /Perrier, supra note 147, at 89. Chile, Panel, supra note 64, at 7.39. This finding was criticised by Chile, which claimed that this argument is tantamount to saying that consumers only consideration is simply to have alcohol, irrespective of the form in which it is contained. Id. at 7.36. Commission v. France, supra note 19, at 26. Case C-319/96, Brinkmann Tabakfabriken v. Skattenministeriet, [1998] ECR I-5255, at 26. Commission v. France, Advocate General, supra note 67, at 69. Choi, supra note 23, at 52.

244.

245. 246. 247. 248.

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system on a worldwide basis has, to a certain extent, harmonised national classifications. However, two major drawbacks for the use of tariff classifications in the likeness analysis under WTO law remain. First, not all products are covered by the schedules of Article II GATT, for which tariff classification is necessary. Second, many WTO members, especially lesser-developed countries, have not yet established detailed classifications systems whether or not based on the HS. In WTO law, to the extent that the focus has shifted to the substitutability of demand, tariff classification has lost most of its importance as a distinguishing criterion for the likeness analysis.249 Similarly, while it initially held tariff classifications to be an important factor,250 the Court of Justice has become more cautious.251 The Court has also rejected the use of tariff classifications on the ground that they were only concerned with external trade by the EU.252 This reasoning is not entirely convincing, as EU members are also WTO members. If this papers conclusions are correct,253 both the text of Articles III:2 GATT and 90 EC and the analysis undertaken to enquire about the competitive relationships between products are similar. Therefore, tariff classification for external trade may be equally helpful, for an analysis of intra-EU trade. This argument is even stronger after the partial harmonisation following the introduction of the HS. Overall, however, this paper agrees that tariff classifications should not play a significant role, if any, in a likeness analysis, because they fail to give guidance on actual consumer behaviour in a given market. 5.6. Channels of Distribution and Points of Sale An analysis of products channels of distribution and points of sale has been undertaken only in WTO law. This is not a traditional criterion contained in the Border Tax Adjustments report, but it was first used by the panel in Korea Alcoholic Beverages.254 The criterion examines to what degree products distribution systems display similarities. Examination has been quite detailed. In Chile, distribution and display of products within a same outlet has been analysed. The panel examined whether the products in question were put on adjoining shelves.255 Again, this criterion should not be emphasised on its own, but, rather, it may help to illustrate the degree of substitution between products as viewed from consumers perspective. The Korea panel recognised the lack of persua249. 250. 251. 252. 253. 254. 255. See, for example, Asbestos, Appellate Body, supra note 16, at 146. See, for example, Fink-Frucht, supra note 46, at 232; Rewe, supra note 29, at 12. See, for example, Commission v. Denmark, supra note 37, at 17. See, for example, Commission v. France, supra note 12, at 35. See supra, under 6. Korea, Panel, supra note 35, at 10.83. et seq.; Chile, Panel, supra note 64, at 7.55 et seq. Chile, Panel, supra note 64, at 7.57.

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sion of the criterion per se by stating that [t]here is a considerable degree of overlap between the questions of common end-uses and common channels of distribution.256 It is submitted here that rather than concerning common enduses, commonality of distribution systems may provide an element of evidence for ascertaining consumers tastes and habits. 5.7. The Particular Function of Marketing/Advertising Advertising performs an auxiliary function mainly to the process of distribution of products. In this sense, the issue of marketing is related to the previous analysis of channels and points of distribution.257 This paper stresses that the use of advertising and marketing in the determination of likeness is a two-edged sword. On the one hand, advertising might give information about the target group of the products at issue. If two products are targeted at similar groups of consumers, this may provide some evidence of competitiveness between them. The panels in Japan,258 Korea259 and Chile260 recognised this possibility.261 On the other hand, marketing may equally be an instrument to differentiate products. Often, the very purpose of marketing is to distinguish between products which have very similar characteristics and which would, in principle, likely be considered as substitutes by consumers in the absence of marketing.262 If the result of marketing campaigns was that consumers would not consider products to be substitutes, while they would be inclined to do so in the absence of such campaigns, the panel in Korea implied that the effect of the campaign should be disregarded.263 A marketing campaign may indicate whether a company attempts to differentiate its products from other products or whether it endeavours to present its products as being identical or equivalent to other products. It may therefore give insight about the strategy a company (or an industry) pursues to capture clientele in the market. It does not, however, directly reveal the competitive
256. 257. 258. 259. 260. 261. Korea, Panel, supra note 35, at 10.83. See supra, under 5.4.6. Japan, Panel, supra note 14, at 6.28. Korea, Panel, supra note 35, at 10.65. Chile, Panel, supra note 64, at 7.457.47. Similarly, in the Indonesia National Car case, the panel found that brand image/reputation of passenger vehicles might be important in the assessment made by purchasers of the physical characteristics of the cars being purchased. As a result, marketing strategies aimed at shaping this image and reputation might be important for the examination of physical characteristics. Indonesia Automobile, Panel, supra note 191, at 14.173. In this sense, Korea, Panel, supra note 35, at 10.65. Advocate General Alber highlights the same problem with regard to the advertising of cigarettes. Commission v. France, Advocate General, supra note 67, at 72. Id. at 10.65 and 10.66.

262.

263.

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relationship, which consumers perceive currently exists between the products in question. Therefore, it is submitted that marketing and advertising campaigns should largely be ignored for the purposes of determining likeness under Articles III:2 GATT and 90 EC.

6. Conclusions The prohibition of fiscal discrimination is based on similar provisions in WTO and EU law. In the application of Article III:2 GATT and Article 90 EC, respectively, WTO adjudicators and the Court of Justice follow comparable procedures. When determining the likeness of products, both WTO and EU tribunals use a number of criteria, which overlap to some extent. Overall, however, WTO adjudicators generally undertake a more detailed analysis and rely more heavily on economic factors. The basic idea pervading this paper is that any assessment of likeness should examine the economic relationship between products viewed from the consumers perspective. It is argued that such a relationship is best expressed through the degree of substitution consumers perceive to exist between products. This market-based approach seems to be covered by the criterion of consumers tastes and habits or consumer habits in WTO terminology. Recently, WTO adjudicators seem to adopt such an approach by focusing more strongly on the marketplace. In EU law, on the other hand, with some exceptions the ECJ has proven to be less inclined to rely predominantly on the economic relationship between products. While other criteria should not be taken into account as independent factors for assessing likeness, they may nonetheless provide useful guidance for determining the main criterion consumers tastes and habits. This paper examined the adjudicators use of these criteria factor-by-factor, and attempted to assess their effectiveness for the likeness determination. Given the fact that competition law undertakes equivalent attempts to ascertain substitutability between products, this paper examined some of the tools and techniques available in that field of law. Many of these techniques could prove helpful to enquire about the criterion of consumers tastes and habits in trade law. Overall, WTO adjudicators seem to accept this proposal and have incorporated some of these analytical tools into their repertoire. This is a welcome development, and gives hope that what seems to be the essence of the national treatment principle is adequately protected: Imported products, it seems, can only suffer from discrimination if consumption is diverted to domestic products.

415