When spirits are willing ...

is the subject of my Trade Tripper column this Friday-Saturday issue of BusinessWorld:

As mentioned last week, after the country’s historic WTO Appellate Body win in our Thai Cigarettes case, news came that the Philippines disappointingly lost in Philippines -- Taxes on Distilled Spirits (docketed as DS396 and DS403). As reported by BusinessWorld, a WTO panel, “in a confidential report circulated to the parties involved in the dispute, had ruled that the Philippines’ taxes discriminate against brands such as Jack Daniel’s and Jim Beam as well as Spain’s Brandy de Jerez, while favoring domestic producers catering to the country’s $3-billion spirits market.”

Following WTO practice, the panel ruling itself is confidential until its formal release in August. This is to “provide sufficient time for the Members to consider panel reports,” which shall be considered for adoption by the Dispute Settlement Body only after 20 days from the date of circulation to the WTO members. After which, WTO members objecting to the panel report “shall give written reasons to explain their objections” at least 10 days prior to the DSB meeting.

In any event, the reactions of the disputants were quite predictable. US Ambassador Henry K. Thomas “welcomed” the panel ruling. The Distilled Spirits Association of the Philippines (DSAP) was reported by BusinessWorld as urging the government to immediately appeal the case to the WTO’s Appellate Body. In its statement, DSAP bravely declared that “the battle isn’t over for the local distilled spirits industry ... The Philippines needs to appeal WTO’s findings because of its adverse impact on local manufacturers, allied industries, Filipino consumers and the economy in general.”

An appeal would certainly be quite interesting. There have been three (only three, although there is also the ongoing DS423, Ukraine -- Taxes on Distilled spirits, filed by Moldovia) previous liquor tax disputes that went through the gauntlet of the WTO dispute system and all three were resolved in favor of the complainants. Theoretically, stare decisis is not followed in international law. Nevertheless, recent empirical studies have disturbingly shown that complainants in WTO disputes remarkably win almost 90% of the cases that go into litigation. This is a win-rate far above that of any domestic tribunal.

In a 2010 paper by New York University’s Mathew Turk (“Why Does The Complainant Always Win At The WTO: A Reputation-Based Theory of Litigation at the World Trade Organization”), he found that “the tendency towards complainant success is also not reversed under any subset of disputes. Maton and Maton found an 81.9 percent success rate in Panel rulings, and a 78.4 percent success rate in Appellate Body rulings. xxx In summary, while statistical studies of WTO outcomes use a variety of methods, their results are all substantially the same: the complainant almost always wins. Colares’ study, which coded its data most analogously to research on civil litigation, reported win-rates approaching 90 percent. Furthermore, these win-rates did not significantly decline for any subset of complainants or substantive area of dispute. Thus, the threshold counterargument -- that there is no empirical puzzle to explain because studies use the label ‘win’ incorrectly and fail to capture the true significance of litigation outcomes should be rejected.” Significantly, the foregoing corroborates the findings of Andrew Guzman of the University of California (“The Political Economy of Litigation and Settlement at the WTO”) and Juscelino Colares of Syracuse University (“A Theory of WTO Adjudication”).

Going back to the previous liquor cases, the first dispute, Japan -- Alcoholic Beverages (DS8, 10, 11), concerned the Japanese Liquor Tax Law’s system of internal taxes. The AB agreed -- ruling, amongst others, that the panel’s finding that vodka was taxed in excess of shochu was correct. It also accepted the panel’s interpretation that Art. III:2, first sentence, requires a determination of the presence of two elements: (i) whether the taxed imported and domestic products are like; and (ii) whether the taxes applied to the imported products are in excess of those applied to the like domestic products.

The second case, Korea -- Alcoholic Beverages (DS75, 84), relates to Korea’s multi-tiered taxation regime (the Liquor Tax Law of 1949 and the Education Tax Law of 1982) on the sale of alcoholic beverages. The complaint centered on GATT Article III:2. In this case, the AB held, amongst others, that evidence of “present direct competition” and the panel’s approach of grouping the liquor products were appropriate.

Finally, Chile -- Alcoholic Beverages (DS87, 110) dealt with the “Additional Tax on Alcoholic Beverages” (“Impuesto Adicional a las bebidas Alcoholicas”), levying an excise tax on the sale and importation of alcoholic beverages. The complaint again looked at GATT Art. III:2, second sentence. The AB found that an examination of the design, architecture, and structure of Chile’s tax law tended to reveal that the application of dissimilar taxation of directly competitive or substitutable products would “afford protection to domestic production.”

A more accurate analysis of this case would have to wait for August. In the meantime, nevertheless, it still boils back to that old dictum: in vino veritas.