Punch drunk spirits

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

Last August 15, a WTO Panel finally confirmed what everybody else knew: after the country’s historic WTO Appellate Body win in our Thai Cigarettes case, the Philippines disappointingly lost in Philippines -- Taxes on Distilled Spirits (docketed as DS396 and DS403). The Panel ruled that the excise taxes on imported distilled spirits, such as Jack Daniel’s and Jim Beam, as well as Spain’s Brandy de Jerez, are discriminatorily 10 to 50 times higher than those produced in the Philippines.
United States Trade Representative Ron Kirk gleefuly announced that the "ruling demonstrates the commitment of the United States to combat trade barriers wherever they occur. [The] Panel Report confirms that the Philippines’ taxes on imported distilled spirits are discriminatory and inconsistent with WTO rules. We urge the Philippine government to comply swiftly with the Panel’s recommendations and rulings, and level the playing field for our exports immediately."

The Panel essentially found the imported spirits taxed more than domestic spirits. While the Philippines did argue that domestic distilled spirits are made from indigenous raw materials, such as cane sugar or coconut, and imported spirits are generally made from cereals or grapes, the Panel thought the difference unconvincing, and did not justify a low flat tax for the local products and higher tax rates for imported products. The products in question -- according to the panel -- are practically the same: gins, rums, and whiskies. Thus, according to the Panel, while the Philippine measure gives the appearance of neutrality, it nevertheless is discriminatory and violates the first and second sentences of GATT Article III:2.

The Distilled Spirits Association of the Philippines (DSAP) is certainly trying to put up a brave face. DSAP president Olivia Limpe-Aw has reportedly said that the Panel findings are "not yet binding" and that an appeal shall certainly be made to the WTO’s Appellate Body. For his part, House Speaker Feliciano Belmonte, Jr. was reported to have ordered all deliberations suspended on any bill seeking the amendment of the distilled spirits’ excise tax laws. This apparently upon request of the local industry and despite President Aquino categorizing the amendment of such laws as a "priority" matter.

Nevertheless, an appeal would certainly be interesting. In his 2010 paper, 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) found a WTO "tendency towards complainant success." Meanwhile, John Maton and Carolyn Maton (Independence Under Fire: Extra-legal Pressures and Coalition Building in WTO Dispute Settlement) discovered an 81.9% success rate in Panel rulings, and a 78.4% success rate in Appellate Body rulings for complainants. 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). Colares’ study reported win-rates approaching 90% for the complainants. It’s a win-rate far above that of any domestic tribunal.

More significantly, however, are the statements and admissions made by our very own legislators and government officials, which did not escape the notice of the Panel: "Philippine authorities were ‘aware’ of the WTO incompatibility of the measures as well as that some domestic legislation distinguishes between domestic (‘local’) and imported products, these constitute further evidence of the protective application of the measure" (see Panel report, page 91, para. 7.172). Thus, the Panel noted, Senator Ralph Recto [declared that it] "would be to the interest of the nation if we protect our local manufacturers". Senator Enrile [stated that the purpose of lower tax rates was] "to protect the domestic people." The Department of Finance acknowledged that the current excise tax system needed to be reformed so as "to make it consistent with the [Philippines’] commitments under the WTO." The Department of Trade and Industry declared the excise measure "inconsistent with GATT 1994 as it gives preferential treatment to domestic products produced from indigenous or locally sourced raw materials." The Panel, along with the EU in its first written submission and the US’ response to Panel questions, also noted the following admissions from the 14th Congress: HB 6079 (filed by Reps. Limkaichong. Armaiz, and Teves) -- "The bill addresses the issue of unfair competition between manufacturers of locally produced and of imported alcohol products"; SB 2980 (filed by Sen. Lacson) -- "The bill addresses the issue of unfair competition between manufacturers of locally produced and of imported alcohol products"; and SB 3190 (also by Sen. Lacson) -- "The price-based classification of these products have severely favored locally produced brands." (see Panel report, page 91, footnote 599).

All in all, this case is finely instructive on how to conduct trade policy, legislation, and litigation. Considering the huge amount of time, effort, and definitely money that will go into this appeal, presumably there is some realistic, rational, and studied purpose for it. As I’ve said and will say again: in vino veritas.