More on distilled spirits

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

In an IEL site, I came across a discussion on an 1872 report of the US Senate finance committee on the necessity of imposing higher duties for Russian hemp over Manila hemp. Claiming violation of MFN privileges arising from bilateral relations, the Russians demanded a refund on the “excess” duties paid. The Senate noted that “Russia hemp and Manila hemp are quite unlike in appearance, Russia hemp being of a dull yellowish-green color, while Manila hemp is much brighter and lighter, or almost a cream color. The latter is rather sharp and stiff to the touch, and the former comparatively soft and more yielding. Botanically they are distinct, and differ totally.”

Thus, the US Senate claimed, considering there was no “likeness” between the two hemps, the higher duties were justified. 140 years later, this same issue of “likeness” would play a crucial part in our WTO panel loss in Philippines -- Taxes on Distilled Spirits (docketed as DS396 and DS403). WTO members are prohibited from applying internal taxes on an imported product at rates higher than that applied to domestic “like products.” Clearly, “like products” is a complex term and was actually the focal point of the deliberations in the three previous WTO alcoholic beverage cases involving respondents Japan, Korea, and Chile, respectively. Philippine courts essentially recognize almost the same type of reasoning when dealing with cases that involve the “equal protection clause” of the Constitution.

The panel ruled in our case (see page 57 of the report) that relevant factors to be considered in determining “likeness” include “the product’s properties, nature and quality”; “the product’s end-uses in a given market”; “consumers’ tastes and habits, which change from country to country”; tariff classification, which, if sufficiently detailed, “can be a helpful sign of product similarity”; and “other internal regulations.” The panel also declared that its “analysis will focus on the relevant market in the present case; namely, the Philippines’ market” and kept “in mind the Appellate Body’s statement that the definition of ‘like products’ under Article III:2, first sentence, must be construed narrowly.” Finally, the panel stated that “likeness under the first sentence of Article III:2 is not limited to products that are identical. Indeed, had this sentence intended to cover only identical products, the agreement would have used the word ‘identical’, instead of using the expression ‘like products’.”

In the end, the panel was quite dismissive of Philippine arguments, finding (see page 67) that “with respect to the physical qualities and characteristics of the products, as well as with regard to their end uses, there is similarity between all the relevant imported and domestic distilled spirits, irrespective of whether they are made from the designated raw materials or from other raw materials. With respect to consumers’ tastes and habits, some elements, such as the manufacturers’ marketing campaigns, suggest similarity between all distilled spirits relevant in the present dispute.” Furthermore, “the labels of domestic distilled spirits made from designated raw materials do not suggest to the consumer that these products are different from imported spirits made from other raw materials. With respect to tariff classification, the fact that all distilled spirits at issue in this dispute, irrespective of the raw materials from which they are made, fall within the HS heading 2208 is a further indication of their similarity. Finally, domestic regulations on distilled spirits in the Philippines do not distinguish between imported and domestic spirits, nor between spirits made from the designated raw materials and those made from other raw materials.”

The panel also waived away Philippine arguments regarding “impact on competitive conditions” (page 95), saying such “are misplaced at this stage of the analysis and do not cast doubt on the Panel’s finding that the contested measures afford protection to domestic production.”

Interestingly enough, the Finance Department recently came up with suggested legislation that simplifies the excise tax structure on alcoholic products, adopting a so-called “unitary rate.” Thus, according to BusinessWorld, “Distilled spirits such as whiskey, brandy, rum, gin and vodka will be taxed according to their alcohol content under the new bill. Those that contain 45% alcohol and below will be taxed P42 per proof liter next year, increasing to P80 in 2013 and P150 the following year. Distilled spirits that have a more than 45% alcohol content will be charged P150 per proof liter next year, P233.73 in 2013 and P317.45 in 2014.” Although one wonders why, considering also the general welfare and health purposes of the amendatory draft law, as well as the P60 billion in additional income it was expected to generate, that it wasn’t effected sooner. It certainly could have helped the Philippines stave off a humiliating WTO loss. In any event, President Aquino already categorized the amendment of said taxes to be a “priority measure.”

Taking it all in, an appeal to the WTO’s Appellate Body will be a rather intriguing exercise indeed, for which a rational purpose is to be presumed.