Distilled spirits lose on WTO appeal

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

In a ruling that probably was a surprise to some, the WTO Appellate Body upheld last December an earlier WTO panel ruling against the Philippine liquor industry. The AB recommended that the Philippines “bring its measures, found... to be inconsistent with the GATT 1994, into conformity with its obligations under that Agreement.” The US, understandably, was exultant: “This is an important victory for American distilled spirits producers and workers,” declared US Trade Representative Ron Kirk.

The WTO AB ruling was quite straightforward, focusing on the idea that “competitiveness” is a key aspect to grasping the concept of “likeness”: “While in the determination of ‘likeness’ a panel may logically start from the physical characteristics of the products, none of the criteria that a panel considers necessarily has an over-arching role in the determination of ‘likeness’ under Article III:2 of the GATT 1994. A panel examines these criteria in order to make a determination about the nature and extent of a competitive relationship between and among the products. We understand that products that have very similar physical characteristics may not be ‘like’, within the meaning of Article III:2, if their competitiveness or substitutability is low, while products that present certain physical differences may still be considered “like” if such physical differences have a limited impact on the competitive relationship between and among the products.” (see paras 119-120)

The AB finding harks back to the discussions made in EC-Asbestos that “a determination of ‘likeness’ under Article III:4 is, fundamentally, a determination about the nature and extent of a competitive relationship between and among products.” In sum, the AB seemed to have agreed with one US manufacturer’s assessment that Philippine excise laws on distilled spirits “is a textbook case of discrimination against imported products.” Or, as more diplomatically put by Ambassador Kirk: “The Philippine tax system for these products is discriminatory, plain and simple.”

The Philippine defense was spirited (no pun intended), led (as reported by other newspapers) by a host of trade law experts, including Solicitor General Jose Anselmo Cadiz and Gregory Spak of White & Case. White and Case, incidentally, is also the law firm assisting the Philippines in Fraport AG Frankfurt Airport Services Worldwide vs. Republic of the Philippines (docketed as ARB/11/12). The case, which practically was sent back to square one by the ICSID arbitral tribunal, had reportedly -- if newspaper reports are true -- already cost the government P2.65 billion in legal costs.

The Distilled Spirits Association of the Philippines (DSAP), however, still put up a valiant face, saying that the AB got the “wrong result.” The ruling, incidentally, was penned by renowned and highly respected trade law expert Peter Van den Bossche (as AB presiding member, with fellow AB judges Jennifer Hillman and Ricardo Ramirez-Hernandez -- all with advanced international law training and years of international trade practice). Anyway, the ruling stands. As Finance Assistant Secretary Maria Teresa S. Habitan said, there will be “one rate for fermented liquor such as beer and one rate for distilled spirits. The distinction on raw materials is removed.” This is seconded by Trade Secretary Greg Domingo, stating that the government will just have to “find ways to help alleviate potential negative impacts on distillers.”

However, one wonders why the tax law amendments weren’t made sooner. Timely amendments certainly could have helped the Philippines stave off a humiliating WTO loss. President Aquino already categorized the amendment of the said taxes to be a “priority measure,” with the draft bills placing emphasis on general welfare, increased revenue, and health objectives. In fact, as late as last year, reported then by BusinessWorld, the Finance department already suggested legislation adopting a simplified “unitary rate” for alcoholic products: “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.”

As it is, the Philippines now has to make the amendments within a “reasonable period of time,” which could either mean the period of time approved by the WTO Dispute Settlement Body, or as agreed by the Philippines with the winning Parties, or as determined through arbitration (which means additional legal costs for the government). Any such period should normally not exceed 15 months from the date of adoption of the AB report. If the winning Parties aren’t happy with the way implementation of the AB recommendations are being made, they could just resort to retaliation as provided for in Article 21 of the WTO Dispute Settlement Understanding.

We’ll devote further articles on this quite instructive ruling, analyzing the various issues raised by the Philippines and as addressed by the Appellate Body.