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In the 1996 World Trade Organization dispute, Japan-Taxes on Alcoholic Beverages, neither the Panel nor the Appellate Body appreciated the significance of its decision. The Panel and the Appellate Body focused solely on resolving the complaint by the United States, the European Community (EC), and Canada that the Japanese Liquor Tax Law[1] discriminated against imported liquors. In the fall of 1995, the US, the EC and Canada requested that the Dispute Settlement Body form a panel to assess whether the Japanese system of internal taxation for liquors protected shochu, a predominantly domestic product, and discriminated against other, almost exclusively imported, liquors.[2] The complainants argued that the higher tax levied on liquors other than shochu decreased the competitive opportunities of these products in violation of Japan's obligations under Article III:2, National Treatment on Internal Taxation and Regulation, of the General Agreement on Tariffs and Trade 1994 incorporated into the Agreement Establishing the World Trade Organization.[3] By October 1996, both the Panel and the Appellate Body had recommended that Japan bring the Liquor Tax Law into conformity with its obligations under Article III:2.
The most important question in the dispute was not, however, whether the Japanese Liquor Tax Law discriminated against imported liquors under Article III:2. Rather, the most important question, and the one whose implications were overlooked, was how to design a test for Article III:2 that does not encroach upon the fiscal sovereignty of the Contracting Parties to the Agreement. As the Panel in Malt Beverages stated, "[it is] imperative that...determinations [made] in the context of Article III...not unnecessarily infringe upon the regulatory authority and domestic policy options of contracting parties."[4] The Panel and the Appellate Body, however, employed a test that restricts the fiscal sovereignty of the Contracting Parties both prior to and during a dispute.[5]
The United States and Japan presented a viable alternative to the Panel's test that provides the Contracting Parties with greater flexibility and power to pursue the non-trade fiscal polices within their sovereignty. Their option, the aim-and-effect test, asks whether the purpose of the measure was to protect domestic production and whether the measure has a distorting effect on the competitive opportunities of the products. A panel must answer both questions affirmatively before finding a violation of Article III:2. As a result, governments are able to pursue non-trade policies that have no protective purpose but create unintentional protective trade effects. Not only did the Panel and the Appellate Body reject this alternative, but they also failed to discuss the serious issues underlying the tests.
This paper is an effort to recapture a lost opportunity. It addresses the issues Panel and the Appellate Body did not examine in this dispute and advocates a test for Article III:2 that preserves the fiscal sovereignty of the Contracting Parties. First, I summarize the arguments of the parties to the dispute and outline the Panel's test and the aim-and-effect test. Second, I elaborate the aim-and-effect test, discussing the rationales for the test and its viability. The section on rationales examines fiscal sovereignty generally, the ability of the aim-and-effect test to protect the fiscal sovereignty of the Contracting Parties, and the inapplicability of Article XX to this type of dispute. In the section on the mechanics of the test, I focus on the textual basis for the test, the specific inquiries into the aim and the effect of the measure, and the methodology for measuring the tax differential. Finally, in the Conclusion, I respond to potential criticisms of the aim-and-effect test.
[1] Shuzeiho (Japanese Liquor Tax Law), Law No. 6 of 1953 as amended. This law laid down a system of internal taxation applicable to all liquors, defined as domestically produced or imported beverages with greater than or equal to one degree of alcohol which are intended for consumption in Japan.
[2] See Panel Report, Japan-Taxes on Alcoholic Beverages ,WT/DS8/R, WT/DS10/R, WT/DS11/R, 11 July 1996 (96-2651), paras. 3.1-3.4, 4.1-4.181, for the parties' claims and arguments [hereinafter referred to as the Panel Report].
[3] General Agreement on Tariffs and Trade 1994, reprinted in Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts (GATT Secretariat ed., 1994)[hereinafter referred to as the GATT or the Agreement].
[4] Panel Report, United States-Measures affecting Alcoholic and Malt Beverages, DS23/R, adopted 19 June 1992, BISD 39S/209, para. 5.21 [hereinafter referred to as Malt Beverages].
[5] This test will be referred to as the Panel's test even though, as used in this paper, it includes the Appellate Body's modifications.
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