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Panel Report WORLD TRADE WT/DS308/R 7 October 2005 ORGANIZATION (05-4310) Original: English MEXICO – TAX MEASURES ON SOFT DRINKS AND OTHER BEVERAGES Report of the Panel WT/DS308/R Page i TABLE OF CONTENTS Page I. INTRODUCTION ....................................................................................................................1 II. FACTUAL ASPECTS ..............................................................................................................2 A. THE MEASURES ...........................................................................................................................2 B. RELEVANT MEASURES ................................................................................................................2 C. PRODUCTS INVOLVED .................................................................................................................2 III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS.........................3 IV. ARGUMENTS OF THE PARTIES ........................................................................................5 A. REQUEST FOR PRELIMINARY RULING..........................................................................................5 B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES ................................................................5 1. Introduction...............................................................................................................................5 2. Legal argument .........................................................................................................................5 (a) The IEPS is an internal tax..........................................................................................................6 (b) The HFCS soft drink tax and distribution tax are inconsistent with GATT Article III:2, first sentence ..........................................................................................................6 (i) Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are like products...............................................................................................6 Physical characteristics.............................................................................................................................. 6 End-uses and channels of distribution....................................................................................................... 7 Consumer preferences ............................................................................................................................... 7 Tariff classification ................................................................................................................................... 7 (ii) Soft drinks and syrups sweetened with HFCS are taxed in excess of soft drinks and syrups sweetened with cane sugar ..............................................................................................7 HFCS soft drink tax................................................................................................................................... 7 Distribution tax.......................................................................................................................................... 8 (c) The IEPS is inconsistent with Article III:2, second sentence, of GATT 1994 ...........................8 (i) The HFCS soft drink tax as applied to HFCS is inconsistent with GATT Article III:2, second sentence...........................................................................................................................8 HFCS and cane sugar are directly competitive or substitutable products ................................................. 8 Physical characteristics...................................................................................................................... 9 End uses and consumer preferences .................................................................................................. 9 Channels of distribution................................................................................................................... 10 Tariff classification.......................................................................................................................... 11 Price relationships and competition in the marketplace................................................................... 11 Summary on direct competition and substitutability ....................................................................... 12 HFCS and cane sugar are not similarly taxed.......................................................................................... 12 HFCS soft drink tax is applied so as to afford protection to domestic production.................................. 12 WT/DS308/R Page ii (ii) The HFCS soft drink tax and distribution tax as applied to soft drinks and syrups is inconsistent with GATT Article III:2, second sentence.............................................................13 Soft drinks and syrups sweetened with cane sugar are directly competitive or substitutable with soft drinks and syrups sweetened with HFCS .................................................................................13 Soft drinks and syrups sweetened with HFCS and soft drinks and syrups sweetened with cane sugar are not similarly taxed ................................................................................................................... 14 The HFCS soft drink and distribution tax is applied so as to afford protection to domestic production ............................................................................................................................................... 14 (d) The HFCS soft drink tax, distribution tax and reporting requirements applied on the use of HFCS are inconsistent with GATT Article III:4 ............................................................15 (i) HFCS and cane sugar are like products...................................................................................15 (ii) IEPS is a law affecting the use of HFCS...................................................................................15 (iii) IEPS accords less favourable treatment to HFCS....................................................................16 3. Conclusion ...............................................................................................................................16 C. FIRST WRITTEN SUBMISSION OF MEXICO..................................................................................17 1. Introduction.............................................................................................................................17 2. Facts .........................................................................................................................................18 (a) The importance of the Mexican sugar industry ........................................................................18 (b) The NAFTA negotiations .........................................................................................................18 (i) The United States requests changes..........................................................................................19 (ii) Subsequent developments..........................................................................................................20 (iii) Throughout this time, the United States recognized the existence of a genuine dispute...........20 (iv) The United States' refusal to submit to dispute settlement........................................................21 (c) The decision to impose the IEPS on certain beverages ............................................................21 3. Legal arguments......................................................................................................................22 (a) This dispute arises out of a dispute under the NAFTA regarding bilateral trade in sweeteners.................................................................................................................................22 (b) Mexico requests a preliminary ruling: the Panel should decline to exercise its jurisdiction ................................................................................................................................22 (c) Request for specific recommendation.......................................................................................23 (d) The measure was not intended to afford protection to domestic production within the meaning of Article III of the GATT 1994.................................................................................24 (e) In the event of any inconsistency, the measure is justifiable under Article XX(d)...................24 (i) There was no "arbitrary or unjustifiable discrimination between countries where the same conditions prevail"...........................................................................................................27 (ii) The measure is not a "disguised restriction on international trade"........................................29 4. Conclusion ...............................................................................................................................30 D. OPENING STATEMENT OF THE UNITED STATES AT THE FIRST MEETING OF THE PANEL............30 1. Article XX(d) ...........................................................................................................................31 WT/DS308/R Page iii 2. Developing countries...............................................................................................................32
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