THE UNBEARABLE LIGHTNESS OF LIKENESS

7/22/2019 THE UNBEARABLE LIGHTNESS OF LIKENESS

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Same Same But Different?

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Same Same But Different? FiscalDiscrimination in WTO Law and EU Law:

What Are Like Products?By Adrian Emch*

1. Introduction

Although the extent of integration in the European Union (EU) goes muchfurther than the integration scheme of the World Trade Organization(WTO), both in the field of economic integration as well as in its extensioninto non-economic fields, the two systems have certain common features. Bothcreate areas for the exchange of goods and services beyond the boundaries of the nation-state. In the field of trade of goods, both regimes aim at abolishing non-tariff restrictions to imports (and exports). One explicit goal of both

WTO and EU law is to create a level playing field for domestically producedgoods and imported goods. Once imported goods have passed the border andlawfully 1 circulate in the country of import, they should be treated on an equalfooting as domestic products in the market. This requirement is named na-tional treatment and means, in the context of trade in goods, that nationalregulation should not intervene to create distinct conditions for imported anddomestic products. In other words, as this paper will argue on the pages thatfollow, the importing states authorities should refrain from intervening andleave the decision on whether imported and domestic goods are equivalent tothe appropriate decision-maker: the marketplace.

Provisions of both WTO and EU law guaranteeing the principle of na-tional treatment do not prescribe that the state authorities must adopt certaintypes of measures, but instead lay down rules which limit the states freedomto adopt measures. This restriction of regulatory freedom takes the form of prohibitions upon WTO and EU member states to discriminate between im-ported and domestic products by means of adopting fiscal and non-fiscal regu-lation. The principle of national treatment in the field of fiscal regulation, on

Legal Issues of Economic Integration32(4): 369415, 2005. 2005 Kluwer Law International. Printed in the Netherlands.

* Lawyer, Clifford Chance. The author thanks Miguel Rato and Cyril Ritter for their commentson earlier drafts.

1. Imports lawfully circulate in the country of import if they have passed the necessary administra-tive formalities at the border and, in the WTOs case only, if they have paid the requiredcustoms duties. They must also comply with national legislation in areas where the importing country maintains unfettered prerogatives which can in principle not be challenged under

WTO law (e.g ., national security).


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which this paper will exclusively focus, is contained in Article III:2 GATT2and Article 90 EC.3

Viewed from a broad perspective, these two articles in the GATT and inthe EC Treaty aim to prevent municipal4 tax legislation5 from discriminating between imported and domestic products, which show a sufficient degree of similarity, with the effect that domestic production receives more favourabletreatment. More specifically, this paper attempts to analyse in detailhow simi-lar two products must be in order to fall under Article III:2 GATT and Article90 EC.

Both WTO and EU law provide some, limited guidance on the relation-ship between domestic and imported goods. While the first sentence of Article

III:2 GATT requires products to be like, Article 90 EC, first paragraph,speaks of similar products. The text of Article III:2 GATT, first sentence, inthe Spanish and French versions of the GATT, which, as its English version,are equally recognised as official,6 read similar and similaire , respectively.7

In WTO law, the Working Party Report on Border Tax Adjustments 8(Border Tax Adjustments ) set out some criteria to define likeness and heldthat analysis of like or similar products must be made on a case-by-case basis.Prior to the establishment of the WTO, 9 panels generally relied quite strongly on that report. Panels frequently used the criteria contained in the report, andthey adopted a case-by-case approach so much so that the GATT case law does not appear particularly consistent. The establishment of the WTO, withits judicialization of the dispute settlement, inverted that tendency. The Ap-pellate Body the highest adjudicatory organ in the dispute settlement body (DSB) has defined the obligations of Article III:2 GATT in greater detail,and established a more coherent structure for the analysis to be undertakenunder that article. The Appellate Body (AB) has also addressed the issue of the criteria for determining whether products are like or directly competitiveor substitutable.

2. GATT stands for General Agreement on Tariffs and Trade, and is attached in Annex 1A tothe Agreement Establishing the World Trade Organization (WTO Agreement).

3. Treaty Establishing the European Community, consolidated version OJ 2002 C 325, p. 33.4. The term municipal measures refers to domestic law in a broad sense including, for the

purposes of this paper, measures adopted by the institutions of the European Union.5. This category may include constitutionally lower ranked regulations evenad hoc or informal

measures. Generally throughout this paper, the word measures will be used, but sometimes theterm legislation is meant to encompass this broader category of governmental measures.

6 . Signature Details of the WTO Agreement; Article 33 of the Vienna Convention on the Law of Treaties (VCLT), 8 I.L.M. 679 (1969). The EC Treatys versions in Spanish and French,among others, are recognised as official, as is the English version.

7. The Spanish and French versions are available at www.wto.org/spanish/docs_s/legal_s/gatt47.doc and www.wto.org/french/docs_f/legal_f/gatt47.doc.

8. Working Party Report on Border Tax Adjustments, BISD, 18th Supp. (1972).9. The WTO was created by the WTO Agreement, and became operational as from 1 January

1995.


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In EU law, there has been a flood of judgments by the European Court of Justice (ECJ or Court of Justice) dealing with Article 90 EC.10 Again, how-ever, it cannot be said that the whole body of case law is particularly consis-tent.

While the first paragraph of Article 90 EC prohibits taxation in excess of that imposed on similar domestic products, the second paragraph of Article90 EC only mentions other products without further specification. ECJ caselaw has interpreted the second paragraph of Article 90 EC as meaning com-peting products similar to the notion of directly competitive or substitut-able products of GATT Article III:2, second sentence.11 Strongly resembling the ABs approach in the WTO system, the ECJ has developed two separate

tests under Article 90 EC. Under the analysis of similarity, the Court pursuesan examination equivalent to that of the WTO body under the first sentenceof Article III:2 GATT. The second paragraph of Article 90 EC is interpretedin an equivalent fashion to mean products in competition.12

WTO and EU adjudicators have used multiple factors to ascertain whethertwo products can be considered as like, similar or competitive. This papersargument is that a market-based approach should be taken as the methodology to assess likeness,13 and that only the criterion of consumers tastes andhabits should be considered. These suggestions will be discussed in the twofollowing sections. The central issue ofhow these tastes and habits are investi-gated and measured will follow. Finally, the benefits and drawbacks of othercriteria used by adjudicators will be subject to analysis.

2. Focus on Marketplace

This paper argues, first, that the economic relationships between productsshould not only be a fundamental factor but should be the exclusive or, at

10. According to Demaret, more than 200 judgments have been issued by the ECJ.See PaulDemaret, The Non-Discrimination Principle and the Removal of Fiscal Barriers to Intra-Commu-nity Trade, in Cottier et al. (Ed.), Regulatory Barriers and the Principle of Non-Discrimination inWorld Trade Law, p. 172.

11. See Pieter Jan Kuyper, Booze and Fast Cars: Tax Discrimination Under GATT and the EC,129, 140 LIEI (1996).

12. Despite having clarified the meaning of the second paragraph of Article 90 EC and having established a two-test approach, the Court of Justice frequently fails to state whether it analysesa case under the first or the second paragraph.See , for example, case 168/78, Commissionv .France , [1980] ECR 347, at 39; and case 169/78, Commissionv . Italy , [1980] ECR 385, at 33.By avoiding a ruling on that question, the Court is, however, compelled to prove not only thatthe products in question are, at least, in competition with each other and that taxation isexcessive, but also that the tax measure affords protection to the domestic industry.

13. For the sake of simplicity, the term likeness will cover analyses of like, similar and directly competitive or substitutable products.


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least, decisive factor in the likeness analysis. Second, it is argued here that theexclusive focus for analyzing these economic relationships should lie on thedemand side. As a result, an adjudicators main investigation should focus onthe criterion of consumers tastes and habits which responds to both theseconcerns.

2.1. Focus on Economic Factors

Articles III:2 GATT and 90 EC feature a clear-cut prohibition of discrimina-tion between imported and domestic products. They establish a level playing field for imports and domestic produce. A level playing field for products must

focus on economic conditions in the market . The goal for shipping products toother countries is to sell them in their markets. Thus, the prohibition of discrimination ensures that products enjoy equality of conditions in the mar-ket whatever their origin. In WTO law, this focus on the market has beenrecognised in the Japan Alcoholic Beverages case. The panel in that case statedthat the appropriate test to define whether two products are like or directly competitive or substitutable is the market place.14 The Appellate Body en-dorsed this view in Japan with regard to Article III:215 and in EC Asbestos

with regard to Article III:4.16 In particular, the wording in EC Asbestosseemsunequivocal. A concurring opinion by a member of the Appellate Body in Asbestosconfirms that the Appellate Body relies heavily on economic factors inthe likeness determination. The opinion reveals certain Appellate Body mem-

bers conception of the fundamental, perhaps decisive, role of economiccompetitive relationships in the determination of the likeness of productsunder Article III:4.17

In the EU, this focus on the market has been less explicit. However, someof the ECJs case law can be seen as moving into that direction. In the FrenchSpirits case, for example, the Court of Justice held that economic analysis wasimportant declaring that [i]t will be necessary to examine within this frame-

14. Japan Taxes on Alcoholic Beverages , Panel Report, WT/DS8/R; WT/DS10/R; WT/DS11/R,11 July 1996, at 6.22.

15. Japan Taxes on Alcoholic Beverages , Appellate Body Report, WT/DS8/AB/R; WT/DS10/AB/R; WT/DS11/AB/R, 4 October 1996, p. 16: ([T]he Panel emphasized the need to look notonly at such matters as physical characteristics, common end-uses, and tariff classifications, butalso at the market place. This seems appropriate. The GATT 1994 is a commercial agree-ment, and the WTO is concerned, after all, with markets.)

16. European Communities Measures Affecting Asbestos and Asbestos-Containing Products, Appellate Body Report, WT/DS135/AB/R, 12 March 2001 ( Asbestos ), at 103. See , also, Rob-ert E. Hudec, Like Products: The Differences in Meaning in GATT Articles I and II, Cottieret Al. (Ed.) Regulatory Barriers and the Principle of Non-Discrimination in World Trade Law (2000), at 104: (Since GATT is a commercial agreement, it seems reasonable to start with theassumption that likeness is (or should be) a commercial concept)

17. Asbestos , Appellate Body, supra note 16, at 153.


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work the economic relationships between the products concerned.18 However,the ECJ has not yet stated with the same conviction as the Appellate Body thatthe focus should predominantly, if not exclusively, lie on the marketplace.19

This paper further proposes that a market-based analysis should be fol-lowed to the same extent under both the first and the second sentences of

Articles III:2 GATT and 90 EC. The analytical tools for the economic tests, with their focus on the marketplace, should be the same for both sentences.The only difference between the two sentences, in both articles, should be thedegreeof economic relationship required. This seems to be the approach takenby the panel in Japan, which undertook the same analysis for both like anddirectly competitive or substitutable products.20 The Appellate Body in Ja-

pan, nevertheless, accepted the focus on the marketplace in its analysis of directly competitive and substitutable products,21 although it did not excludethat its reasoning also applied to the first sentence of Article III:2 GATT.

A corollary of the finding that the market-based approach should be pre-dominant, if not exclusive, is that other factors, such as physical characteristics,should only provide subsidiary means in a likeness analysis. This is not to say,however, that other factors cannot be taken into account. Simply, while they should not have authoritative value on their own, other factors could be indi-cators for the economic relationships in the marketplace. Products with iden-tical physical characteristics, for example, are likely to have a very close eco-nomic relationship.

2.2. Focus on Demand Side

The marketplace is where buyers and sellers meet.22 Conditions in the market-place may be analysed both by looking at the demand side and at the supply side. In the context of Article III:2 GATT and Article 90 EC, however, theexclusive focus should lie on the demand side. The basic reason for this lies inthe fact that these articles establish a level playing field for products . The supply side, i.e., the products, is therefore given as a constant. Thus, the effect of theinternal tax on the givenproducts must be assessed with regard to the variable:demand.

18. Commissionv . France , supra note 12, at 13.

19. Most recently, several Advocates General in fact recommended that the ECJ rely on thecriterion of objective characteristics. Opinion of the Advocate General, case C-302/00,Com-missionv. France , [2002] ECR I-2055, at 72, in fine ; Opinion of the Advocate General, case C-475/01, Commissionv . Greece , [2004] ECR I-0000, at 89.

20. Japan, Panel, supra note 14, at 6.22.21. Japan, Appellate Body, supra note 15, p. 16.22. Korea Taxes on Alcoholic Beverages , Appellate Body Report, WT/DS75/AB/R; WT/DS84/AB/

R, 18 January 1999, at 114: (The context of the competitive relationship is necessarily themarket place since it is the forum where consumers choose between different products.)


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Supply-side considerations, in a strict sense, are not warranted for thefollowing reasons. First, the text of the GATT does not seem to permit a contrary viewpoint. Second, the rationale for considering the supply side incompetition law is not present in trade law. Third, practical matters speak against such considerations.

2.2.1. Lack of Textual Basis Chois arguments in favour of supply-side considerations are based, in part, onthe wording of Note to Ad Article III:2. Choi finds, with the help of dictionar-ies, that the word competitive implies that producers perspective has to betaken into account. According to that author, substitutable suggests a per-

spective from the consumers viewpoint, and competitive makes sense if viewed from the suppliers angle.23 The Appellate Body, however, rejected thisargument in Cotton Yarn from Pakistan, where it found that it had previously used the terms directly competitive and directly substitutable withoutimplying any distinction between them in assessing the competitive relation-ship between products.24

Choi maintains that Article III:2 GATT may be concerned with the effectson foreign producers .25 He argues that, under certain circumstances, high sup-ply-side substitutability could be invoked to determine the overall relationshipbetween the products as being not like or directly competitive or substitut-able.26 However, this finding does not seem accurate. First, such a finding cannot be supported by the text of Articles III:2 GATT and 90 EC. Admit-tedly, Articles III:2 GATT and 90 EC do not state from whose viewpoint, i.e.,buyer or seller, the assessment should be made. Nonetheless, unlike GATSnon-discrimination articles,27 they do not mention producers, but only man-date that products be alike. This finding seems to be confirmed by WTO/GATT case law. The panel in the Gas Guzzlercase, for example, noted:

The Panel () observed that Article III prescribes in general the treat-ment to be accorded to imported products in relation to domestic prod-ucts. In particular, Article III:1, which sets out the principle underlying

23. Won-Mog Choi, Like Products in International Trade Law Towards a Consistent GATT/ WTO Jurisprudence , Oxford University Press (2003), at 36et seq .

24. United States Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan, AppellateBody Report, WT/DS192/AB/R, 8 October 2001, at 94.

25. Choi states that the primary focus of [GATTs] non-discrimination provisions is on the com-petitive relationship between producersof the products. Choi, supra note 23, at 35 (emphasisin original) (footnote omitted).

26. Id. at 45.27. GATS Article XVIII on national treatment, for example reads: [E]ach Member shall accord to

services and service suppliers of any other Member, in respect of all measures affecting thesupply of services, treatment no less favourable than that it accords to its own like services andservice suppliers (emphasis added).


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Article III, refers to treatment resulting from measures, applied to prod-ucts. Article III:4 refers only to laws, regulations and requirements affect-ing the internal sale, offering for sale, purchase, transportation, distribu-tion or use of products. The Panel noted that these activities relate to theproduct as a product , from its introduction into the market to its finalconsumption. They do not relate directly to the producer. The Panelfurther noted that a similar principle underlies the treatment of taxesunder Art. III:2.28

Second, discrimination against imported products does not only affect foreignproducers but also importers from the country of import.

The same focus on products seems to exist in the EU, although case law isless explicit. In Kortmann, the ECJ implicitly found that Article 90 EC isconcerned with products, not with producers.29

2.2.2. Competition Law Generally, competition law takes into account both demand-side and supply-side substitutability. However, competition law primarily focuses on demand.In U.S. competition law, and to a somewhat lesser extent in EU competitionlaw, only demand-side considerations are taken into account for the purposesof defining the relevant market. Supply-side considerations are addressed notat the stage of the definition of the relevant market per se . Rather, supply-sidesubstitutability and potential competition30 are dealt with in the inquiry of dominance over, or unilateral effects in, the already defined relevant market:31

28. United States Taxes on Automobiles , Panel Report, DS31/R, 29 September 1994, at 5.52(emphasis in original).

29. In Kortmann, the Court rejected arguments that an internal tax would place a higher burden onforeign undertakings, which sold smaller amounts of products on the domestic markets. TheCourt found that Article 95 [now 90 EC] is complied with where a tax of the same amountaffects the cost prices of different undertakings unequally by reason of particular features of their economic structure. It is sufficient that the internal tax applies in accordance with thesame criteria, objectively justified by the purpose for which the tax was introduced, to domesticproducts and imported products so that it does not result in the imported products bearing a heavier charge than that borne by the similar domestic product. Case 32/80,Criminal Proceed-ings against Kortmann, [1981] ECR 251, at 28. Also, in Rewe , the ECJ found that the analysisof products also must focus, inter alia , on whether they meet the sameneeds from the point of view of the consumers . Case 45/75, Rewe Zentralev . Hauptzollamt Landau/Pfalz , [1976] ECR 181, at 12 (emphasis added).

30. Potential competition differs from supply-side substitutability in that market entry would bemore costly and take more time. In US terminology, these concepts correspond to the notionsof uncommitted entry and committed entry. U.S. Department of Justice & Federal TradeCommission, Horizontal Merger Guidelines, infra note 32, at 1.0 and 3.0.

31. Commission Notice on the definition of relevant market for purposes of Community competi-tion law, OJ 1997 C 372, pg. 3, at 1314 and 23.


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Market definition focuses solely on demand substitution factors i.e.,possible consumer responses. Supply substitution factors i.e ., possibleproduction responses are considered elsewhere in the (HorizontalMerger) Guidelines in the identification of firms that participate in therelevant market and the analysis of entry.32

In other words, demand-side substitutability determines the degree of com-petitive relationship existing between the products, while supply-side substitut-ability is mainly concerned with the exercise of market power on the definedmarket.33

2.2.3. Practical Reasons Apart from the theoretical perspective, Chois proposals seem unrealistic inpractical terms. In the first place, much of the information that Choi requiresto develop his model of supply-side substitution will not be available to theparties to a dispute. Panels already have great difficulties in gathering informa-tion relating to demand . Furthermore, sending questionnaires to foreign pro-ducers is likely to prove less reliable than consumer surveys. Foreign producersof imported goods may be more biased than domestic consumers as theirinterest in the resolution of a case is often more articulated. In any event,although this paper favours a more economics-based approach to internationaltrade law, Chois proposals are overly complicated for the decision-making capabilities of WTO panels and Appellate Body as well as the EU courts.

2.3. Rejection of Future Competition

At the outset, the notion of potential competition and that of future compe-tition must be differentiated. Under competition law, the concept of poten-tial competition includes analysis of the question of whether new entry, by existing producers or newcomers, is likely to occur in the medium term in theevent of a small non-transitory increase in price. The analysis examines thecapability of suppliers to switch production, from product A to product B, inthe medium term without incurring excessive switching costs.34 The concept

32. U.S. Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines,available at http://www.usdoj.gov/atr/public/guidelines/horiz_book/toc.html (last visited on 9May 2005), at 1.0.

33. For similar reasons, Horn and Mavroidis approach regarding supply-side substitutability isinadequate. Their analysis relies on the protective effect and on the harm caused by discrimi-natory taxation. Henrik Horn and Petros C. Mavroidis, Still Hazy after all These Years: The Interpretation of National Treatment in the GATT/WTO Case-law on Tax Discrimination, 39, 61Eur. J. Intl L. (2004). However, this author takes the view that, like the analysis of the exerciseof market power in competition law, examination of the effects of protection and/or discrimi-nation is a different step, which should be undertaken after the market has been defined.

34. For a more elaborate delimitation of the concept of potential competition and potential


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of future competition, however, focuses on the likely evolution ofdemand even if supply remains constant.

Under both WTO and EU law, existing case law seems to promote theconcept of future competition, at least to a certain extent. Even though itspeaks of potential rather than future competition, the Appellate Body en-dorsed the panels look into the future in the Korea case.35 The Appellate Body found:

The context of the competitive relationship is necessarily the marketplace since it is the forum where consumers choose between differentproducts. Competition in the market place is a dynamic, evolving pro-

cess. Accordingly, the wording of the term directly competitive or sub-stitutable implies that the competitive relationship between products isnot to be analyzed exclusively by reference to current consumer prefer-ences. In our view, the word substitutable indicates that the requisiterelationship may exist between products that are not, at a given moment,considered by consumers to be substitutes but which are, nonetheless,capable of being substituted for one another.36

The ECJ may be interpreted as accepting a look into the future in assessing likeness of products in the DanishFruit Wine case. The Court held:

competitor, see European Commission, DG COMP, Glossary of Terms Used in EU CompetitionPolicy , http://europa.eu.int/comm/competition/publications/glossary_en.pdf, (last visited on 9May 2005), at 37.

35. Korea Taxes on Alcoholic Beverages , Panel Report, WT/DS75/R; WT/DS84/R, 17 September1998, at 10.4710.49: (Another question that has arisen is the temporal nature of the assess-ment of competition. All parties agree that the Panel should look at both actual and potentialcompetition. However, Korea argues that potential competition does not include future com-petition. They argue that at most, the Panel must make a but for decision. That is, but forthe taxes would the products be directly competitive or substitutable at the present moment.() Koreas arguments in this regard are not persuasive. We, indeed, are not in the business of speculating on future behaviour. However, we do not agree that any assessment of potentialcompetition with a temporal aspect is speculation. It depends on the evidence in a particularcase. Panels should look at evidence of trends and changes in consumption patterns and makean assessment as to whether such trends and patterns lead to the conclusion that the productsin question are either directly competitive now or can reasonably be expected to becomedirectly competitive in the near future. It is not evident why such an assessment is any morespeculative in nature than the but for analysis itself. Such an analysis also requires making anassessment about what would happen in the theoretical case of the tax differentials being removed. In our view, the approach suggested by Korea is too static. It would be a profoundly troubling development in GATT/WTO jurisprudence if Members were forced to return todispute settlement on the same laws over and over only because the market in question had notyet changed enough to justify a finding at a particular moment.)

36. Korea , Appellate Body, supra note 22, at 114 (emphasis in original).


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The question whether they [imported and domestic products] meet thesame needs must be assessed on the basisnot of existing consumer habits but of the prospective development of those habits and essentially, on thebasis of objective characteristics which ensure that a product is capable of meeting the same needs as another product form the point of view of certain categories of consumers.37

In the British Wine/Beer I case, the Court ruled that for the determination of a competitive relationship under Article 90 EC, second paragraph:

it is necessary to consider not only the present state of the market but

also the possibilities for development within the context of free move-ment of goods at the Community level and further potential for thesubstitution of products for one another which may be revealed by inten-sification of trade 38

The concept of future competition has also received some support among scholars. Choi, for example, understands future competition to refer to thequestion of what would happen, in a designated future time frame, to currentdemand substitution if the contested tax measures were removed.39 Choi cau-tiously favours such an approach,40 since he finds that the future competitionanalysis might prove useful in product sectors with short life cycles.41 Hefurther argues that a future competition examination would have additionalpractical advantages. Choi seems to suggest that reasons of proceduraleconomy support the adequacy of the future competition test.42

The concept of future competition, however, does not seem appropriate.First, the corollary of the finding that consumer habits change in time andspace43 does not only imply that each geographic market must be analysed

37. Case 106/84, Commissionv. Denmark , [1986] ECR 833, at 15 (emphasis added).38. Case 170/78, Commissionv. United Kingdom, [1980] ECR 417 (Interlocutory judgment), at 6.39. Choi, supra note 23, at 75.40. One could question whether it is desirable for international tribunals to intervene and issue

orders about future relationships between products, about which it is only possible to specu-late. Choi, supra note 23, at 76. This should not be to argue, however, that any futurecompetitiveness or substitution aspect should be excluded from the consideration of likeness.() Examination of future substitution or competition should proceed only in order to con-firm the validity of the contemporary or potentiality analysis, or to complement it.Id. at 77(emphasis in original).

41. Choi speaks of high-tech, short shelf-life product sectors, such as semiconductors, in whichcurrent competitive relationships between products may predictably be transitory. Choi,supra note 23, at 77.

42. Id. at 78.43. Both the Court of Justice and the GATT panel in Japan Wine and Liqueur recognized that

consumer habits are variable in time and space Commissionv. United Kingdom (Interlocutory judgment), supra note 38, at 13; Japan Customs Duties, Taxes and Labeling on Imported Wines


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separately,44 a view Choi subscribes to, but also that two moments in timemust be subject to separate analyses. In other words, at each point in time,consumers likelihood of switching must be newly established. This approachhas the advantage, moreover, to be consistent with the market definitionanalysis under competition law. InCoca-Cola , the EUs Court of First Instanceheld:

Moreover, in the course of any decision applying Article 86 of theTreaty [on abuse of dominant position], the Commission must define the relevant market again and make a fresh analysis of the conditions of competition which will not necessarily be based on the same consider-

ations as those underlying the previous finding of a dominant position.45

The rejection of the future competition approach, however, does not entailthat it is necessary that the products in question compete in the present.Simply, it should be examined whether products would be in competition butfor the existence of the governmental tax measures. The relevant question is

whether these products would be in competition if the tax measures had neverbeen adopted. As to whether products will, in the future, be in competitionafter the measures are removed is a different question.46

Second, matters of convenience, as proposed by Choi, cannot overrideobligations in the text of the law. Third, this paper argues that a prospectiveanalysis under future competition is not only conceptually erroneous, butthat it should also be discarded to ensure legal certainty.

3. Consumers Tastes and Habits

3.1. Consumers Tastes and Habits as a Criterion

This paper argues that the only reliable method to ascertain consumers tastesand habits is to measure their purchases. As a result, the criterion of consum-ers tastes and habits responds directly to the two aforementioned require-ments that the relationship between products be economicand that it bedetermined by demand .

and Alcoholic Beverages , Panel Report, L/621634S/83, 10 November 1987, at 5.7 ( Japan Taxes on Wine and Liqueur ).

44. See infra , under 4.8.45. Joined cases T-125/97 and T-127/97 , Coca-Colav . Commission, [2000] ECR II-1733, at 82

(emphasis added).46. Yet another question is whether the competitive relationship between two products is not

merely fortuitous, but lasting, i.e. the competitive relationship must be stable and consistentover a certain period of time. Case 2667,Fink-Fruchtv. Hauptzollamt Muenchen-Landsberger-strasse , [1968] English Special Edition 223, p. 232.


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GATT and WTO tribunals have recognised the usefulness of considering the products end-uses in a given market and consumers tastes and habits inthe likeness determination.47 These two concepts clearly focus on thebehaviour on the demand side and must be seen as closely interrelated with thequestion of demand-side substitutability. The predominance of the consumerperspective in WTO law was recently affirmed in the Asbestoscase. The Appel-late Body found that health risks inherent in the products at issue might havean effect on consumers habits.48 The underlying rationale was that a healthrisk associated with one product would cause consumers to consider it unlikefrom an otherwise identical product. Accordingly, the Appellate Body foundthe evidence to be insufficient to demonstrate that the products in question

were like.49

The ECJ adopted a market-based approach by examining whether products were capable of fulfilling the same needs from the point of view of the con-sumers50 and by examining consumer habits.51

3.2. Problems with Consumers Tastes and Habits

The ECJ recognised early the possibility of distortion of consumer habits as a result of the tax measures in place. The Court of Justice feared that giving

weight to existing consumer habits would lead to their entrenchment and,thus, to protection of national preferences. In the British Wine/Beer Icase, theCourt noted:

For the purpose of measuring the possible degree of substitution, it isimpossible to restrict oneself to consumer habits in a Member state or ina given region. In fact, those habits, which are essentially variable in timeand space, cannot be considered to be a fixed rule; the tax policy of a Member state must not therefore crystallize given consumer habits so asto consolidate an advantage acquired by national industries concerned tocomply with them.52

This anxiety has been echoed in GATT and WTO case law in virtually iden-tical words for example in Japan Wine and Liqueur .53

47. See Border Tax Adjustments , supra note 8; and, for example, Canada Periodicals , AppellateBody Report, WT/DS31/AB/R, 30 June 1997, at 101102.

48. Asbestos , Appellate Body, supra note 16, at 122.49. Id. at 126 and 131. See concurring opinion by one of the Appellate Bodys members, finding

that the health risks do indeed make products unlike . Id. at 152 and 153.50. Rewe , supra note 29, at 12.51. See , for example, Commissionv. United Kingdom(Interlocutory judgment), supra note 38, at

14.52. Id. at 13.53. Japan Taxes on Wine and Liqueur , Panel, supra note 43, at 5.7.


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The solution to this problem is to develop a method for assessing hypo-thetical consumer habits in the absence of the tax measure. This is the but forapproach alleged, among others, by Korea in theKorea Alcoholic Beverages case.54 The but for approach does not only cover the hypothetical situation

where no tax differential exists between the products in question, but shouldalso presume that no such differential has ever existed. This requirement isnecessary because the consumer habits might be significantly entrenched, andonly slowly follow changes in prices of the products (as a result of the elimina-tion of tax differentials). As the Appellate Body found, this is particularly relevant for experience goods:

We note, however, that actual consumer demand may be influenced by measures other than internal taxation. Thus, demand may be influencedby, inter alia , earlier protectionist taxation, previous import prohibitionsor quantitative restrictions. Latent demand can be a particular problemin the case of experience goods, such as food and beverages, whichconsumers tend to purchase because they are familiar with them and with

which consumers experiment only reluctantly.55

Presumably because the Appellate Body is sceptical whether the but for ap-proach works in practice, it stated that elasticity of demand cannot be the decisive criterion to establish likeness.56

However, it would be an erroneous approach to disregard the criterion of consumer habits altogether, as was done by the ECJ in the FrenchSpirits case.57 It would also be inappropriate to replace the criterion with a uniformstandard of consumer habits, as suggested by Advocate General Reischl in thesame case:

Whilst Article 95 [now 90 EC] prohibits the national legislature frompursuing extra-fiscal objectives in the taxation of foreign goods it wouldcertainly be easy for the Member States otherwise to justify different tax treatment of imported products by reference to the domestic economicstructure different from the country of origin or to different consumerbehaviour. To recognize such objections would inevitably bring about

54. Seecase 319/81, Commissionv. Italy , [1983] ECR 601, at 16: (For that purpose it is necessary to take into consideration the potential market of the products in question in the absence of protectionist measures and to ignore comparisons of consumption and import figures.) (Em-phasis added.)

55. Korea , Appellate Body, supra note 22, at 123 (references omitted).56. Japan, Appellate Body, supra note 15, p. 16.57. The Court found that consumer habits which also differ from region to region and even

according to social environment, so that they cannot supply appropriate differentiating criteria for the purpose of Article 95 [now 90 EC]. Commissionv . France , supra note 12, at 37.


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the danger that nine [number of Member States at that time] differentdefinitions of similarity would in fact result and that as a result of this theprovision would be deprived of its scope. Similarity must therefore beuniformly defined () [T]he concept of similar products must be given a uniform interpretation, without in so doing taking into consideration na-tional habits .58

This approach was explicitly accepted by the ECJ for example inCOGIS .59Such an approach is based on the assumption that, in the absence of distorting tax measures, consumer habits do not vary in different regions within the EU.However, this paper takes the view that tastes of consumers may vary, inde-

pendent of the fiscal regime, from country to country.60

Choi finds, correctly,that different consumer habits are not necessarily a consequence of regulatory intervention.61

4. Methodology for Assessing Consumers Tastes and Habits

The degree of demand-side substitutability, in essence, unveils the relationshippurchasers find to exist between two competing products. The most effectiveindicator of the degree of demand-side substitutability iselasticity of demand .There are, however, other methods for assessing demand-side substitutability.Competition law envisages the utilisation of various quantitative methods todefine economic relationships between products.62

4.1. Use of Competition Law Tools

Competition law has long dealt with economic relationships between products in particular, in the analysis of the relevant product market. Such an analysisis similar to that proposed for trade law.

The relationship between competition and trade law has been the object of proceedings before WTO panels and the Court of Justice. In Korea Alcoholic Beverages , the question regarding the relationship between trade law and com-

58. Opinion of the Advocate General, case 168/78,Commissionv. France , [1980] ECR 347, at 376and 382 (emphasis added).

59. Case 216/81, COGIS v. Amministrazione delle Finanze dello Stato, [1982] ECR 2701, at 8:(With regard to spirits for human consumption it should be remembered whether, having regard to distinguishing criteria such as the origin and method of manufacture, their possibleapplication and the habits of consumers throughout the Community as a whole , the productsdisplay a sufficient degree of similarity.) (Emphasis added).

60. In fact, tastes vary from consumer to consumer.61. Choi, supra note 23, at 25. Choi gives the example that it is not higher taxation on beef, which

crystallises Hindus preference for pork.62. See , for example, Commission Notice, supra note 31, at 39.


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petition law was raised before the panel. The panel noted that while thespecifics of the interaction between trade and competition law are still being developed, we concur that the market definitions need not be the same.63 InChile Alcoholic Beverages , the panel indirectly utilised competition law. Priorto the proceedings under WTO law, the Chilean competition authorities hadmade a finding regarding the relevant product market in a merger case. Thepanel found it to be logical that competitive conditions sufficient for defining an appropriate market with respect to anti-trust analysis woulda fortiori sufficefor an Article III analysis.64 Thus the Panel appeared to have taken this as a piece of evidence to determine likeness under Article III:2 GATT, secondparagraph.65

The ECJ, however, has been more reluctant regarding this issue. While, in Aquavit , the ECJ was confronted with the defendants argument that marketdefinition according to competition rule should be undertaken, it did not reply to that claim.66 In the French Tobaccocase, the Advocate General found thatthe defendants assessment of light-tobacco and dark-tobacco cigarettes forcompetition-law purposes can only be of limited importance. Although com-petition decisions can contain arguments that are also relevant in a tax context,that is not necessarily true of the findings made. Each area of law is subject toits own rules, the application of which must be examined separately.67 None-theless, in a case regarding the imposition of a sales tax on medicinal prod-ucts,68 the Court of Justice followed the defendants view finding that itsarguments were in line with EU competition law.69

The reluctance to utilise certain techniques used in competition law 70

63. Korea , Panel, supra note 35, at 10.81: (Trade law generally, and Article III in particular,focuses on the promotion of economic opportunities for importers through the elimination of discriminatory governmental measures. Antitrust law generally focuses on firms practices orstructural modifications which may prevent or restrain or eliminate competition. It is notillogical that markets be defined more broadly when implementing laws primarily designed toprotect competitive opportunities than when implementing laws designed to protect actualmechanisms of competition. In our view, it can thus be appropriate to utilize a broader conceptof markets with respect to Article III:2, second sentence, than is used in antitrust law.)

64. Chile Alcoholic Beverages , Panel Report, WT/DS87/R; WT/DS110/R, 15 June 1999, at 7.87.65. Id. at 7.87.66. Case 171/78, Commissionv. Denmark , [1980] ECR 447, at 28.67. Opinion of the Advocate General, case C-302/00,Commissionv . France , [2002] ECR I-2055,

at 63 (footnotes omitted). A very generous reading of this statement would not conflict withthe findings of this paper. See infra , under 4.9.

68. Although the case was based on a Directive instead of Article 90 EC, this judgment may nonetheless be relevant to an analysis under Article 90 EC as the Court appears to have reliedon the case law on Article 90 EC.See , also, Opinion of the Advocate General, case C-481/98,Commissionv . France , [2001] ECR I-3369, at 36.

69. Case C-481/98, Commissionv. France , [2001] ECR I-3369, at 29.70. Michael J. Trebilcock and Shiva K. Giri,The National Treatment Principle in International

Trade Law (2003), available at www.law.berkeley.edu/cenpro/ils/conference/Trebilcock%20paper.pdf, last visited on 28 April 2005, at 60.


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some WTO decisions apart does not seem justified. The following pagesdemonstrate that such techniques could equally be applied in trade law.

4.2. Cross-price Elasticity

Substitutability between two products is concerned with the degree of con-sumer switching between them. Price elasticity estimates the degree of switch-ing between products. The relevant method to measure elasticity, for the pur-poses of the likeness analysis, is cross-price elasticity. Cross-price elasticity of demand refers to the percentage change in quantity demanded for a good thatresults from a one percent increase in the price of a second good.71 Own-price

elasticity cannot provide the same information, as it examines the degree of switching from a given product to all possible substitutes.In WTO law, panels and the Appellate Body have recognised the useful-

ness of an analysis based on elasticity of demand. In Japan Alcoholic Bever-ages , the panel noted that [u]nder national antitrust and trade law regimes, theextent to which products directly compete is measured by the elasticity of substitution.72 The ECJ, however, has not directly ruled on the use of demandelasticity as evidence of the competitive relationship between products. Asearly as in Aquavit , the Danish government argued that cross-elasticity shouldbe taken into account, and proposed that the rules of competition law shouldbe used to delimit the relevant product market.73 The Court of Justice, how-ever, failed to reply to these arguments. Similarly, in the BelgianWine/Beer

case, Advocate General Vilaa argued that cross-elasticity of demand could beused as evidence.74 Again, the Court did not explicitly take up the argument.It is difficult to establish at which threshold of cross-price elasticity prod-

ucts should be considered as being like, similar or directly competitive orsubstitutable. The Appellate Body inCanada Periodicals stated that perfectsubstitutability was not necessary for a finding of a competitive relationshipunder Article III:2, second sentence.75 The panel in Chile was somewhat moreelaborate, finding that an elasticity of 0.26 was low.76 The panel further noted:

A high coefficient of cross-price elasticity would of course lend morecredence to a claim of direct competitiveness or substitutability, althougha low coefficient of cross-price elasticity is not necessarily fatal to a claimof direct competitiveness or substitutability. Indeed, a low coefficient of

71. Robert S. Pindyck & Daniel L. Rubinfeld, Microeconomics (1998), at 34.72. Japan, Panel, supra note 14, at 6.31 (emphasis added).73. Commissionv . Denmark , supra note 66, at 28.74. Opinion of the Advocate General, case 356/85,Commission v. Belgium, [1987] ECR 147, at

122.75. Canada Periodicals , Appellate Body, supra note 47, p. 17.76. Chile , Panel, supra note 64, at 7.71.


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cross-price elasticity may be due to the very measures in question in thedispute.77

Arguably, this statement could be interpreted as creating a presumptionof likeness if a high cross-price elasticity is evidenced.

The examination of cross-price elasticity raises, however, a number of ques-tions.

4.2.1. Reverse Cellophane Fallacy One problem with elasticity of demand is that reliable data is difficult toobtain.78 This is even more so when the demand-side substitutability is dis-

torted as a result of the internal tax measure in question. Therefore, elasticity can be expected to differ from the situation that would exist in normal condi-tions of competition. This distortion could be described as a reversed form of the cellophane fallacy.79 This theory says that the SSNIP-test,80 or compa-rable test, may, under certain circumstances, deliver a distorted degree of elas-ticity of demand. If prices in the potential relevant market are above thecompetitive level, consumers may switch to another product more easily than

where prices are at the competitive level. Thus, elasticity of demand wouldappear inflated, and as a result, the relevant market would be defined toobroadly.81 In a likeness analysis, however, governmental tax measures, notbehaviour by companies, distort the degree of elasticity of demand. While inCellophane the original product, from which switching would occur, waspriced above competitive levels, in this case the alternative product, to whichconsumers would switch, is overpriced (as a result of higher taxation). Thus,the elasticity of demand, for the domestic product, understates the degree of

willingness of consumers to switch to other products.82 The solution to thisproblem lies in estimating the cross-price elasticity in a but for situation.

4.2.2. Which Elasticity? For any two products there are always two cross-price elasticities, and these areindependent of each other. The question thus arises whether the cross-priceelasticity of the imported good or that of the domestic should be measured.

77. Id . at 7.70.

78. Recent developments, such as the bar code system, have increased the availability of reliabledata.

79. The phenomenon of cellophane fallacy obtained its name from a case in the United States.United Statesv . DuPont de Nemours , 351 U.S. (1956).

80. See infra , under 4.3.81. This analysis would thus benefit the undertaking concerned, which has supra-competitive

prices, because its market share would appear more limited.82. Elasticities differ along a market demand curve.See , for example, Robert B. Ekelund & Robert

D. Tollison, Economics: Private Markets And Public Choice (2000), at 111.


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The text of Articles III:2 GATT and 90 EC fails to indicate which elasticity should be considered. At first sight, it seems tempting to focus on the domesticproducts elasticity, because the important question seems to be how many consumers switch from national to imported goods. But this would be misin-terpreting the question of how much substitutability exists between two prod-ucts. The focus of the national treatment obligation in trade law is on theinterchangeability of goods from the consumers perspective. This includesboth switching from product A to product B, as well as in the inverse direc-tion. One solution to resolve this uncertainty would be, in the event that bothcross-price elasticities in a but for situation are known, to take the average of the two elasticity measures.83

A different, but related, issue is the levelat which cross-price elasticitiesshould be measured. The but for approach requires that cross-price elasticity should be measured in a hypothetical situation with no tax differential. Thereare three ways to eliminate the tax differential in order to establish the but forsituation. First, taxes on imported products can be lowered to the level of thedomestically produced goods. Second, the defendant state may raise the tax level of domestic products to that of imports. Third, the taxes on importscould be reduced and those on domestic goods increased until they are levelledsomewhere in between. Although they could be expected to be quite similar,all options may yield different cross-price elasticities, even in a perfect but forsituation.84 Again, a solution might be to average the different elasticities by measuring the arc elasticity.85

4.2.3. Use of Surveys EU competition law provides for the use of surveys to ascertain the degree of elasticity between products in particular when quantitative information onelasticity is not available.86 However, surveys must be applied with caution.Consumer surveys can be distorted by a framing bias depending on how thequestions are phrased.87 Also, even though surveys generally involve the assess-ment of hypothetical behaviour on the part of the consumer, questions asking respondents to quantify their preference are often less reliable than those whichask respondents to rank their preferences or to state what they would do if a

83. This averaging approach would have the further advantage of resolving the problem of the

cellophane fallacy, to a certain extent, because the switching from the imported to the domes-tic product might be relatively high as a result of the tax measures.

84. See supra , mainly under 3.2.85. Arc elasticity measures the average elasticity along any given segment of a demand curve.

Ekelund & Tollison, supra note 82, at 114.86. Commission Notice, supra note 31, at 3334.87. Lexecon, An Introduction to Quantitative Techniques in Competition Analysis , available at http:/

/www.lexecon.co.uk/publications/media/quantitative_techniques.pdf, last visited on 28 April2004, at 24.


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certain product or service were not available.88 For these reasons, competitionauthorities are cautious when taking into account information from surveys.The European Commission (Commission), for instance, is reluctant to acceptsurveys madead hoc for a particular case.89

4.2.4. Practical Problems in the Use of Cross-price Elasticity The critique that [a]s a methodology, cross-price elasticity is too problematic,hard to use and easy to manipulate90 should not be accepted. The analysisbelow shows that a variety of techniques exist to measure the elasticity of demand reasonably well, provided that certain minimum information is avail-able.

First, while it is true that quantitative techniques more broadly speaking may raise complicated technical issues, this does not mean that they areprone to abuse. More sophisticated techniques simply require considerableexpertise on the part of the body making the assessment. As a result, morereliance on economists, to the detriment of lawyers, would be required a phenomenon which has already occurred in competition law. Second, adjudi-cators seem to acknowledge that quantitative techniques are not always reli-able. It may well be for this reason that the Appellate Body in Japan found thatcross-price elasticity is an important, though not decisive criterion.91 There-fore, quantitative techniques only provide useful conclusions if they are basedon sound data and methodology. Accordingly, only in that case, would they betaken into account by adjudicators.

4.3. SSNIP-test

Competition law typically uses the SSNIP-test92 to assess the elasticity of demand. Regulators both in the United States and the EU use this tool. TheU.S. Horizontal Merger Guidelines93 and the Commission Notice on thedefinition of the relevant market94 refer to this test.

The use of the SSNIP-test in trade law is not appropriate for the following reasons. First, its aim caters more towards the analysis under competition law,

which differs from the analysis undertaken in trade law. The SSNIP-test en-

88. Id.

89. Commission Notice, supra note 31, at 41.90. Serena B. Wille, Recapturing a Lost Opportunity: Article III:2 GATT 1994 Japan Alcoholic

Beverages 1996 , 9 Eur. J. Intl L. 182 (1998), available at http://www.ejil.org/journal/Vol9/No1/sr1b.rtf, p. 16.

91. Japan, Appellate Body, supra note 15, p. 16.92. SSNIP stands for Small But Significant Non-transitory Increase in Price.93. U.S. Department Of Justice & Federal Trade Commission, Horizontal Merger Guidelines,

supra note 32.94. Commission Notice, supra note 31, at 1519.


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ables competition authorities to discover a hypothetical way in which a mo-nopolist could profitably raise prices. In trade law, however, the profitability of consumer switching is not an issue. As a result, the notional situation of a hypothetical monopolist constructed by the SSNIP-test is not useful for theexamination under trade law, which looks at the real life situation. Second, theSSNIP-test undertakes a unidirectional analysis of consumer switching. Asstated above, this paper proposes that both price elasticities between two prod-ucts be taken into consideration.

4.4. Absolute Price Differences

In competition law analyses, differences in the absolute prices of products may be important for determining whether products are part of the same relevantmarket.95 Substantial price differences may be seen as an indication that theproducts are not close competitors96 to a certain degree.97

In the Korea Alcoholic Beveragescase, the defendant noted that pricedifferences between imports and domestic goods were substantial. The panelacknowledged that there were significant price differences,98 but found, none-theless, that these differences were not decisive. [A]bsolute differences are lessimportant than behavioural changes that occur due to relative price move-ments.99

In EU law, the question of pre-tax price differences has generally not beendealt with in the determination of the likeness of products. However, in the

Belgian Wine/Beer case, the Court of Justice was confronted with a similarsituation as the panel in Korea Alcoholic Beverages . As in Korea , the prices of imported products were found to be approximately four times the price of domestic products.100 Unlike the Koreapanel, the ECJ found that a minimaltax differential applied to products with substantial price differences does notafford protection of the domestic industry. While the Courts finding is notnecessarily erroneous, the substantial price difference may well indicate that

95. See , for example, Commission Notice, supra note 31, at 39.96. See , for example, the merger cases before the European Commission: Case IV/M.53,

Arospatiale/Alenia/De Havilland , OJ 1991 L 334, pg. 42; case IV/M.214, DuPont/ICI , OJ

1993 L 7, pg. 13; case IV/M.190, Nestl /Perrier , OJ 1992 L 356, pg. 1.97. Motta, for example, takes the view that absolute price differences are not a good indicator formarket definition. Massimo Motta, Competition Policy Theory and Practice 106 (2004).

98. For example, Vodka was four times the price and standard whisky four and a half times theprice of premium diluted soju, and eight and nine times, respectively, the price of standarddiluted soju. Korea , Panel, supra note 35, at 10.94.

99. Id. at 10.94.100. The ECJ examined the prices includingtax. Case 356/85, Commissionv. Belgium, [1987] ECR

147, at 16.


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the products at issue were not directly competing in the first place.101 Thispaper proposes that price differences should first and foremost be examined inthe likeness determination. As with competition law, substantial divergenceof pre-tax prices may be an element indicating dissimilarity. However, itshould nonetheless be possible, in the second place, to examine pre-tax pricedifferences in the analysis of affording protection to domestic production.102Even if a tax differential were found to be more thande minimis , it would stillbe possible for the defendant to argue that the difference was insignificantcompared to the pre-existing price difference, so that no protective effect

would be found. The Appellate Bodys rejection of such an argument at thestage of so as to afford protection seems too stringent.103 More accurate seems

to be the view of Advocate General Vilaa:

[T]he difference in the prices of these two beverages which, of course,reflects their different characteristics and production costs whilst itself constituting a factor liable to attenuate the competitive relationship be-tween them is nevertheless something which must be taken into accountin assessing to what extent the difference in rates distorts consumer pref-erences.104

4.5. Price Correlation

In competition law, not just absolute prices can indicate the degree of compe-

tition between products, but price movements of one product relative to thoseof another may also prove useful.105 Price correlation is independent of theanalysis of absolute price levels of products. It is possible for two products tocompete in the same relevant product market despite being priced at differentabsolute levels, because demand-side substitution depends on the willingnessof consumers at the fringes to switch from one product to another as the

101. In another exception to the general rule that it would not examine absolute prices as a factorfor assessing likeness, the ECJ held inRoders that [i]n that connection, the national courtmust have regard to the difference between the selling prices of the products in question andthe impact of that difference on the consumers choice, as well as to changes in the consump-tion of those products. Joined cases C-367/93 to C-377/93, Roders v . Inspecteur der

Invoerrechten, [1995] ECR I-2229, at 39.102. This step should not be confused with the analysis of levels of taxation to determine whether

the products in question are not similarly taxed.103. Korea , Appellate Body, supra note 22, at 152.104. Commissionv . Belgium, Advocate General,supra note 74, at 111.105. Commission Notice, supra note 31, at 38. It is clear that the analysis of price correlation may

suffer from certain defects. There are, however, methods to reduce or avoid those complica-tions. Lexecon, An Introduction to Quantitative Techniques in Competition Analysis , supra note158, at 78.


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relative price changes.106 The main hypothesis is that the more parallel themovements in price of two products are, the higher the elasticity betweenthem. The goal of a price correlation analysis is to examine the extent to whichthe prices of two products move together. If the price of one good constrainsthe other, the two price series should move together.107

In the field of internal fiscal measures, however, the utility of this analysismay be more limited. In fact, the tax measure itself may influence the pricemovements of the products. In other words, an imported goods price mightbe raised, through higher taxation, above that of domestic products as a result of which the degree of substitutability would be diminished. As a result,relative price movements would be less accentuated. If, on the other hand,price movements were relatively parallel, that should be taken as a strong indicator of a high elasticity between products.108

4.6. Shock Analysis

The shock analysis test can be used to define relevant product markets incompetition law. The Commission Notice in EU law, for example, explicitly envisages the use of evidence of substitution deriving from past experiences:

In certain cases, it is possible to analyse evidence relating to recent pastevents or shocks in the market that offer actual examples of substitutionbetween two products. When available, this sort of information will nor-mally be fundamental for market definition.109

By extension, the shock analysis test could also shed light on the competitiverelationship between products in an analysis under international trade law.The idea, on which this test is based, is that a large unanticipated change in a market can provide the basis for a natural experiment.110 A change, especially a sudden and unexpected change, to either supply or demand can give a key insight into the competitive conditions in a market on the basis of how cus-tomers and/or competitors have reacted to the event.111 These shocks canaffect a range of industry, or concern one market or even one firm only:

106. Lexecon, An Introduction to Quantitative Techniques in Competition Analysis , supra note 138,at 5.

107. Lexecon, Competition Memo: Dont Throw Out Your Numbers (1998), available at http:// www.lexecon.co.uk/publications/media/1998/numbers.pdf, last visited on 28 April 2004. A further improvement of the method of price correlation is the so-called stationary analysis.See , also, Lexecon, An Introduction to Quantitative Techniques in Competition Analysis , supra note 158, at 913.

108. Such a finding would be analogous to the panels reasoning inChile Alcoholic Beverages withregard to cross-price elasticity.Chile , Panel, supra note 64, at 7.70.

109. Commission Notice, supra note 31, at 38.110. Lexecon, Competition Memo: Dont Throw Out Your Numbers , supra note 158, pg. 2.111. Lexecon, An Introduction to Quantitative Techniques in Competition Analysis , supra note 138,

at 34.


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Such shocks cover a wide array of possible events: they include strikes,unexpected plant shutdowns, stock shortages, promotion and advertising activity, trade frictions, sudden exchange rate movements, technologicalchange and regulatory intervention.112

The common element of these events is that they may give rise to sudden shiftsof supply or demand in a given market. This method of analysis has theadvantage that it does not require large amounts of data.113

Market share While movements in market shares are not generally used as an instrument to

define the relevant market in competition law,114

they may prove useful underthe shock analysis test. In Japan Alcoholic Beverages , the EU argued that the Japanese tax reform in 1989, which raised taxes of one alcoholic beverage, ledto higher market shares115 of two other products.116 The panel accepted thatthe fact that both these products captured market shares lost by the product,

which was the object of the tax rise, was evidence that they were competing forthe same market. Accordingly, the panel found elasticity of substitution be-tween them.117

On the European level, the ECJ examined a similar claim when deciding whether a tax measure had a protective effect. The Commissions argumentin the Belgian Wine/Beercase was very similar to the situation in Japan Alcoholic Beverages . The Commission alleged that tax increases first for wineand then for beer led to changes in consumer pattern (and, as a result, relativemarket shares). The ECJ was sceptical in general as regards the use of shock analysis type of evidence. There, the Court implicitly addressed and rejectedthe argument on market share evolution:

Whilst these figures [on beer and wine consumption] show the generaltrends in the consumption of the products in question, they do not show

with any certainty that there is any causal connexion between the pat-terns of consumption described and the introduction in 1977 of a higherrate of VAT [value-added tax] for wine.118

112. Id.113. Id. at 37.114. In that field of law, market share evolution might be relevant for other purposes, such as

establishing collusion.115. Market shares in the examination under trade law do not necessarily mean market in the

meaning of relevant product market under competition law.116. As the Lexecon report indicates, tax changes are among the events triggering the shock

analysis test. Lexecon,Competition Memo: Dont Throw Out Your Numbers , supra note 158,pg. 2.

117. Japan, Panel, supra note 14, at 6.30.118. Commissionv. Belgium, supra note 100, at 20.


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Nonetheless, the Court highlighted that between 1978 and 1983 the rate of VAT applicable to beer was increased on three occasions without there being in the medium term any restrictive effect on the consumption of beer to theadvantage of wine.119

In any event, in the evaluation of the impact of shock events on marketshares, caution must be applied. As was stated in the sections on elasticity of demand and price correlation, the tax measure itself may influence marketshare changes. It is thus not surprising that the Appellate Body rejected argu-ments that stable market shares prevented the finding of a competitive rela-tionship. In Canada Periodicals , it stated:

We are not impressed either by Canadas argument that the marketshare of imported and domestic magazines has remained constant overthe last 30plus years, and that one would have expected some variationif competitive forces had been in play to the degree necessary to meet thestandard of directly competitive goods. This argument would have

weight only if Canada had not protected the domestic market of Cana-dian periodicals through, among other measures, the excise tax 120

Overall, market share movements cannot be used as conclusive evidence, butmay prove useful, under certain circumstances, as evidence of the economicinterrelationship between two products.

4.7. Different Customer Groups

In EU competition law, the Commission Notice on the definition of therelevant market finds that [a] distinct group of customers for the relevantproduct may constitute a narrower, distinct market when such a group couldbe subject to price discrimination.121

However, this possibility to distinguish relevant markets according to cus-tomer groups should not be used in trade law. The issue in competition law concerns the profitability of the price rises, as the sellers are able to establishprice discrimination. This issue is not present in trade law.122 The assessmentof likeness in trade law only looks at the products in question, not at theultimate purchasers. The key feature of the possibility to distinguish separate

119. Id.120. Canada Periodicals , Appellate Body, supra note 47, at p. 1718.121. Commission Notice, supra note 31, at 43. According to the Notice, the finding of a separate

product market for a given customer group requires two conditions to bet met. First, it mustbe possible to identify clearly which group an individual customer belongs to at the momentof selling the relevant products to him, and, second, trade among customers or arbitrage by third parties should not be feasible. Id.

122. See supra , under 4.3.


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relevant markets, in of competition law, is that, by definition, the productspurchased by the various groups of customers are identical.

If, however, the products are not identical, the fact that the different prod-ucts are purchased by different categories of consumers is a strong indicationagainst their likeness. Seen in this light, the ECJs reasoning in the FrenchTobaccocase is hard to follow. The Advocate General in that case had foundthat light-tobacco cigarettes and dark-tobacco cigarettes had different con-sumer groups.123 Although it acknowledged that the age of the two customergroups differed substantially,124 the ECJ held that the two types of cigarettes

were similar. This seems deficient, as the separation into two different groupsof customers means that each group prefers one product and may not consider

the other product to be substitutable.

4.8. Evidence from Outside the Market Concerned

In an analysis under competition law, the relevant market is defined both forproducts and for its geographical extent. The competitive conditions in eachgeographic region must be assessed separately. It is thus perfectly possible thattwo products are directly competitive in one market, and not in another geo-graphically different market.

An authentic market-based approach should take into account the particu-larities of the markets. Both WTO and EU adjudicators found that consumerhabits change in time and space.125 The corollary of this finding is that

information gathered regarding the patterns of consumption should be limitedto the country concerned. This is the position the panel in Japan adopted:

[C]onsequently, two products could be considered to be directly com-petitive or substitutable in market A, but the same two products wouldnot necessarily be considered to be directly competitive or substitutablein market B.126

In the Belgian Wine/Beer case, the Court of Justice seemed to acknowledge,implicitly, that each geographical market has to be examined separately. Inthat case, the ECJ transposed its conclusions about the economic relationshipbetween beer and wine found in the earlierCommission/United Kingdom cases

after noticing that nothing in the documents before the Court indicates any

123. Commissionv . France , Advocate General,supra note 67, at 71 and 75.124. Commissionv . France , supra note 19, at 26.125. Commissionv . United Kingdom (Interlocutory judgment), supra note 38, at 13; Japan Taxes

on Wine and Liqueur , Panel, supra note 43, at 5.7.126. Japan, Panel, supra note 14, at 6.22.


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feature specific to the Belgian market which might justify a different approachfrom that in the United Kingdom case.127

However, these cases appear isolated. InKorea , the appellant challenged thepanels assertions that it could look at the Japanese market for additionalinformation.128 The Appellate Body, however, endorsed the findings of thepanel:

It is also true that consumer responsiveness to products may vary fromcountry to country. This does not, however, preclude consideration of consumer behaviour in a country other than the one at issue. It seems tous that evidence from other markets may be pertinent to the examination

of the market at issue, particularly when demand on that market hasbeen influenced by regulatory barriers to trade and competition. Clearly,not every other market will be relevant to the market at issue. But if another market displays characteristics similar to the market at issue,then evidence of consumer demand in that other market may have somerelevance to the market at issue. This, however, can only be determinedon a case-by-case basis, taking into account of all relevant facts.129

In EU law, as stated above, the Court of Justice has accepted Advocate GeneralReischls approach ofuniformity of consumers tastes and habits throughoutthe Community. 130

These approaches should be considered erroneous. Consumer patterns dif-fer from country to country and should, therefore, be assessed separately.

4.9. Conclusion

This paper argues that international trade law could benefit from incorporat-ing the methodology used for determining the relevant product market incompetition law. While the Court of Justice seems more reluctant, WTOadjudicators are moving in that direction. The fact that the same or similarmethods and techniques are used does not, however, entail that the outcomesof the analyses under trade and competition law are, or indeed should be,necessarily the same. While the inquiries are essentially the same, that is, toascertain demand substitution between products, the examinations considerdifferent degreesof such substitution. As a result, it would not be surprising that, for example, a competition authority finds two products to belong toseparate markets, while under trade law they would be considered like. A

127. Commissionv. Belgium, supra note 100, at 11.128. Korea , Appellate Body, supra note 22, at 137.129. Id.130. See supra , under 5.2.2.


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striking example of such a divergent interpretation resulted from the bananascases.131 The ECJ found bananas to be in competition with other table fruitin an examination under the second paragraph of Article 90 EC,132 but inUnited Brands , applying competition rules, it found them not to form part of the same relevant product market.133

5. Other Criteria

5.1. General

GATT and WTO panels have frequently used the criteria expressed in the Working Party Report on Border Tax Adjustments . It should be recalled, how-ever, that this report should only be seen as persuasive, never authoritative text.The report does not have the value of primary international treaty law, nor isit likely to be considered as binding subsequent practice.134 The AppellateBody in EC Asbestos held:

These criteria [of the Working Party Report] are, it is well to bear inmind, simply tools to assist in the task of sorting and examining therelevant evidence. They are neither treaty-mandated nor a closed list of criteria that will determine the legal characterization of products.135

This paper does not argue that the criteria in Border Tax Adjustments , and thesimilar criteria used by the ECJ, are not valuable in the analysis of likenessbetween products. Simply, it is argued that these criteria should only be usedas subsidiary means of the analysis of actual demand-side substitutability in a given market. In EC Asbestos , the Appellate Body found:

131. Paul Demaret and Raoul Stewardson, Border Tax Adjustments under GATT and EC Law and General Implications for Environmental Taxes , Journal of World Trade 5, 50 (1994).

132. Case 184/85, Commissionv. Italy , [1987] ECR 2013, at 12.133. Case 27/76, United Brandsv. Commission, [1978] ECR 207, at 35.134. VCLT, art. 31(3)(b). The Appellate Body found in Japan Alcoholic Beverages that panel

decisions do not amount to subsequent practice. Japan, Appellate Body, supra note 15, at p.810. While the Working Party Report is not a panel decision, it is likely that the same

reasoning applies.135. Asbestos , Appellate Body, supra note 16, at 102. Similarly, Hudec finds that [i]t is difficult to

understand why so much respect is accorded to this passage [ofBorder Tax Adjustments ], giventhat it is discussing the term like or similar, whereas the key words of Article I, III:2 andIII:4 are like product. Moreover, the criteria listed in the report were just suggestionsfrom one or more members of the Working Party, and even at that are merely an illustrativelist of some criteria that might be applied. The suggestions are merelyreported by the

Working Party, but in no way officially recommended by it. Hudec,supra note 16, at 102, at113 (emphasis in original).


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[W]hether the Border Tax Adjustments framework is adopted or not, it isimportant under Article III:4 to take account of evidence which indicates

whether, and to what extent, the products involved are or could be ina competitive relationship in the marketplace.136

In other words, the Border Tax Adjustments criteria, and similar criteria used by the ECJ, should be functionally subordinated to the market-based approach.They should be a means to determine likeness according to the main criterion that of consumers tastes and habits. This proposal finds support both in

WTO and EU case law. For example, the Appellate Body inEC Asbestos notonly ordered panels to fully examine the physical properties of the products in

question, as suggested by theBorder Tax Adjustments report, but also declared:In particular, panels must examine those physical properties of productsthat are likely to influence the competitive relationship between productsin the market place.137

Similarly, though less explicitly, the ECJ found in the DanishFruit Wine casethat the question of whether two products meet the same needs must beassessed essentially on the basis of objective characteristicswhich ensure that a product is capable of meeting the same need as another product from the pointof view of certain categories of consumers.138 This wording seems to suggestthat the ultimate goal of the analysis of objective characteristics should be toassess their effects on consumer behaviour. Similarly, in the BelgianWine/Beer case, the Court held that commonly consumed wines have enoughcharac-teristics in common with beer to constitute an alternative choice for consumers .139

This study proposes that this subordinate relationship should, by analogy,extend to other criteria used by the Court of Justice or contained in the Border Tax Adjustments report. That approach would be consistent with the proce-dure under competition law. The Commission Notice on the definition of therelevant market, with regard to general end-uses, states:

136. Asbestos , Appellate Body, supra note 16, at 103.137. Id. at 114.138. Commissionv . Denmark , supra note 37, at 15 (emphasis added).139. Commissionv. Belgium, supra note 100, at 11 (emphasis added). In the French Cars case, the

Court seemed to suggest that there is a link between objective characteristics of products andconsumer habits. The Court ruled that products such as cars are similar for the purposes of the first paragraph of Article 95 of the Treaty [now 90 EC] if their characteristicsand the needs which they serve place them in a competitive relationship () It is thus clear thatvehicles of different makes [of cars], whether or not they are fitted with a six-speed manualgearbox or a five-speed automatic transmission, mayin the eyes of the consumers , constitutesimilar vehicles for the purposes of the first paragraph of Article 95 of the Treaty [now 90 EC] Case C-265/99, Commissionv. France , [2001] ECR I-2305, at 43 and 44 (emphasisadded).


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An analysis of the product characteristics and its intended use allows theCommission, as a first step, to limit the field of investigation of possiblesubstitutes. However, product characteristics and intended use are insuf-ficient to show whether two products are demand substitutes. Functionalinterchangeability or similarity in characteristics may not, in themselves,provide sufficient criteria, because the responsiveness of customers torelative price changes may be determined by other considerations as

well.140

5.2. Physical Characteristics

WTO law uses slightly different terminology than EU law. In the WTOsystem, while the Border Tax Adjustments report mentions products proper-ties, nature and quality,141 WTO tribunals frequently refer to the concept of physical properties.142 The European Court of Justice, on the other hand, inits analysis under Article 90 EC, generally examines objective characteris-tics.143 The ECJs terms seem to be broader than the terms used in WTOlaw.144 Examination of products characteristics is equally important for thedetermination of the relevant product market under EU competition law.145

5.2.1. Varying Importance of Physical Characteristics under the First and Second Sentence of Articles III:2 GATT and 90 EC?

Both WTO tribunals and the ECJ have consistently found that under the first

sentences of Article III:2 GATT and Article 90 EC, physical and objectivecharacteristics, respectively, play a more important role than under the secondsentences of those articles. Under WTO law, the issue of physical characteris-tics arose mainly in the context of the first paragraph of Article III:2 GATT,and WTO tribunals generally held that this aspect was more relevant underthat paragraph than under the second paragraph of Article III:2.146 Legal

140. Commission Notice, supra note 31, at 35.141. Border Tax Adjustments , supra note 10, at 101102.142. Asbestos , Appellate Body, supra note 16, at 110: (We see the first criterion, properties, nature

and quality, as intended to cover the physical qualities and characteristics of the products.) Japan, Appellate Body, supra note 15, p. 20.

143. The John Walker court, somewhat confusingly, speaks of intrinsic characteristics. Case 243/

84, John Walkerv . Ministeriet for Skatter og Afgifter , [1986] ECR 875, at 13.144. The ECJ includes the products origin, the method of manufacture and their properties in the

concept of objective characteristics.See , for example, Commissionv . Denmark , supra note 37,at 12.

145. Commission Notice, supra note 31, at 7.146. See , for example, Chile Alcoholic Beverages , where the Panel said that an examination of the

physical characteristics of products is more critical in determining whether two products arelike than in the determination of whether two products are directly competitive or substi-tutable. Chile , Panel, supra note 64, at 7.51.


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writers support this interpretation. Hudec, for example, finds that it wouldappear that the concept of like product in Article III:2 GATT may in fact bereferring to similarity of physical characteristics147 This paper, however,argues that examination of physical characteristics plays an equivalent roleunder both sentences of Article III:2 GATT and Article 90 EC.148 A textualinterpretation of those articles does not support the conclusion that objectivecharacteristics are necessarily more relevant under the first sentences of ArticlesIII:2 GATT and 90 EC. Furthermore, analogies to definitions of like prod-ucts, such as that in Article 2.6 of the Anti-Dumping Agreement, are notparticularly useful.149 Accordingly, this study finds that differences betweenthe two sets of paragraphs are simply a matter ofdegree of closeness in eco-

nomic relationships.5.2.2. Focus on Marketplace The focus of the likeness analysis, both under the first and second sentencesof Articles III:2 GATT and 90 EC, should lie predominantly, or even exclu-sively, on the marketplace. Physical characteristics or properties, as well asother factors, should only be taken into account in the likeness analysisinsofar as they complement or supplement indicia of actual consumerbehaviour. An indication that WTO jurisprudence on physical characteristicsmoves towards assessing the impact of these characteristics upon consumerpatterns can be detected in the Appellate Bodys reasoning inEC Asbestos .150

147. Hudec, supra note 16, at 105. Similarly, Choi argues that physical characteristics are impor-tant for the determination of likeness under the first sentence but not for the analysis of directly competitive or substitutable products under the second sentence of Article III:2.Choi, supra note 23, at 1920.

148. Therefore, the panel in Korea Alcoholic Bev

THE UNBEARABLE LIGHTNESS OF LIKENESS

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