Topics handled by WTO committees and agreements
Issues covered by the WTO’s committees and agreements

REPERTORY OF APPELLATE BODY REPORTS

Directly Competitive or Substitutable Products


ON THIS PAGE:

> Korea — Alcoholic Beverages, para. 114
> Korea — Alcoholic Beverages, para. 115
> Korea — Alcoholic Beverages, para. 118
> Korea — Alcoholic Beverages, para. 120
> Korea — Alcoholic Beverages, para. 124
> Korea — Alcoholic Beverages, para. 127
> Korea — Alcoholic Beverages, para. 134
> Korea — Alcoholic Beverages, para. 137
> Korea — Alcoholic Beverages, paras. 142–143
> US — Cotton Yarn, paras. 96–98
> Philippines — Distilled Spirits, paras. 205, 207
> Philippines — Distilled Spirits, para. 215
> Philippines — Distilled Spirits, paras. 218–219
> Philippines — Distilled Spirits, paras. 221–222
> Philippines — Distilled Spirits, paras. 226–227

D.1.1 Korea — Alcoholic Beverages, para. 114     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

The term “directly competitive or substitutable” describes a particular type of relationship between two products, one imported and the other domestic. It is evident from the wording of the term that the essence of that relationship is that the products are in competition. This much is clear both from the word “competitive” which means “characterized by competition”, and from the word “substitutable” which means “able to be substituted”. The context of the competitive relationship is necessarily the marketplace since this is the forum where consumers choose between different products. Competition in the market place is a dynamic, evolving process. Accordingly, the wording of the term “directly competitive or substitutable” implies that the competitive relationship between products is not to be analyzed exclusively by reference to current consumer preferences. In our view, the word “substitutable” indicates that the requisite relationship 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.
 

D.1.2 Korea — Alcoholic Beverages, para. 115     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

Thus, according to the ordinary meaning of the term, products are competitive or substitutable when they are interchangeable or if they offer, as the Panel noted, “alternative ways of satisfying a particular need or taste”. Particularly in a market where there are regulatory barriers to trade or to competition, there may well be latent demand.
 

D.1.3 Korea — Alcoholic Beverages, para. 118     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

… “Like” products are a subset of directly competitive or substitutable products: all like products are, by definition, directly competitive or substitutable products, whereas not all “directly competitive or substitutable” products are “like”. The notion of like products must be construed narrowly but the category of directly competitive or substitutable products is broader. While perfectly substitutable products fall within Article III:2, first sentence, imperfectly substitutable products can be assessed under Article III:2, second sentence.
 

D.1.4 Korea — Alcoholic Beverages, para. 120     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

In view of the objectives of avoiding protectionism, requiring equality of competitive conditions and protecting expectations of equal competitive relationships, we decline to take a static view of the term “directly competitive or substitutable”. The object and purpose of Article III confirms that the scope of the term “directly competitive or substitutable” cannot be limited to situations where consumers already regard products as alternatives. If reliance could be placed only on current instances of substitution, the object and purpose of Article III:2 could be defeated by the protective taxation that the provision aims to prohibit. …
 

D.1.5 Korea — Alcoholic Beverages, para. 124     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

… the term “directly competitive or substitutable” does not prevent a panel from taking account of evidence of latent consumer demand as one of a range of factors to be considered when assessing the competitive relationship between imported and domestic products under Article III:2, second sentence, of the GATT 1994. …
 

D.1.6 Korea — Alcoholic Beverages, para. 127     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

… the object and purpose of Article III is the maintenance of equality of competitive conditions for imported and domestic products. It is, therefore, not only legitimate, but even necessary, to take account of this purpose in interpreting the term “directly competitive or substitutable product”.
 

D.1.7 Korea — Alcoholic Beverages, para. 134     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

… we share the Panel’s reluctance to rely unduly on quantitative analyses of the competitive relationship. In our view, an approach that focused solely on the quantitative overlap of competition would, in essence, make cross-price elasticity the decisive criterion in determining whether products are “directly competitive or substitutable”. …
 

D.1.8 Korea — Alcoholic Beverages, para. 137     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

It is, of course, true that the “directly competitive or substitutable” relationship must be present in the market at issue. … It is also true that consumer responsiveness to products may vary from country to country. This does not, however, preclude consideration of consumer behaviour in a country other than the one at issue. It seems to us that evidence from other markets may be pertinent to the examination of the market at issue, particularly when demand on that market has been influenced by regulatory barriers to trade or to 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 some relevance to the market at issue. This, however, can only be determined on a case-by-case basis, taking account of all relevant facts.
 

D.1.9 Korea — Alcoholic Beverages, paras. 142–143     back to top
(WT/DS75/AB/R, WT/DS84/AB/R)

… Some grouping is almost always necessary in cases arising under Article III:2, second sentence, since generic categories commonly include products with some variation in composition, quality, function and price, and thus commonly give rise to sub-categories. From a slightly different perspective, we note that “grouping” of products involves at least a preliminary characterization by the treaty interpreter that certain products are sufficiently similar as to, for instance, composition, quality, function and price, to warrant treating them as a group for convenience in analysis. But, the use of such “analytical tools” does not relieve a panel of its duty to make an objective assessment of whether the components of a group of imported products are directly competitive or substitutable with the domestic products. …
 

Whether, and to what extent, products can be grouped is a matter to be decided on a case-by-case basis. …
 

D.1.10 US — Cotton Yarn, paras. 96–98     back to top
(WT/DS192/AB/R)

According to the ordinary meaning of the term “competitive”, two products are in a competitive relationship if they are commercially interchangeable, or if they offer alternative ways of satisfying the same consumer demand in the marketplace. “Competitive” is a characteristic attached to a product and denotes the capacity of a product to compete both in a current or a future situation. The word “competitive” must be distinguished from the words “competing” or “being in actual competition”. It has a wider connotation than “actually competing” and includes also the notion of a potential to compete. It is not necessary that two products be competing, or that they be in actual competition with each other, in the marketplace at a given moment in order for those products to be regarded as competitive. Indeed, products which are competitive may not be actually competing with each other in the marketplace at a given moment for a variety of reasons, such as regulatory restrictions or producers’ decisions. Thus, a static view is incorrect, for it leads to the same products being regarded as competitive at one moment in time, and not so the next, depending upon whether or not they are in the marketplace.
 

It is significant that the word “competitive” is qualified by the word “directly”, which emphasizes the degree of proximity that must obtain in the competitive relationship between the products under comparison. As noted earlier, a safeguard action under the ATC is permitted in order to protect the domestic industry against competition from an imported product. To ensure that such protection is reasonable, it is expressly provided that the domestic industry must be producing “like” and/or “directly competitive products”. …
 

When … the product produced by the domestic industry is not a “like product” as compared with the imported product, the question arises how close should be the competitive relationship between the imported product and the “unlike” domestic product. It is common knowledge that unlike or dissimilar products compete or can compete in the marketplace to varying degrees, ranging from direct or close competition to remote or indirect competition. The more unlike or dissimilar two products are, the more remote or indirect their competitive relationship will be in the marketplace. The term “competitive” has, therefore, purposely been qualified and limited by the word “directly” to signify the degree of proximity that must obtain in the competitive relationship when the products in question are unlike. Under this definition of “directly”, a safeguard action will not extend to protecting a domestic industry that produces unlike products which have only a remote or tenuous competitive relationship with the imported product.
 

D.1.11 Philippines — Distilled Spirits, paras. 205, 207     back to top
(WT/DS396/AB/R, WT/DS403/AB/R)

… the Panel appropriately framed the analysis as one aimed at determining whether competition between imported and domestic distilled spirits in the Philippines is sufficiently direct so that these products could be properly characterized as “directly competitive or substitutable”. … The requisite degree of competition is met where the imported and domestic products are characterized by a high, but imperfect, degree of substitutability. As the Appellate Body found, this will be the case where the imported and domestic products are “interchangeable” or offer “alternative ways of satisfying a particular need or taste”.
 

...
 

… We note, in this respect, that the Panel expressly derived, from its statement that the “question before us … is not so much what the ‘degree of competition’ between the products at issue is, but what is the ‘nature’ or ‘quality’ of their ‘competitive relationship’”, the conclusion that it “should not place too much emphasis on quantitative analyses”. … In de-emphasizing the role played by quantitative analyses of substitutability, the Panel followed the guidance provided by the Appellate Body in previous cases. …
 

D.1.12 Philippines — Distilled Spirits, para. 215     back to top
(WT/DS396/AB/R, WT/DS403/AB/R)

… We consider that price is very relevant in assessing whether imported and domestic products stand in a sufficiently direct competitive relationship in a given market. This is because evidence of price competition indicates that the imported product exercises competitive constraints on the domestic product, and vice versa. In this respect, we agree with the Philippines that evidence of major price differentials could demonstrate that the imported and domestic products are in completely separate markets. …
 

D.1.13 Philippines — Distilled Spirits, paras. 218–219     back to top
(WT/DS396/AB/R, WT/DS403/AB/R)

We do not agree with the Philippines that Article III:2, second sentence, of the GATT 1994 requires identity in the “nature and frequency” of the consumer’s purchasing behaviour. If that were the case, the competitive relationship between the imported and domestic products in a given market would only be assessed with reference to current consumer preferences. … requiring identity in frequency and nature of consumers’ purchase decisions, as suggested by the Philippines, would not sufficiently account for latent demand for imported distilled spirits in the Philippine market.
 

Moreover, in determining whether imported and domestic distilled spirits offer “alternative ways of satisfying a particular need or taste” in the Philippines, the Panel was required to examine both “latent and extant demand” for imported distilled spirits in the Philippine market. …
 

D.1.14 Philippines — Distilled Spirits, paras. 221–222     back to top
(WT/DS396/AB/R, WT/DS403/AB/R)

… we do not agree with the Philippines that Article III:2, second sentence, requires that competition be assessed in relation to the market segment that is most representative of the “market as a whole”. To the contrary, the Panel was correct in concluding that Article III of the GATT 1994 “does not protect just some instances or most instances, but rather, it protects all instances of direct competition.” This reading is consistent with the Appellate Body’s finding that the object and purpose of the GATT 1994, as reflected in Article III, is “requiring equality of competitive relationships and protecting expectations of equal competitive relationships”. Moreover, current demand for imported spirits in the Philippine market is a function of actual retail prices, which could be distorted by the excise tax system and other related effects, such as higher distribution costs, and lower volumes and economies of scale. …
 

For these reasons, it was reasonable for the Panel to conclude that actual competition in a segment of the market further supports its conclusion that imported and domestic distilled spirits are capable of being substituted in the Philippines. …
 

D.1.15 Philippines — Distilled Spirits, paras. 226–227     back to top
(WT/DS396/AB/R, WT/DS403/AB/R)

We do not agree with the Philippines that [the Panel’s statement that “ the imported and domestic products at issue in this dispute are indeed capable of being directly competitive or substitutable in the future”] is in error. … In our view, … instances of actual competition are also highly probative in relation to potential competition, particularly in this case where imported distilled spirits are subject to excise taxes that are 10 to 40 times higher than those applicable to domestic distilled spirits. … For this reason, instances of current substitution are likely to underestimate latent demand for imported spirits as a result of distortive effects introduced by the excise tax at issue. This is particularly the case for “experience goods” such as distilled spirits, which consumers “tend to purchase because they are familiar with them and with which consumers experiment only reluctantly”.
 

In addition, we do not agree with the Philippines that an analysis of potential competition under Article III:2, second sentence, is limited to an assessment of whether competition would otherwise occur if the challenged taxation were not in place. In our view, such a “but for” test reflects an overly restrictive interpretation of the term “directly competitive or substitutable” products, one which assumes that internal taxation is the only factor restricting potential substitutability. On the contrary, as noted by the Appellate Body, “consumer demand may be influenced by measures other than internal taxation”, such as “earlier protectionist taxation, previous import prohibitions or quantitative restrictions”.
 


The texts reproduced here do not have the legal standing of the original documents which are entrusted and kept at the WTO Secretariat in Geneva.