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Mexico – Tax Measures on Soft Drinks and Other Beverages Essay Sample

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Mexico – Tax Measures on Soft Drinks and Other Beverages Essay Sample

The Mexico- Soft drinks case was an important case based on the sweetener’s trade market in North America. This case note will try to summarize the facts of the case in order to analyze the issues raised by it. Following, we try to expose the reasons why Mexico decided to implement tax measures as a response to the United State’s refusal to submit their dispute to the North American Free Trade Agreement (NAFTA) dispute settlement panel. And last, give a brief opinion on the issues and the way they were upheld along the case.

Since January 2002, Mexico imposed a twenty percent tax on the sale and distribution of soft drinks and other beverages that used any sweetener other than cane sugar, including, and specially, high fructose corn syrup (HFCS). The United States is the primary supplier of almost all the HFCS used to sweeten beverages in Mexico, and on the other hand all the beverages sweetened with cane sugar use domestic product.

In March 2004 the United States requested consultations with Mexico regarding Articles 1 and 4 of the DSU and Article XXII of the GATT 1994, with respect to these tax measures imposed by Mexico. And on 10 June 2004, the United States requested the WTO to establish a panel pursuant to Article 6 of the DSU. The United States claimed that Mexico had violated the provisions stated in GATT 1994 Article III.

The Dispute Settlement Body established the Panel on 6 July stating the following, as purpose of the establishment of the panel : “To examine, in the light of the relevant provisions of the covered agreements cited by the United States in document WT/DS308/4, the matter referred to the DSB by the United States in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements.”

Canada, China, the European Communities, Guatemala and Japan participated in the panel as third parties.

Relevant Facts regarding the case:
The tax measures imposed by the Mexican government were: a) twenty percent tax on the transfer or importation of soft drinks and other beverages that use any sweetener other than cane sugar, b) twenty percent tax on services such as: agency, representation, brokerage, distribution, etc. when transferring or importing beverages sweetened with any kind of sweetener except for cane sugar, c) and some other requirements imposed to taxpayers regarding the above mentioned taxes.

High fructose corn syrup (HFCS) comprised one hundred percent imports of sweeteners from the US to Mexico and cane sugar is a domestically produced product that comprises ninety five percent of Mexican sweetener production. Considering the fact that the “soft drink tax” did not apply to beverages sweetened with cane sugar, it is pretty clear that Mexican sugar production industry was being favored by the imposition of these measures.

Articles I and III of the General Agreement on Tariffs and Trade 1994 (GATT) talk about the non-discrimination on like products. More specifically Article III establishes the national-treatment rule, which seeks the equal treatment to domestic and products imported from other states, establishing criteria such as: “No domestic laws should be applied to imported products to protect domestic producers from the competing “like” products. And imported products should receive treatment under national laws that “is no less favorable” than the treatment given to like domestic products”.

United State’s claims:
The issues concerning provisions established on Article III of the GATT 1994 that were claimed by the United States were the following: (i) imposing an excessive tax on an imported product compared to taxes applied to a “like” domestic product, (ii) imposing a tax to an imported product that is directly competitive or substitutable with a domestic one that is “not similarly taxed”, (iii) imposing a law that affects the internal use of imported HFCS, treating an imported product in a “less favorable way” compared to products of national origin. So the United States requested the Panel to consider the violations on the imposition of these challenged tax measures.

The above-mentioned issues concerning the imposition of soft drink taxes, distribution taxes and bookkeeping requirements were adopted by Mexican legislations by virtue of a decree that reformed the Mexican Special Tax Law applicable to Production and Services as well its Regulations and also the Miscellaneous Fiscal Resolutions of years 2003 and 2004, in order to incorporate the taxes subject to this dispute concerning soft drinks and beverages that use any sweetener other than cane sugar and its distribution and special requirements. So these legislative bodies are also the issues and subject matter to the dispute.

Mexico’s requests to the Panel:
On the other hand, Mexico requested the Panel to decline the exercise of its jurisdiction and suggested to submit their dispute to an Arbitral Panel in accordance to NAFTA, based on the Shrimp Turtle decision where the WTO recommended that the parties should resolve their difference according to the Inter-American Convention, so both states could resolve their concern with respect to the sugar trade between them. That way, Mexico could claim market access to the United States and the compliance of previous Treaties between them and the United States could also submit its claims regarding tax measures adopted by Mexico.

The Panel decided to proceed and exercise its jurisdiction, so Mexico requested for them take into account its particular condition and that as a developing country some “special treatment” exceptions could apply to their situation. So the Mexican measures could be justified under this understanding and also under Article XX of the GATT. Mexico also requested the Panel to consider the NAFTA framework while resolving and formulations their recommendations.

“Mexico explained that its tax on sweeteners was a necessary measure to secure U.S. compliance with NAFTA in granting access for Mexican sugar to the U.S. market”.

Statements considered by the Panel:
HFCS-sweetened and cane sugar-sweetened soft drinks are “like” products in accordance to what is established on GATT Article III:2, first sentence for having virtually identical physical properties, end-uses and tariff classifications and are equally preferred by consumers based on surveys applied by the US. Therefore; The HFCS soft drink tax and distribution tax are inconsistent with GATT Article III:2, first sentence.

The imported product (HFCS) and the domestic product (cane sugar) are “directly competitive or suitable products” that with the tax measures imposed by the Mexican government were not being similarly taxed in order to protect Mexican’s domestic production, consequently; there was no doubt that Mexico was infringing its obligations under GATT Article III,2 second sentence.

Based on these statements the WTO Panel rejected Mexico’s petitions and favored the United State’s position. The Panel stated that Mexico was not empowered to take measures in order to “secure compliance” to induce another Member to comply with obligations owed to it under a non-WTO treaty., it also resolved that that International Treaties such as NAFTA were not covered in the exceptions established in GATT Article XX (d), and also that the “laws or regulations” covered in exception of Article XX(d) of the GATT 1994 do not include NAFTA (which is an International Treaty) as part of them, and last, that the measures adopted by Mexico “were not necessary to secure compliance” to previous agreements to the United States.

In December 2005 Mexico appealed the Panel’s decision based on exceptions provided on GATT Article XX(d) and arguing that the Panel failed to make “an objective assessment of the facts”, as required by Article 11 of the DSU but still, the Appellate Body upheld the Panel’s conclusions and rejected Mexico’s claims.

Considering the stated facts, there is no doubt regarding the violation of the GATT Article III by the Mexican government on the establishment the soft dink tax along with distribution tax and other requirements imposed to taxpayer on this matter, but I firmly believe it is important to consider the reasons why the Mexican government was lead to implement these radical measures considering the United State’s non-compliance with obligations established in the NAFTA.

One of the main reasons why Mexico implemented the soft drinks tax measures was the United States’ incompliance with market access agreements on sugar trade established on NAFTA, while US export of HFCS to Mexico were substantially increasing. The United States continuously refused to submit to NAFTA dispute settlement while still enjoying the benefits of the agreement regarding sugar trade. Before Mexico decided to take tax measures, it tried to resolve the dispute regarding the scope and meaning of provisions in the NAFTA governing sweeteners, but no dispute settlement forum seemed to be able to hear about the case, they needed the cooperation of the US for the integration of the panel and the United Stated did not cooperate.

Importance of the Mexican Sugar Industry
The sugar industry it’s a growing sector of the Mexican economy. According to NAFTA agreements, Mexico had an expectation for it to would be competent to export very high quantities of sugar to the United State’s market, but the US never acknowledged what they had agreed by virtue of two letters negotiated between the two states after NAFTA, so there was a confusion on the volume of sugar that could be exported from Mexico to the US. In the mean time, US exports of HFCS to Mexico were increasing and that was reflected on a reduction on the domestic sugar market.

So with this background it is now easier to understand the reason why the Mexican Congress decided to impose “soft drink taxes” in order to balance the situation and try to bring the falling Mexican sugar industry to an equilibrated position in the market so that the sugar that could have been exported to the United States, could now be sold in the domestic market.

But it is understandable that even if the United States did not comply with its NAFTA obligations, there is no justification a WTO member to violate its WTO obligations in order to punish another member for not complying with its obligations under an international agreement like the NAFTA in this case.

Analysis of relevant issues regarding Mexico’s initial petitions

More than criticizing I would like to analyze two of the petitions made by Mexico to the WTO Panel along with the Panel’s and Appellate Body’s responses to those petitions, more specifically determine if a Panel is entitled to decline to exercise its jurisdiction in an issue presented before it. As well as Mexico’s petition to the Panel to consider the NAFTA framework on its resolutions, this leads me to questioning if the Panel can actually exercise its jurisdiction based on other international agreements, and if so, to what extent?

The Panel immediately refused Mexico’s petition to decline to exercise its jurisdiction on this case. It seems very obvious that if both parties were subject to an International Treaty such as NAFTA, which regulated the sugar trade between them and they were having conflicts regarding this sector, those issues should have been heard by a NAFTA Panel. But the answer to this issue relies on the Appellate Body’s argument that according to the Dispute Settlement Understanding (DSU) a panel with jurisdiction could not decline to exercise it at all without some legal impediment because it would be contradictory to articles 3.2, 7.1, 7.2, 11, 19.2 y 23. So according to the Appellate Body’s Report Paragraph 52: A Member is entitled to initiate a WTO dispute whenever it considers that “any benefits accruing to [that Member] are being impaired by measures taken by another Member” implies that that Member is entitled to a ruling by a WTO panel.

The Appellate Body also stated that the issues claimed by Mexico regarding the agreement on NAFTA were NAFTA-based issues related to market Access, that did not necessarily under lapped with the issues claimed by the US that violated Article III of the GATT 1994 with respect of the imposition of soft drink taxes as well as distribution taxes, which in my opinion makes sense but it is clearly an disadvantaged position for Mexico since it would have needed cooperation from the United States in order to constitute a panel that could hear and resolve those NAFTA- based issues.

In these I agree, so I think we cannot blame this matter on the Panel or Appellate Body of the WTO, since they just complied with their work and obligation to bring protection to the Members when they considered to be entitled to a ruling from the WTO for being effected by measures taken by other members that are subject to the WTO jurisdiction. So the main problem here is not the decision of the WTO to continue hearing the case, as they were just performing their work, but the way the United States managed the situation, only claiming the actions that directly affected their market and economy without obeying their obligations under an International Treaty or at least making an effort to clarify on the misunderstandings related to them, so Mexico could also be beneficiated from the importation of sugar to the united States.

The second matter in question is whether the Panel can consider International Agreements on its resolutions and of so, to what extent?

Article 3.2 of the Dispute Settlement Understanding (DSU) states that the WTO dispute settlement system “serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements”. There could be circumstances in which the Panel or Appellate Body would have to determine for its own purposes as to whether the United States acted consistently with NAFTA, not to determine its rights under NAFTA or to punish them for non-compliance but to take it in account in their determinations and as a preliminary step in WTO ruling.

WTO Panels and Appellate Body cannot definitively determine rights and obligations under non-WTO agreements; they can refer to and analyze such agreements as long as it serves to determine rights and obligations under the WTO agreements. This is a very clear statement that clarifies the situation as it should be seen in every case the WTO can always take into consideration obligations that arise from other international agreements between countries subject to a dispute, as long as they relate to the dispute and to rights and obligations related to the WTO.

I believe the most important issue raised on the present case relied on the contradiction between an International Treaty and the WTO regulations whereas from the International Law perspective the Tax measures imposed by Mexico seemed fair since the United States was not complying with obligations established under post- NAFTA negotiations so the US was challenging an international obligation derived from an International Treaty (NAFTA). Nevertheless, these fiscal measures are violations from the WTO perspective.

What Mexico was seeking with the imposition of these tax measures was to enforce an equitable defense in a way of “clean hands doctrine” in the understanding that the United States was acting unethically by avoiding the conformation of a NAFTA panel, while being the principal importer of sweeteners in Mexico. It just seemed really unfair for Mexican sugar market to be affected by the exportation of United State’s high fructose corn syrup and other sweeteners, when Mexico was not being able to enjoy the benefits from their previous agreement under the NAFTA.

But the measures adopted by Mexico were perhaps not the best, since a state is not empowered to attempt against its WTO obligations in order to try to force another state to comply with its obligations under a non-WTO international agreement. And as stated above, despite the controversies arisen in this case, I do not think there is a problematic within the WTO and its jurisdiction or the way they resolved the case, I would say that if the United States would have observed its obligations under the NAFTA or at least tried to cooperate in order to resolve their differences and came to an agreement on the sugar trade, Mexico would have never had to take this radical and GATT-violating measures, still, it is not justifiable for it to have done so.

As to the recommendations that raised from this case, on May 2006 the Executive Branch of the Mexican Federal government sent to the Permanent Commission of the Union Congress which is the maximum authority regarding legislations, a reform project in order to overturn the legal dispositions on the Mexican Special Tax Law applicable to Production and Services regarding soft drinks taxes so as to comply with the recommended on the Appellate Body’s resolutions.


[ 1 ]. UNITED STATES, Mexico- Tax Measures on Soft Drinks and Other Beverages , Request for Consultations by the United States, WT/DS308/1, March 18, 2004. [ 2 ]. UNITED STATES, Mexico- Tax Measures on Soft Drinks and Other Beverages , Request for the Establishment of a Panel, WT/DS308/1, June 11, 2004. [ 3 ]. UNITED STATES, Mexico- Tax Measures on Soft Drinks and Other Beverages , Constitution of the Panel Established at the Request of the United States, WT/DS308/5/Rev.1. August, 25 2004. [ 4 ]. http://www.iisd.org/trade/handbook/3_4_1.htm, International Institute for Sustainable Development. Environment and Trade: A handbook. The basics of the WTO. The key agreements, with a special consideration of those related to the environment. 3.4.1. The General Agreement on Tariffs and Trade, 1994 [ 5 ]. http://www.usitc.gov/publications/332/journals/corn_sweeteners.pdf, Kornis, Magda, United States international Trade Commision, Journal of international Commerca and Economics, Web versión December 2006. [ 6 ]. UNITED STATES, Mexico- Tax Measures on Soft Drinks and Other Beverages , Report of the Panel, WT/DS308/R, Paragraph 8.134. [ 7 ]. Report of the Panel, Paragraph 8.78.

[ 8 ]. Panel Report, Paragraphs 8.170 to 8.181.
[ 9 ]. Mexico- Tax Measures on Soft Drinks and Other Beverages, Notification of an Appeal by Mexico, WT/DS308/10, December 6th 2005. [ 10 ]. Appellate body Report, Paragraph 82.
[ 11 ]. Appellate Body Report, Paragraph 47.
[ 12 ]. Appellate Body Report, Paragraph 56.
[ 13 ]. J. Davey William and Sapir André, World Trade Review / Volume 8 /
Special Issue 01 / January 2009, pp 5 -23 DOI: 10.1017/S1474745608004151, Published online: 06 March 2009, page 18. [ 14 ]. UNITED STATES, Import Prohibition of Certain Shrimp and Shrimp-Containing Products, WT/DS58/AB/R, adopted 6 November 1998, PARAGRAPH 168. [ 15 ]. http://cdei.itam.mx/ComentarioMexicoRefrescosOA.pdf, Crzo, Ernesto, Corzo Victor, Comentario sobre México – Impuestos sobre refrescos, Informe del Órgano de Apelación, 24 de marzo de 2006, web publication.

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