WTO Panel Finds Tax Discriminatory and Contrary to WTO Rules

WASHINGTON  – U.S. Trade Representative Rob Portman applauded a World Trade Organization (WTO) panel decision issued today siding with the United States in its case against Mexico’s beverage tax.  Under the tax, soft drinks made with imported sweeteners, such as high-fructose corn syrup (HFCS) and beet sugar, are subject to a 20 percent tax on their sale and distribution.  Beverages made with Mexican cane sugar are tax-exempt.  The beverage tax resulted in an immediate drop in U.S. exports of HFCS to Mexico.  As of 2004, U.S. exports of HFCS to Mexico remained at less than six percent of their pre-tax levels. 

“This is an important win for our industry. The WTO panel could not have been clearer:  Mexico’s beverage tax is discriminatory and contrary to WTO rules,” said Portman. “Mexico needs to eliminate this tax as soon as possible, and in doing so, I urge Mexico not to merely substitute one barrier to HFCS for another.  Mexico must echo the United States’ commitment to free trade for all goods as the implementation of the final NAFTA duty reductions quickly approaches. We hope the recent announcement by Mexico to provide additional duty-free access for HFCS is a step in that direction.”

The WTO panel report sided with the United States on all major issues in the dispute.  Specifically, the panel agreed that the beverage tax discriminates against U.S. products because it taxes the distribution and sale of beverages that use HFCS and beet sugar but does not tax beverages that use Mexican cane sugar.  The panel concluded that such discrimination is contrary to WTO rules – in particular, those rules that prohibit higher taxes on, and require no less favorable treatment for, imported products as compared to directly competitive or like domestic products.  The panel’s findings cover both beverages and the sweeteners HFCS and beet sugar.

The WTO panel also agreed with the United States that several bookkeeping and reporting requirements associated with collection of the beverage tax afford less favorable treatment to HFCS and beet sugar as compared to Mexican cane sugar and are, therefore, also contrary to WTO rules.

In the course of the dispute, the WTO panel rejected Mexico’s request for it to decline jurisdiction in favor of a North American Free Trade Agreement (NAFTA) dispute settlement panel. The panel concluded that WTO panels may not decline to exercise jurisdiction over disputes properly brought before them.  The panel also rejected Mexico's defense that, although discriminatory, its beverage tax is nonetheless justified as necessary to secure compliance with what, in Mexico's view, are U.S. obligations under the NAFTA.  As the United States explained before the WTO panel, although it shares Mexico’s desire to resolve differences over sweeteners, WTO dispute settlement is not the appropriate forum to resolve a disagreement under the NAFTA.  The United States did, however, reiterate its commitment to a negotiated solution to the NAFTA sweeteners dispute and continues to work hard to achieve that.

Background

Mexico imposed the beverage tax on January 1, 2002.  The beverage tax levies a 20 percent tax on soft drinks and other beverages, as well as on syrups and other products that can be diluted to produce soft drinks and other beverages (“soft drinks and syrups”). The beverage tax further imposes a 20 percent tax on services used to transfer soft drinks and syrups (e.g., distribution services).   In addition, the beverage tax subjects taxed products to several bookkeeping and reporting requirements.  The beverage tax only applies to soft drinks and syrups that use any sweetener other than cane sugar, such as HFCS or beet sugar.  Soft drinks and syrups sweetened exclusively with cane sugar are tax-exempt. 

In Mexico, cane sugar is almost exclusively a domestic product, whereas before the tax, HFCS accounted for 99 percent of Mexico’s sweetener imports.  Thus, by taxing soft drinks and syrups made with HFCS, but not those made with cane sugar, Mexico imposed a tax designed to discriminate against imports.

The beverage tax had an immediate effect on HFCS.  Prior to its imposition, soft drink bottlers were the principal consumers of HFCS in Mexico and were increasingly substituting HFCS as a cost-effective alternative to cane sugar.  The beverage tax reversed this trend as application of the beverage tax made the use of HFCS in soft drinks and syrups cost-prohibitive.

At the request of the United States, the WTO established the panel on July 6, 2004.  Before the WTO panel, the United States claimed that the beverage tax is inconsistent with Mexico’s WTO obligations under Articles III:2 and III:4 of the General Agreement on Tariffs and Trade 1994.  The United States challenged the tax as applied on soft drinks and syrups, as well as on HFCS and beet sugar used to make soft drinks and syrups.  The panel found in favor of the United States on all counts, including rejecting Mexico’s defense that the beverage tax is justified as necessary to secure compliance with the NAFTA.

The NAFTA calls for duties that remain on a handful of products, including sugar, to be eliminated by 2008.

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