As mentioned here, the recent Appellate Body findings on likeness in the Philippines - Spirits decision seem to mean that competitiveness is the key to the "likeness" analysis, even under GATT Article III:2, first sentence. Here's what we said about this issue in our DSC (subscribers only) for the case:
The Appellate Body's reasoning on "likeness" in the context of GATT Article III:2, first sentence recalls the divided opinion on this issue in the EC - Asbestos case. There, two Members of the Appellate Body took the view that, under Article III:4, likeness is about the "competitive relationship" between products: "a determination of 'likeness' under Article III:4 is, fundamentally, a determination about the nature and extent of a competitive relationship between and among products." (See para. 99) By contrast, one Member of the Division was skeptical about what he referred to as a "fundamentally economic interpretation" of "like products," stating: "the necessity or appropriateness of adopting a 'fundamentally' economic interpretation of the 'likeness' of products under Article III:4 of the GATT 1994 does not appear to me to be free from substantial doubt." (See para. 154)
In the Distilled Spirits case, the Appellate Body seems to have built on the reasoning of the Asbestos majority, applying it beyond Article III:4. Of particular importance is that it did so despite the fact that the legal provision at issue was Article III:2, first sentence. The Asbestos majority had emphasized the distinction between Article III:4 and Article III:2, with the latter containing separate provisions for "like products" and "directly competitive or substitutable products," while Article III:4 refers only to "like products." For the Asbestos majority, this distinction indicated a broader scope of coverage for likeness under Article III:4 than for likeness under Article III:2, first sentence. (See paras. 94-99) In Distilled Spirits, however, the Appellate Body cited a key passage from the Asbestos reasoning, and then seemed to apply this reasoning to "likeness" under Article III:2, first sentence:
119. While in the determination of "likeness" a panel may logically start from the physical characteristics of the products, none of the criteria that a panel considers necessarily has an overarching role in the determination of "likeness" under Article III:2 of the GATT 1994. A panel examines these criteria in order to make a determination about the nature and extent of a competitive relationship between and among the products.211
120. We understand that products that have very similar physical characteristics may not be "like," within the meaning of Article III:2, if their competitiveness or substitutability is low, while products that present certain physical differences may still be considered "like" if such physical differences have a limited impact on the competitive relationship between and among the products.
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211 In EC – Asbestos the Appellate Body found that "a determination of 'likeness' under Article III:4 is, fundamentally, a determination about the nature and extent of a competitive relationship between and among products." (Appellate Body Report, EC – Asbestos, para. 99)
With these statements, the Appellate Body seems to have issued a clear ruling that, as a general matter and regardless of which provision is at issue, likeness in the context of WTO obligations is about the economic competitiveness of products.
The Clove Cigarettes appeal may put our statement that likeness is always about competitiveness to the test. In this appeal, the Appellate Body will be considering various U.S. arguments related to the panel's findings on likeness under the TBT Agreement Article 2.1 National Treatment obligation. On the issue of likeness under Article 2.1 as a general matter, the panel had stated:
7.99 In our view, it is far from clear that it is always appropriate to transpose automatically the competition-oriented approach to likeness under Article III:4 of the GATT 1994 to Article 2.1 of the TBT Agreement because that approach was developed by the Appellate Body in EC – Asbestos on the basis of the general principle in Article III:1 of the GATT 1994, which does not have an equivalent in the TBT Agreement. In EC – Asbestos, the Appellate Body stressed the relevance of the "general principle" articulated in Article III:1 as expressed in Article III:4 and how it informs the interpretation of the concept of like products in Article III:4. ...
7.119 From our considerations above, we do not believe that the interpretation of Article 2.1 of the TBT Agreement, in the circumstances of this case where we are dealing with a technical regulation which has a legitimate public health objective, should be approached primarily from a competition perspective. We rather think that the weighing of the evidence relating to the likeness criteria should be influenced by the fact that Section 907(a)(1)(A) is a technical regulation having the immediate purpose of regulating cigarettes with a characterizing flavour for public health reasons. ...
So for the Clove Cigarettes panel, competitiveness was not the main issue under TBT Article 2.1. Given the Spirits finding, however, will the Appellate Body take a different approach? Will it find that competitiveness is the key under 2.1, as it is under Article III:2, first sentence? And if so, how will that affect the findings on National Treatment in the Clove Cigarettes case? One caveat is that the U.S. has not specifically appealed the issue of the panel's consideration of competitiveness under the likeness issue, so the Appellate Body could probably avoid this issue if it wanted to.
Let me add one more quote from our Spirits DSC:
Of course, to the extent that such differences affect the competitiveness of the products, they will still be taken into account. Thus, for example, if one product involves a health risk whereas another product does not, this will have an impact on the degree to which they compete in the marketplace.
The point here is that even if competitiveness is the focus, health risks will be taken into account to the extent they affect competition between the products, which they presumably will.
As a final point in this post, related to the Clove Cigarettes appeal more generally, the U.S. appeal arguments try to pick apart much of the panel's reasoning. Let's say the Appellate Body agrees with some of the U.S. arguments. If the Appellate Body finds fault with the panel's reasoning, will it be able to find a violation based on its own reasoning, or will we be left in limbo with a finding that reverses the panel but does not reach a conclusion on the substantive issues?
