Content

I - Summary of the facts ....................................................................................... 1

II - Legal issues ..................................................................................................... 2
III - Arguments raised by disputing parties ...................................................... 2
1. “Like circumstances” .............................................................................. 2
2. No less-favorable treatment .................................................................... 3
IV - Findings by arbitral tribunals ..................................................................... 3
V - Commence on the outcome ............................................................................ 5
Reference ............................................................................................................... 5

I - Summary of the facts

Cargill was a food company incorporated in the United States of America sold the
high fructose com syrup ("HFCS") to its Mexican subsidiary, who in turn sold it to
Mexican companies, particularly the soft drink industry. To protect its refined sugar
cane industry, Mexico enacted a number of trade barriers. Mexico imposed a tax on
soft drinks containing HFCS, applied to all products that contained sweeteners other
than cane sugar, which meant that the presence of any HFCS in a beverage was
sufficient to trigger the Tax. While HFCS was produced and distributed entirely by
U.S.-owned companies, cane sugar was produced by Mexican-owned companies and
by the Mexican government-owned sugar mills.1

On 31 December 2001 (the same date on which Mexico introduced the IEPS Tax),
the executive of Mexico published a decree that established new tariff rates for 2002
for the importation of goods under the NAFTA and other trade agreements. Under
this decree, HECS imports from the United States would require a permit issued by
the secretary of economy ("import permit requirement"). If an importer did not have
a permit, the import would be subject to the MEN tariff established by the Decree of

1
Cargill, Inc. v. United Mexican States, Paragraph 106, Page 26.
1
11 October 200 I. Claimant explains that these MEN tariffs ranged from 156% to
210%; in comparison, the NAFTA tariff was 3% for 2002 and 1.5% for 2003.2

II - Legal issues
Whether Cargill de Mexico, as a supplier of HFCS to the soft drink industry, was in
"like circumstances" as domestic suppliers of cane sugar to the soft drink industry?

Whether the treatment accorded to it was less favorable than the treatment accorded
to domestic investors or their investments?

III - Arguments raised by disputing parties

1. “Like circumstances”
Claimant argues that Mexico's measures violate NAFTA Article 1102. Specifically,
the lEPS Tax was imposed on "all soft drinks containing HFCS, all of which was
supplied by U.S.-owned companies" and not imposed on soft drinks sweetened with
cane sugar, all of which was supplied by domestic sugar producers. In addition,
Claimant argues that Mexico's import permit requirement and the failure to issue a
permit to Cargill "disadvantaged Cargill to the benefit of Mexican domestic sugar
producers."3 Respondent counters that there has been no violation of Article 1102.
The lEPS Tax did not discriminate on the basis of nationality, a requirement for
discrimination under Article 1102; nor, Respondent asserts, was Cargill de Mexico
in "like circumstances" with Mexican sugar producers.4.

Claimant argues that Cargill and its investment Cargill de Mexico were in "like
circumstances" with Mexican domestic sugar producers because they operated "in the
same business or economic sector." They were, in Claimant's view, supplying a
"functionally interchangeable product to the same customers in the same sector of the
economy for the same business purpose." Claimant points to the decision of the WTO
panel in Mexico-Tax Measures on Soft Drinks and Other Beverages, which found
HFCS and sugar to be "directly competitive or substitutable" products within the
meaning of GATT Article Ill. "Like goods", Claimant argues, is an important
component of "like circumstances".5 Respondent argues that, just because the
products sugar and HFCS compete in the same market, does not mean that the
distributors of sugar and the distributors of HFCS are in "like circumstances", even
though investors and domestic producers are producing the same product, they may

2
Cargill, Inc. v. United Mexican States, Paragraph 117, Page 29.
3
Cargill, Inc. v. United Mexican States, Paragraph 185, Page 50.
4
Cargill, Inc. v. United Mexican States, Paragraph 186, Page 50.
5
Cargill, Inc. v. United Mexican States, Paragraph 192, Page 52.
2
still not be in "like circumstances". Respondent cites three reasons for its contention
that Cargill de Mexico and domestic sugar suppliers were not in "like circumstances".
First, Cargill de Mexico is a distributor of diverse products whereas Mexican sugar
producers are limited to one product. Second, the market for sugar is highly regulated,
but the market for HFCS is not. Third, the sugar industry was devastated
economically, but the HFCS industry was not.6 Claimant rejects each of these
arguments. First, the fact that Cargill de Mexico distributes a variety of products is
irrelevant because this case is about one product owned by Mexican nationals and
one product owned by U.S. nationals. Second, the claim that the market for sugar is
more highly regulated is neither pertinent nor proved. Third, the claim that sugar was
more vulnerable "misses the point" because both products competed for the business
of soft drink bottlers.7

2. No less-favorable treatment

Claimant argues that the treatment accorded it by Respondent was less favorable in
that the "difference in tax treatment made HFCS a far more expensive input into soft
drinks than sugar." Moreover, Claimant alleged that "Mexico's new import
requirement and its refusal to issue such a permit to Cargill" disadvantaged Claimant
to the benefit of domestic sugar producers in the competition for sweetener orders
from the soft drinks industry.8 Respondent does not challenge the claim that, under
the IEPS Tax, HFCS was treated less favorably than cane sugar, but instead argues
that, in order to comply with Article 1102, differential treatment has to be received
on the basis of nationality and also argues, since there was some Mexican investment
in the HFCS industry and there was foreign investment (including that of Cargill) in
the cane sugar industry, the discrimination as between suppliers of HFCS and cane
sugar to the soft drinks industry could not have been on the basis of nationality.
Claimant counters that Article 1102 applies to de facto as well as de jure
discrimination.

IV - Findings by arbitral tribunals

The Tribunal concludes that the IEPS Tax and the export permit requirement violate
Mexico's obligations under Article 1102.

6
Cargill, Inc. v. United Mexican States, Paragraph 197, Page 53.
7
Cargill, Inc. v. United Mexican States, Paragraph 198, Page 54.
8
Cargill, Inc. v. United Mexican States, Paragraph 216, Page 59.
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The Tribunal concludes that, in relation to the IEPS Tax, Cargill de Mexico was in
"like circumstances" with domestic suppliers of cane sugar to the soft drink industry.
First. "like circumstances" in Article 1102 should be interpreted in accordance with
Article 31(1) of the Vienna Convention 1969, that is, the "ordinary meaning to be
given to the terms of the treaty in their context and in the light of its object and
purpose.” Second, in each of these cases, the investor and domestic producers were
not in "like circumstances" even though they produced the same product and
competed in the same market. Third, the diversity of Cargill de Mexico's business is
not relevant in this case. The fact that Cargill de Mexico engaged in business other
than the distribution of HFCS to the soft drink industry, or the fact that domestic
suppliers of cane sugar engaged in businesses other than the supply of sugar to the
soft drinks industry. Fourth, the sugar operates in a highly regulated market in
comparison to the HFCS market is not relevant in this case. In fact, Respondent does
not elaborate on how this factor is relevant. Fifth, the difference in economic
circumstances existed. However, the measure was not taken because of economic
circumstances (The industry is in dire economic straits). Additionally, Mexico did
not claim that it took the measure simply to allow sugar producers to capture the
sweetener market for soft drinks. In fact, the measure taken to disadvantage the HFCS
industry that was in healthy economic circumstances, and which had the effect of
driving the HFCS industry out of the market. Its rationale for the measure was to
bring pressure on the United States government to live up to its NAFTA obligations.
Therefore, a difference in economic circumstances is simply not relevant to
determining whether the suppliers of HFCS and the suppliers of cane sugar are in
"like circumstances".

The Tribunal concludes that, in relation to the import permit requirement, Cargill de
Mexico was in "like circumstances" with domestic suppliers of cane sugar to the soft
drink industry. In the Tribunal's view, the answer to the import permit requirement is
precisely the same as the answer for the IEPS Tax: difference in economic
circumstances does not mean that the suppliers of HFCS and suppliers of cane sugar
are not in "like circumstances" in relation to the import permit requirement.

From the Tribunal's view, the IEPS Tax, the treatment received by suppliers of HFCS
to the Mexican soft drinks industry was less favorable than the treatment received by
suppliers of cane sugar. HFCS suppliers could no longer compete as a result of the
IEPS Tax, whereas cane sugar suppliers were not affected. Moreover, the Tribunal
also concludes that the discrimination was based on nationality both in intent and

4
effect. The IEPS Tax was taken avowedly to bring pressure on the United States
government. By its very design, then, it was directed at United States producers of
HFCS because only in that way would pressure be brought to bear on the United
States government. The import permit requirement, which was intended by the
Mexican government to be a substitute for the IEPS Tax, was even more directly
targeted at United States producers, even though it may have affected other nationals
as well.

V - Commence on the outcome

First, the final conclusion of the Tribunal on the issue: “Whether Cargill de Mexico,
as a supplier of HFCS to the soft drink industry, was in "like circumstances" with
domestic suppliers of cane sugar to the soft drink industry” was not explained clearly
as they started with invalidating respondent’s arguments: “Cargill de Mexico and
domestic suppliers of cane sugar were not in "like circumstances", “The diversity of
Cargill de Mexico's business; The sugar operates in a highly regulated market; The
difference in economic circumstances are all irrelevant to the measure taken, the IEPS
Tax imposed on soft drinks sweetened with HFCS” even though the Tribunal’s
reasoning were logical and convincing. However, the Tribunal came to final
conclusion that Cargill de Mexico, as a supplier of HFCS to the soft drink industry,
was in "like circumstances" with domestic suppliers of cane sugar to the soft drink
industry by invalidating the argument that Cargill and domestic suppliers were not in
“like circumstances” without apparent explanation.

Second, in paragraph 220, the tribunal says that "the discrimination was based on
nationality both in intent and effect." Not only did they argue about "nationality"
based discrimination, but they also rely on "intent and effect." Of course, it's
important to note that they are not saying intent and effect are the only factors to
consider, or are required factors. Nevertheless, the tribunal did take these into account
as key issues in its "less favorable treatment" analysis.

Reference
1. ICSID Case No. ARB(AF)/05/Z Cargill, Incorporated and United Mexican
States
2. North American Free Trade Agreement
3. General Agreement on Tariffs and Trade