Mexico — Tax Measures on Soft

Drinks and Other Beverages

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INTRODUCTION
In 2004, a trade dispute between the United States and Mexico emerged within the
World Trade Organization (WTO) framework, centered around Mexico's imposition
of taxes on soft drinks and beverages using sweeteners other than cane sugar. The
United States challenged these tax measures, alleging violations of GATT 1994
provisions. This dispute journeyed through consultations, panel proceedings,
appellate review, and negotiations over compliance timelines, culminating in
Mexico's withdrawal of the contested measures in 2007. This case underscores the
significance of WTO dispute resolution mechanisms in addressing trade conflicts
among member states.
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COMPLAINT BY THE
UNITED STATES.
On March 16, 2004, the United States formally initiated consultations with Mexico
regarding specific tax measures imposed by Mexico on soft drinks and other
beverages utilizing sweeteners other than cane sugar. These measures encompassed
a 20 percent tax on such beverages, known as the "beverage tax," and a similar levy
on various services related to their distribution. The United States alleged that these
taxes contravened Article III of the General Agreement on Tariffs and Trade (GATT)
1994, particularly citing violations of Article III:2, both the first and second
sentences, as well as Article III:4.

Subsequently, on March 26, 2004, Canada expressed its desire to participate in these
consultations. Mexico, on May 14, 2004, informed the Dispute Settlement Body
(DSB) of the WTO that it had accepted Canada's request to join the consultations.
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COMPLAINT BY THE
UNITED STATES.
As the consultations did not lead to a resolution, on June 10, 2004, the United States
sought the establishment of a panel to further address the matter. However, at the
DSB meeting on June 22, 2004, the establishment of the panel was deferred.
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MEASURE AT ISSUE
The measure in question pertains to Mexico's tax policies, which imposed a 20 percent tax
on the transfer and importation of soft drinks utilizing non-cane sugar sweeteners,
alongside taxing specific services associated with the transfer process. Additionally, these
measures included bookkeeping requirements.

The product under scrutiny includes non-cane sugar sweeteners like High Fructose Corn
Syrup (HFCS) and beet sugar, as well as soft drinks sweetened with such substances.
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PANEL
PROCEEDING
Following a second request by the United States, a panel was
established by the Dispute Settlement Body (DSB) at its meeting on
July 6, 2004. Several WTO members, including Canada, China, the
European Communities, Japan, and Pakistan, reserved their third-
party rights, with Guatemala also reserving its third-party right on
July 15, 2004. However, Pakistan later informed the DSB on August
20, 2004, that it would not participate as a third party in the panel
proceedings.

The Panel was composed on August 18, 2004. The Chairman of the
Panel informed the DSB on February 1, 2005, that the panel
expected to complete its work by the end of May 2005, as outlined
in the agreed timetable. Subsequently, on May 4, 2005, the
Chairman informed the DSB that the work was expected to conclude
in August 2005, allowing time for the translation of the interim
report into Spanish before its issuance, as agreed with the parties
involved.
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On October 7, 2005, the Panel's Report was circulated to Members. The

Panel concluded that Mexico's soft drink tax and distribution tax, as
applied to imported sweeteners, soft drinks, and syrups, were
inconsistent with Article III:2 of GATT 1994. Additionally, the Panel
found that the soft drink tax, distribution tax, and bookkeeping
requirements, as imposed on imported sweeteners, violated Article III:4
of GATT 1994. Furthermore, the Panel determined that these measures
were not justified under Article XX(d) of GATT 1994.

Mexico opted to appeal certain legal issues addressed in the Panel report
and certain legal interpretations developed by the Panel. The Appellate
Body notified the DSB on February 2, 2006, that it would not be able to
provide its report within the 60-day period and estimated that the report
would be circulated to WTO Members no later than March 6, 2006.

The Appellate Body Report was circulated to Members on March 6,

2006. The Appellate Body upheld the Panel's decision not to decline
jurisdiction and, for different reasons, affirmed the Panel's finding that
Mexico's measures did not constitute measures to secure compliance
with laws or regulations within the meaning of Article XX(d) of GATT
1994.

At its meeting on March 24, 2006, the DSB adopted both the Appellate
Body report and the Panel report, as modified by the Appellate Body
report.
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KEY FINDINGS
Under the principle of national treatment, as outlined in Article III:2 of the General Agreement on Tariffs and Trade (GATT), countries are
required to treat imported products no less favorably than similar domestic products. However, in the case of Mexico's tax measures on soft
drinks, the Panel found inconsistencies with both the first and second sentences of Article III:2.

Firstly, regarding soft drinks sweetened with High Fructose Corn Syrup (HFCS), the Panel determined that Mexico's tax measures violated the
first sentence of Article III:2. Soft drinks containing HFCS were subjected to internal taxes exceeding those imposed on similar domestic
products, specifically soft drinks sweetened with cane sugar, which were exempt from these taxes.

Secondly, concerning non-cane sugar sweeteners like HFCS, the tax measures were found to breach the second sentence of Article III:2. The
dissimilar taxation applied to directly competitive or substitutable imports (HFCS) and domestic products (cane sugar) provided protection to
domestic production, thereby contravening the principle of national treatment.
Additionally, the Panel concluded that Mexico's treatment of non-cane sugar sweeteners, such as HFCS, violated Article III:4 of the GATT. By
according them less favorable treatment, through tax measures and bookkeeping requirements, compared to like domestic products (cane sugar),
Mexico failed to meet its obligations under the national treatment principle.

Regarding the exceptions clause outlined in Article XX(d) of the GATT, the Appellate Body upheld the Panel's finding that Mexico's measures,
aimed at securing compliance by the United States with its obligations under NAFTA, did not qualify as measures to secure compliance with
laws or regulations within the meaning of Article XX(d). This is because Article XX(d) refers to domestic legal rules, not obligations of another
WTO Member. The Appellate Body clarified that measures designed to secure compliance need not guarantee absolute certainty of achieving
their intended results, nor do they require coercion as a necessary component.
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IMPLEMENTATION
OF THE REPORT
During the DSB meeting on April 21, 2006, Mexico expressed its
need for a reasonable time frame to implement the DSB
recommendations and rulings. Subsequently, on June 22, 2006, the
United States requested arbitration when discussions on the
compliance period failed. However, on July 3, 2006, both Mexico
and the United States agreed on a nine-month and eight-day
compliance period, extending to ten months and seven days if
Mexican Congress enacted legislation in December 2006. By
January 23, 2007, Mexico informed the DSB that it had withdrawn
the disputed measure. Mexico complied within the agreed period,
confirmed by the repeal of inconsistent tax provisions on December
27, 2006, thus fulfilling its obligations under the dispute settlement
mechanism.
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CONCLUSION
In conclusion, the trade dispute between the United States and Mexico, centered
around Mexico's taxation of soft drinks and beverages using sweeteners other than
cane sugar, traversed a comprehensive process within the World Trade
Organization's framework. Through consultations, panel proceedings, and appellate
review, it highlighted violations of GATT provisions, notably concerning national
treatment and exceptions clauses. Ultimately, Mexico's withdrawal of the contested
measures in 2007, following negotiations over compliance timelines, underscored
the efficacy of WTO dispute resolution mechanisms in resolving trade conflicts
among member states and ensuring adherence to international trade rules.
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