I. Identification

1. The Issue

  Soju is the most famous traditional Korean alcoholic beverage. There are two kinds of Soju that one is distilled and the other is diluted. Korean Soju has been manufacturing by diluted way which is different from that of Whisky or Brandy. Usually, Soju has 25% proof of alcohol whereas under 20% proof-soju has become more and more famous. With this low alcohol proof, there is another reason why soju is so popular among people is that the price of Soju is the cheapest among alcoholic beverages in korea. However, the European Communities (the EC) and the U.S. brought a complaint against Korean liquor tax policy on Soju for unfair competition. They insisted that Korea offer a preference to tax on Soju as compared with certain imported western-style alcoholic beverage and this is inconsistent with Article 3:2 of the GATT 1994. Therefore, in 1999, the World Trade Organization (the "WTO") Dispute Settlement Body(the "DSB") decided that the Korean government should make a partial amendment of policy related to liquor taxes. The partial amendment on liquor tax policy became unavoidable as the Korean government as a member of the WTO. Therefore, Korean government amended the tax rate of Soju from 35% to 80% and is going to raise the tax of it continuously until the tax rate of Whisky become same with that of Soju.
Therefore, the Soju Case Study will focus on the Korean Soju Industry and the effects of DSB's decision that the government charges a higher tax on Soju and a lower tax on whiskey. And this focus can include what the signification of Soju to Korean is and how to develop and to export Soju to foreign countries. This study will demonstrate an effective way to develop the Soju industry and make Soju popular in the world by considering the cultural aspect.

2. Description

For Korean people, Soju is called 'A friend of life' and 'Common people's drink'. With Soju, common people can relieve some of their burden or share their happiness with each other or even drown their grief. The popularity of Soju in Korea cannot be overestimated. Korea has so many eating establishments per city and if you walk past any restaurant and you can find tables littered with Soju bottles, and the restaurants littered with customers at varying levels of intoxication.They can get closer to each other with Soju. In Korean culture of that people value the relationship between them above everything else, soju is a medium of culture and that is why Soju has been remained cheaper price than any other alcohol. There seems to be a distinct difference in opinion between the sexes about soju in Korea. Korean men appear to love the stuff and many of them claim that soju increases stamina. Korean men are not soft touches when it comes to drinking. Far from it. The word soju to most Korean women is something approaching a mild panic - an explosive squeal of disgust, a deeply pained expression, head shaking, hand waving. That's not to say they don't drink it. It's just they don't seem particularly like it, even as they pour it down their throats. I can say the taste of Soju to me is similar to ethanol mixed with water, of course I've never tried ethanol before so this comparison is purely guesswork with smell. Some of women can't drink soju because of this taste of ethanol.

Soju has been a Korean traditional alcoholic beverage since the late of the Gorye period(918-1392) and the period of the Won Dynasty in China, Soju was introduced into Korea under the name of 'Sul'. Originally, Sul was from Arabia to the Mongols of the Won Dynasty, then to Manchuria and into Korea. At that time, there were special buildings called Yangonseo where "Sul" was made in palaces for special events like national celebration.

 

SojuDok' traditional soju container

Therefore, common people could not get "Sul" at that time. It was enjoyable drink only for high class. But the late 14th century, Soju came to know to common people. Therefore the 'Sul' had been transformed into the Korean traditional style alcohol 'Soju'. However, it had been still enjoyable for high class people because it had been considered high quality based drink. The Soju which was made during these periods was distilled soju.During the Chosun Dynasty (15th century~1909), brewing was done in the home on a small scale. During this period, soju had become so popular that it was suggested to the king that distillers be taken away from the commoners because they were using too much of their rice to make soju, and did not have enough left to eat.

However, this became outlawed under the Japanese occupation (1910~1945) and the Japanese issued brewing licenses to favored local supporters.This license made brewers produce drink in large quantities and formed the beginning of industrial Sul making in Korea. During this period, western alcoholic beverages such as beer, whisky and wine were introduced to Korea. Because of their high price, these drinks became popular among the wealthy, while Soju have been preserved among the common people. The government is very cautious about raising tax rates on soju, because it affects people's daily lives.
In 1965, Soju industry began to produce diluted Soju which is now called Korean Soju since the Korean government prohibited brewing distilled Soju due to the 1965 Cereals Policy. The 1965 Cereal Policy is one of the counterplans for overcome lake of rice. At that time, Korea had a hard time of rice and the government needed to restrict brewers to make Alcohol with rice with this policy. Brewers from then, couldn't make Alcohol with rice freely and largely. And from 1966, the government had allotted spirits, one of the raw materials of Soju, to brewers and because of this policy, brewers thought out diluted Soju to produce as much as they could with allotted sprites. They became to produce diluted Soju in commercial quantity. What generally called Soju is a distlled hard liquor made from potatoes and grain with high alcoholic content. Traditionally, washed and steamed rice is cooled with cold water and then, mashed and fermented glutinous rice called Nuruk or regular rice is added. After stirring well, keep about a week until it is fermented.And then, it is put into a cauldron over a fire and boiled. The distilled alcohol forms on the surface of the vessel filled with cold water, which is Soju. But the Soju which is currently spent is diluted Soju, so that its alcohol proof is lower and taste is not bitter than distilled Soju. Nowadays, alcohol proof of soju is getting lower and lower so that light drinkers can drink easier than before.

[Table 1. Comparative table between distilled and diluted soju]
Information from http://www.jinro.co..kr
 

Divison	Distilled Soju	Diluted Soju
Raw materials	cereals(rice, wheat, barley, etc)	cereals, sweet potatos, theriac
Alcohol-proof	30~35%	21~30%
Smell	strong	weak
Distilled way	single distillation(Traditional way of distillation)	chain distillation(Modern way of distillation)
Impurities	a little	none

[Table 2. Delivered Quantity of Alcohol in Korea by year]
Imformation from http://www.kalia.or.kr

However in 1997, the EC and the U.S. claimed that the contested measures are inconsistent with Article 3:2 of the GATT 1994 because they accord preferential tax treatment to diluted Soju as compared with certain imported "western-style" alcoholic beverages. WTO Distribute Settlement Body gave a conclusion that Korea government should harmonize existing 35% tax rate of Soju with 100%, same as Whisky. However, the Korean Liquor Tax Law imposes an ad valorem tax on all alcoholic beverage and it is different from the Liquor tax law imposing a specific tax of most WTO member countries include the U.S. and the EU. Under the ad valorem tax law, the EU and the U.S. insisted that it is violation of the Article 3: 2 of GATT regulation.

 

Article 3:2 reads:   " The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal changes to imported or domestic products in a manner contrary to the principles set forth in paragraph1." (The Results of The Uruguay Round of Multilateral Trade Negotiations: The Legal Texts, Geneva: GATT Secrestariat, 1994)

GATT Article 3.1 which is referred to in Article 3:2, reads: "The contracting parties recognize that internal taxes and other internal charges, and laws, refulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitatice regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production" (The Results of The Uruguay Round of Multilateral Trade Negotiations: The Legal Texts, Geneva: GATT Secrestariat, 1994)

In July 2000, Korea government increased tax rate on Liqour from 35% to 80%. It was unavoidable decision as a member of WTO because if the member don't perform its duty, the other members can inflict serious loss on that member country. the U.S. and the EU are putting in a claim for increasing 20% more tax rate on soju. And the Korean government made a declaration of performing it step by step. Despite increased tax rate on soju from 35% to 80%, the price of it still has much more gap with that of Whisky. That will be helpful to Korean government on revenues while that will burden the people who are the major consumer of Soju with higher price.

[Table.3 Comparison Liquor Tax Amount per liter]
Source : Korean Liquor Taxation Report on Amedment : 1999. 9. 14 Korean Ministry of Finance and Economy

[Table 4. Changed price of Consumer's price after amendation]
Source : Korean Liquor Taxation Report on Amedment : 1999. 9. 14 Korean Ministry of Finance and Economy

The problem is even these cheaper price can impose a burden on common people who are major customers of soju. Actually, largely Korean people like dining together after their works or meeting with their friends with soju. After they have a dinner or when they have it, they usually enjoy the mood of drinking or just drinking itself. At this moment, most of drinking beverages have been soju, sometimes beer as well. With soju, people sometimes play a drinking game for fun and from this, they can get closer than before. Since 1960s, soju has been the pleasure of life to wage earners who toil and moil with a small salary, but play the leading role in development. Because of its cheap price and social environment, soju is indispensable to Korean people's life like food and water. However, Korean goverment are planning to increase the tax on soju as same as that on whicky. If then, the price of soju will increase and common people can somtimes hesitate to drink soju. A rise in the price of soju can result in a rise in the difficulties of life. It thus appears that it will affect to Korean Soju industry in the long term. At the slightest slip, culture of soju that is already formed strongly in Korean society might be changed or be disappeared. To prevent these results and to reduce the amount of loss on soju industry, there can be two alternative proposals. One is to make dose of 1 bottle smaller so that people can enjoy the mood of drinking soju as same as before with same price. And the other is to make proof of soju lighter than now so that the tax on soju can be decreased.

And internationally, Soju can be the world alcoholic beverage.

[Table 5. 2002 World sales records of Diluted Alcohol Market] source Ranknig Product Quantity 1 Jinro Soju (Korea) 64million 2 Stolichinaya(Russian Vodka) 55million¸ 3 Moskopskaya(Russian Vodka) 32million¸ 4 San Miguell(Phillippine) 25million¸ 5 Pirasununga(Brazil) 21.6million¸

[Table 6. The amount and quantity of Export Soju to Japan] source Year 92 94 96 98 00 02 Amount 54 114 230 364 411 470 Quantity 5,368 16,219 30,300 40.558 56,135 55,402

 

Therefore, Korean soju is getting more popular closer to Korean people as well as to foreingers. According to the May 2002 edition of the Drink International which is one of the famous magazines in the world, Korean Jinro Soju had been ranked first in the world diluted alcohol market for 2 years. In Japan, Jinro Soju has been ranked first for 5 years in Japan alcohol market.

[Table 7. Korean Soju exporting countries]

source

Soju companies should develop their soju products to suit foreigner's taste and one proposal on here is to export fruit soju to the EU and the U.S. In EU and the U.S., they enjoy wine made of fruit. Korean soju also has several types of fruit soju as well as green tea, yogurt, cucumber soju. If Korean Soju companies develop their fruit soju to suit the western people's taste, they can get much advantage from it. Moreover, even pure soju has been on the top of Japanese Alcohol markets for 5years. In Chinese case, it is a potential market for Soju. The most famous alcohol to Chinese is Baijiu that has over 50% proof of alcohol and bitter taste. Because of these reasons, Chinese women cannot get easily access to Baijiu. Using this fact, Soju company can export soju intended for Chinese women. Fruit Soju which is light and sweet can be suitable for chinese women's taste.
Even though Korean government cannot but increase the tax and the price of Soju up to 100% according to DSB's decision, Korea can have these kind of ways to maintain the culture of Soju and to develop Soju industry.

3. Related Cases

Alcohol Related Cases
Chines Baijiu Mezcal, Smirnoff, Polish Vodka, Kentucky Bourban, Bacardi, Tequilia, German Beer, Tennessee Whisky,

Korean Cases
ArtifactKorea, Dog, Doosan, Korea-Apple, Koreasubsidy,

4. Author and Date:

Joon Hye Han. Jun. 23. 2004

5. Discourse and Status: Agreement (Decision)

Soju is cheaper than any other alcohol in Korea. That can be one of the reasons why Soju is the most popular traditional drink in Korea. The Korean government had been supporting this Soju industry with lower taxes compared to other alcohol from foreign countries. In 1997, the EC and the U.S. claimed that the contested measures are inconsistent with Article 3:2 of the GATT 1994 because they accord preferential tax treatment to diluted Soju as compared with certain imported "western-style" alcoholic beverages.

[Table 8. A Change of Korean Liquor Tax Rate]
Source : Korean Liquor Taxation Report on Amedment : 1999. 9. 14 Korean Ministry of Finance and Economy

Products	'68.1	'72.1	'74.1	'75.1	'91.7	'94.1	'97.1	'00.1
Distilled soju	30	35	35	35	50	50	50	50
Diluted soju	30	35	35	35	35	35	35	80
Wishky	150	160	250	200	150	120	100	100
Brandy	-	100	160	150	120	100	100	100
Liquor	40	50	50	50	50	50	50	50
Beer	100	120	150	150	150	150	130	130

According to the EC, in Article3:2 of the GATT 1994, the notion of "like product" in the first sentence is construable narrowly and the EC notes according to the "Appellate Body Report on Japan - Taxes on Alcoholic Beverages" that minor differences in taste, color and other properties (including differences in alcohol contents) do not prevent products from qualifying as like products. However, Korea stresses the importance of the methodology used to compare domestic and imported products under Article3 :2. It considers that the Panel committed a major legal error in wrongly defining the comparison it had to undertake. The Panel grouped together products that are not physically identical; are used different ways by different manufacturers using different raw materials; taste differently; are used differently; are marketed and sold differently at considerably different prices and are subject to different tax rates in Korea. The Panel also failed to carry out a separate analysis for diluted and distilled soju.(Panel Report, para. 10.54) Korea urges that the panel erred in conducting its analysis on the basis of an agglomeration of the characteristics of two such different products. To extend conclusions that are primarily based on diluted soju to distilled soju is unacceptable logic. Further, by treating diluted soju and distilled soju together, the Panel overlooked the relevance of the considerable price differential between diluted soju and whisky. Nevertheless, WTO DSB concluded that Korean government should raise the liquor tax rate of soju into 100%, same rate as whisky. Because the WTO Appellate Body has confirmed that Korea's tax regime is in violation of is WTO obligations under GATT Article 3: 2(non-discrimination between imported and domestic products), Korea levies liquor tax at significantly lower rates on soju, which is almost exclusively produced in Korea, than on other categories of spirits. This follows last July's victory for the EU, when the original WTO panel found that korea's law was in breach of international trade rules. Both the European industry, which has suffered serious trade damage from the current Korean regime, and the European Comission are expected to closely follow the implementation of the ruling.(Information from <Korea-Teaes on Alcoholic Beverages AB-1998-7, Report of the Appellate Body> World Trade Organization )

6. Forum and Scope: WTO and Multilateral

Korea maintains a multi-tiered taxation regime on the sale of alcoholic beverages. Under the Liquor Tax Law 1949, as amended, Korea creates various categories of distilled spirits, on which it imposes different as valorem taxes. Under the Education Tax Law 1982, as amended, Korea assesses a surtax on certain of these sales, determined as a percentage of the established liquor tax. Both the liquor tax and the education tax on alcoholic beverages are imposed at the wholesale level. The liquor Tax law lays down a system of excise taxes applicable to all alcoholic beverages intended for consumption in Korea. The taxes applied to the categories in dispute are in the form of ad valorem taxes. Under the Education Tax Law of 1990 is assessed as a surtax on the sale of a variety of items, including most alcoholic beverages. For alcoholic beverages, the applicable rate is determined by reference to another tax-the applied liquor tax rate. For those assessed a liquor tax rate of 80% or greater, the law imposes an education surtax calculated as 30% of the liquor tax imposed. The applicable rates on the categories concerned by this dispute, expressed as a percentage of the amount payable pursuant to the Liquor Tax, is as follows.

[Table 9. Liquor and Education Tax Rate in Korea]

source : Korean Taxation: 1997, 3(b) p.188, Korean Ministry of Finance and Economy

According to the Korean law, every consumption tax is based on ad valrem tax system, so it is difficult to switch from ad valrem tax system to specific tax system only for Liquor case. This taxation system depends on situation of the member countries and WTO commits this matter to them. But the EU and the U.S. claimed that Korea should raise the liquor tax amount of soju according to the specific tax system, not to the ad valrem tax system. DSB, however, concluded that Korea should amend the soju tax rate within a Korean tax system.

[Table 10. Comparison Tax amount among countries]

source : Korean Liquor Taxation Report on Amedment : 1999. 9. 14 Korean Ministry of Finance and Economy

12. Type of Measure: Intellectual Property

Traditionally, soju was made of potatos and grain. Washed and steamed rice is cooled with cold water and then, mashed and fermented glutinous rice called Nuruk or regular rice is added. After stirring well, keep about a week until it is fermented. When it is fermented, it is put into a cauldron over a fire and boiled. The distilled alcohol forms on the surface of the vessel filled with cold water, which is Soju. But the Soju which is currently spent is diluted Soju, so that its alcohol proof is lower and taste is not bitter than distilled Soju. Nowadays, this diluted Soju came to represent Korean alcohol and is getting more and more famous in the world. Soju has under 25% alcohol and there are various kinds of soju which has lower alcohol proof than before. These days, lighter alcohol is more popular than stronger one among Korean young people. There are many kinds of Soju in Korea. The most famous brand is "Jinro". There are several kinds of Jinro Soju below.

 

Jinro Soju 375ML/750ML ALC.24% BY VOL. Jinro's brand intended for international consumers and professionals only. The distilled specialty distinguished with its yellow label makes international sensation with the unique, smooth taste. Smooth and clean taste is easy to drink. Like vodka or Jin, Jinro Soju has most no taste making it easy to enjoy. Its is relatively low alcohol content helps lessen the burdon on your body unlike most other spirits with much higher alcohol contents. Whether you drink it straight or with a twist of lemon, it will go down very smooth.

Jinro Chamjinisulro Soju 360ML/375ML ALC.22% BY VOL The liquor thrice-filtered with charcoal made from bamboo In Korea, Chamjinisulro is the first clean and safe soju filtered three times with charcoal made from bamboo, which is cooked at 1,000 degrees celsius. Because Chamjinisulro has been filtered twice, it has never been leaving no harmful ingredients or impurities. You can enjoy pure taste without the burden of hangovers due to it's containing asparagine and affulent minerals.

Jinro Gold Soju 360ML ALC.25% BY VOL It was the most popular soju brand in Korea with its highly valued and refined quality and taste for five years until the launching of Chamjinisulro. It uses natural quality ingredients and a high precision, 10-stage filtering system. Jinro Gold soju is a exotic distilled spirit with clear, colorless body and smooth flavors.

Plum Wine 300ML ALC.10% BY VOL. New type of plum liquor is made from fermentation after adding high quality of selected green plum to Jinro Soju. You can enjoy it at any place and any time easily and it goes well with every kind of food due to its clean and refreshing taste. It is more tasty when you drink chilly on the rocks with ice.

13. Direct v. Indirect Impacts: Yes

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: Yes, Soju

b. Indirectly Related to Product: No

c. Not Related to Product: No

d. Related to Process: Yes, Intellectual Property

15. Trade Product Identification: various types of Soju

Fruit Soju which is made of lemon, cherry, apple and banana.There are other types of Soju which is made of yougurt, green tea and vegetable. These kinds of soju have lower alcohol and sweet tasty. If you feel that taste of Soju is bitter and chemical, these fruit Soju will give you more tasty and somewhat fragrant. Like wine, these fruit soju as well as other types of soju such as green tea and yougurt are good for your health. You can enjoy alcoholic beverage both flavorfully and healthfully.

Cherry Soju

16. Economic Data

17. Impact of Trade Restriction: Low

18. Industry Sector: Food

19. Exporters and Importers: EU, the U.S, Japan and China

These various tyes of Soju can suitable for the people's taste in EU, the U.S. Japan and China because pure soju is already on sale on these countries' alcohol market and ranking high sales records so far. It means that those countries people are accepting the taste of soju. Chinese women as well as westerners can easily enjoy this low alcohol proof soju with sweet smell of fruit like wine, but special taste.

V. Environment Clusters

20. Environmental Problem Type:

21. Name, Type, and Diversity of Species

22. Resource Impact and Effect:

23. Urgency and Lifetime:

24. Substitutes:

25. Culture: yes

People usually drink Soju when they are at mess with colleagues or when they are worried about something or happy meet friends. Sometimes, when people have special events or go to retreat with their friends or schoolfellows, Soju is a requisite to be closed each other or they refresh themselves by it. With Soju, they play a game which brings people into closer relationship each other or they can have a heart-to-heart talk. There is a reason why soju price became cheap. In the period of the Third Reblic(1963~72), the government inhibited from raising the Soju price so that low-wage earners who were considered as pillars of society could unburden themselves with Soju. Moreover, in 1965, Korea had the difficulty of obtaining food and government made the Cereals Policy not to brew the soju from rice and distilled soju changed diluted soju due to this law. Therefore, the cost price of Soju had been maintained low price and became common people's alcohol. Because of cheap price, people can easily access and enjoy it. Korea has a culture of Soju tents which are quite literally tents along the side of a city street that serve soju with a variety of food as below.

 

	Pork with cabbage and Korean chilly source		Sliced raw squid with green onion		Bulgogi and common octopus casserole
Korean pan cake
	Bean sprouts and sea jelly with mustard source	Mixed dish of vegetables and sliced fried bean curd casserole		Fine noodles roasted common octopus
			Pork meat coated with flour and sweet sauce

26. Trans-Boundary Issues:

27. Rights:

28. Relevant Literature

Korean drinks and alcohol, One burdon one soju and one beer,
The present condition of Soju exportation, History of Soju