Does Japanese Liquor Taste Different?: Empirical analysis on the national treatment under the WTO
The national treatment obligation, along with most favored nation obligation, is an important principle of non-discrimination adopted by the WTO. It requires that foreign products be treated no less favorably than national products. This paper empirically examines the 1996 WTO recommendation that a Japanese distilled alcohol beverage, shochu, is a 'directly competitive or substitute product' to other distilled drinks, and thus not taxing similarly is in violation of its national treatment obligation. Demand estimates obtained from a three-stage nested logit model reveal that shochu and other distilled beverages are matched substitutes for each other. Upon the recommendation by the WTO Appellate Body, Japan changed its liquor tax rates closer to the optimal level.
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