Indonesia has filed for a WTO panel against the United States (US) after the introduction of a seemingly benign piece of US legislation has slashed Indonesian cigarette exports to the US from US$ 15 million per annum to zero. The Indonesian exports have simply gone up in smoke.
The US legislation that is at issue is found in the Family Smoking Prevention and Tobacco Control Act. Under section 907 of the legislation a prohibition is introduced against the production or sale in the US of any cigarettes which have a flavour added, with a specific exclusion for menthol flavoured cigarettes.
It is notable that the clove flavoured cigarettes that used to be available on the US market before the legislation came into force were wholly imported (almost in the main from Indonesia), while on the other hand nearly all the menthol cigarettes sold in the US are produced domestically. Clearly one is able to recognize where the Indonesian suspicion arose that imports are discriminated against relative to local production – an infringement of the WTO’s so-called ‘national treatment’ principle. More formally the contention would be that the law at issue creates an unnecessary obstacle to trade in that the US has available to it less trade restrictive options to accomplish their legitimate policy objectives. That the US policy objective is legitimate can hardly be argued – they aim to reduce the prevalence of smoking among the youth. The FDA has for example found that smokers aged 17 and below are three times more prone to smoke flavoured cigarettes than would be the norm among adult smokers over 25 years old. The World Health Organization is on record that it agrees that youngsters have a propensity for flavoured cigarettes. There is also a suspicion that the Indonesian cigarettes known as ‘kretek’ have a coolness factor among American teenagers making these kretek cigarettes desirable above the well know US brand names. This is a meaningful market segment as about 3’600 US teenagers take up smoking each day.
The US legislative action is not at issue per se. The troublesome element is the fact that the one flavour produced exclusively by US manufacturers, menthol, is excluded from the provision, raising the suspicion that the legislation is more about a disguised restriction on international trade and less about legitimate health concerns. No doubt much legal argument accompanied by economic analysis will be presented adding to the rich aquis that already exists in the WTO as regards the definition of what a ‘like product’ is. Colloquially the consideration might be whether a US teenager would just as easily choose a cherry flavoured cigarette as a menthol flavoured one, as one example of these legal likeness questions.
The thrust of the Indonesian case is predicated upon the WTO’s Agreement on Technical Barriers to Trade (TBT) citing that there is no scientific data indicating that clove flavoured cigarettes pose a greater health risk than menthol flavoured cigarettes. In formal terms this is said to result in arbitrary and unjustifiable discrimination, constitute a disguised restriction on trade, and have the effect of being more trade restrictive than necessary to achieve the legitimate policy objective, that being if one were to actually exist at all. One notes that Indonesia has also cited the SPS Agreement to cover all the bases, as the standard legal defence in a standards dispute like this would simply be to contend that the measure cited as TBT was actually an SPS measure and hence the claim under the TBT Agreement was invalid. The law at issue in this case is clearly a TBT matter and the Indonesian panel request simply reflects good lawyering in citing both agreements.
What is clear is that the youth smoker market remains attractive as does the smoker market in developing countries. The kretek cigarette as a product is also an interesting product from a marketing perspective, as evidenced by the perceived ‘coolness’ factor in the US. The smart money knows this and the last 5 years have seen both Philip Morris International and British American Tobacco making sizeable acquisitions in the Indonesian cigarette manufacturing sector both to exploit that growing domestic market and with a view to exports of kretek cigarettes. Both these companies are also active in the Southern African market.
The WTO panel will almost certainly be established at the Dispute Settlement Body meeting on 20 July 2010 as the US has already used its one and only blocking opportunity already. This matter will then become the fifth cigarette case that has been triggered in the WTO. Thereafter the process triggers the official dispute settlement sequence of events – funnily enough in less of a ‘smokey room’ manner than in the GATT days. Tobacco is an important cash crop in several Southern African countries and it will be interesting to see if any of these countries join these proceedings as third parties on 20 July 2010.