THE US RESTRICTION ON FLAVORED CIGARETTES OVERVIEW

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The focus of this article is the US decision to implement the "Family Smoking Prevention Tobacco Control Act of 2009", which contains a provision that bans the "sale or distribution" of all flavored cigarettes except menthol. A bird's eye view of the "Family Smoking Prevention Tobacco Control Act of 2009" gives the impression that it is well intentioned. If you look at it, keeping a close eye on tobacco product manufacturers seems like a good measure for society as a whole. However this legislation is deeply flawed. Furthermore it has far reaching implications for the Indonesian tobacco industry and for Indonesia as a whole. Now how does this affect Indonesia? The majority of cigarettes produced and exported by Indonesia contain clove, so the US has more or less banned Indonesian presence in the US tobacco industry. What is even more surprising is that the legislation contains no restriction on menthol cigarettes which directly benefits the local industry of the US where a high majority of cigarettes produced contain menthol. The name of Phillip Morris Inc. cannot go unmentioned in this regard considering the fact that they are the largest makers of menthol cigarettes and strongly support this bill [1] , leading to this act being nicknamed as the "Marlboro Monopoly Act of 2009". The main purpose of this article is to educate the readers about the current dispute in light of the GATT rules and regulations. It will focus not only on the Indonesian perspective but also on the US response to the Indonesian allegations.

WTO DISPUTE SETTLEMENT PROCEDURE

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Dispute settlement in the WTO occurs through the DSU (Dispute Settlement Unit) whereby a dispute settlement board (DSB) is set up which consists of a representative from both WTO members. The WTO dispute settlement mechanism is a 2 step process namely

Consultation

Panel Proceedings

Indonesia can firstly exercise its rights under article 22 and 23 of the GATT and make its concerns known to the US authorities. The US will then have to abide by the WTO rules and under article 22 of the GATT, give "sympathetic consideration", to the concerns of Indonesia and enter into consultations with them. The US is then bound by WTO laws to reply to a request for consultation within 10 days of receiving the request and start the consultation process within 30 days of the receipt. Consultations would take place in accordance with article 4 of the DSU. [2] In the event the issue could not be resolved through consultation within 60 days of the receipt of the request, the complaining party may request the establishment of a panel and thus moving to the panel proceedings step. The complaining party may request a panel even within the 60 days if both parties agree that the dispute cannot be resolved through consultations (Art 4.7).

The panel proceedings stage is based on a 2 tier structure (1) Panel & (2) Appellate Body. In this stage, as mentioned before, the complainant, in this case Indonesia, can ask the DSB to appoint a Dispute Resolution Panel which assists the DSB in making a decision. The panel then investigates the issue and is required to submit its final report to the DSB within 6 months. Firstly only the interim report is distributed to the parties and if none of the concerned parties have any comment on the report, the report is considered final. If any party feels the need to add something then their views are included in the report before finalizing and then submitted to the DSB for consideration and within 60 days would be adopted formally unless the DSB decides by consensus not to adopt the report or either party chooses to appeal against the report (Art 16.4).

BREACH OF GATT (INDONESIAN ARGUMENT)

Article 3

Article 3.4 of the General Agreement on Tariffs and Trade (GATT) agreement states that "The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use."

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According to Indonesia all flavored cigarettes should be considered as "like" products irrespective of whether they are from Indonesia or the US. The Family Smoking Prevention and Tobacco Control Act restricts the 'sale or distribution' of clove flavored cigarettes - made in Indonesia - but not the menthol flavored cigarettes manufactured in the U.S. As long as clove cigarettes and menthol cigarettes are considered to be "like products" because both are included in the category of flavored cigarettes under the Bill's flavored cigarette provisions, then the Act clearly violates Article 3.4. This particular dispute can relate to the Thai - Cigarette Case [3] which is somewhat similar in nature. The US Cigarette Exporters Association (CEA) brought up a case against Thailand. The sale of cigarettes in the US was going down due to increased health and environmental awareness among people. Therefore the US tobacco manufacturers wanted to make up for it by expanding to other International markets, which in this case was the Thai market. The CEA, appealing through the office of the United States Trade Representative (USTR), alleged that the target countries' restrictive trade policies with respect to tobacco constitute unfair trade practices, which warrant the imposition of retaliatory sanctions. The U.S. government appealed the case to the GATT and eventually Thailand was forced to open its cigarette import market in order to avoid U.S. sanctions.

Article 11

Another breach could be Art 11 of the GATT which states "No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party." The US has completely banned the "sale or distribution" of clove cigarettes in the US which is thereby a breach of the above said article.

Article 1

Article 1 of GATT outlines the concept of Most-Favoured-Nation (MFN) treatment and states that trade concessions granted to one Member are applied immediately and without conditions to all other Members. If Indonesia can prove that the US is importing clove cigarettes from another country and at the same time banned Indonesia from exporting them to the US, then the US will also be in breach of Article 1. Here again the argument of "like product" comes to the fore. As discussed before both Article 1 & 3 require that both clove and menthol cigarettes are considered to be "like products". GATT provisions don't exactly define "like products" but the following points are taken into account when deciding if it's a like product.

Are the products identical?

Are the products substitutable [4] ?

Are the products "directly competitive"?

Another provision which does not apply here but is extremely important is that "method of production [5] " cannot be used to differentiate between two products.

THE US DEFENSE

Article 20 & SPS (Sanitary and Phytosanitary Measures)

The US defense to the above allegations lies with Art 20 of the GATT and the SPS agreement' Article 20 of GATT provides exceptions to the article 3.4. Those exceptions include measures "necessary to protect human, animal or plant life or health" (Art 20(b)). The US can argue that the bill is in accordance with international health measures and also follows the GATT exceptions under article 20(b). They do not however include any relevant political or economic exceptions. Therefore it would be very difficult for the U.S. to credibly argue that the Act is not in violation of GATT. Hence, the measure results in arbitrary and unjustifiable discrimination, a disguised restriction on trade, and is more trade restrictive than necessary to achieve a legitimate objective, if one were to exist.

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If however the US succeeds in convincing the panel that they have fulfilled the conditions for article 20 to apply here then the SPS agreement comes into play. According to the SPS agreement "Members have the right to take sanitary and phytosanitary measures necessary for the protection of human, animal or plant life or health, provided that such measures are not inconsistent with the provisions of this Agreement" (Art 2.1). The US can argue that their bill is in accordance with the SPS agreement and therefore a breach has not been made. However the SPS agreement requires that such measures be taken only when there is sufficient scientific evidence of international standard to justify those actions, therefore a risk assessment is necessary. Article 5.2 explains what kinds of information shall be taken into account when undertaking a risk assessment:

available scientific evidence;

relevant processes and production methods;

relevant inspection, sampling and testing protocols;

prevalence of specific diseases or pests;

existence of pest- or disease-free areas;

relevant ecological and environmental conditions; and

quarantine or other treatment.

Conclusion

The US "Family Smoking Prevention Tobacco Control Act of 2009" has restricted Indonesian presence in the local US tobacco industry thereby breaching Articles 3 & 11 of the GATT. There could also be a breach of Article 1 but that depends on factors that have already been discussed above. The US defense in this case is somewhat weak. Article 20(b) is not applicable because either condition for Article 20(b) to come into play has not been fulfilled. That is, the measures taken by the US are a means of "arbitrary or unjustifiable discrimination" and are also a "disguised restriction on international trade". Hence if Art 20(b) doesn't apply then there's no basis for an exception using SPS because solid scientific evidence would be required. In addition presently there is no scientific proof indicating that clove cigarettes pose a greater health risk than menthol cigarettes. On the contrary a study [6] was carried out in which the venous plasma nicotine and carbon monoxide levels from 10 smokers were tested after smoking clove cigarettes and were found to be similar to non-clove brands of cigarettes, such as Marlboro. Another fact to note here is that while this bill was introduced to cut down on youth smoking, it overlooked the fact that according to US reports [7] more than 43 percent of young smokers smoke menthol cigarettes making up almost a quarter of all cigarettes sold in the US. While clove cigarettes comprise less than 1 percent of the total number of cigarettes consumed by young smokers and less than 1 percent the total number of cigarettes sold in the US. Furthermore according to the National Survey on Drug Use and Health, 62 percent of middle-school students who smoke begin with menthol cigarettes, whose minty taste can mask the harshness of tobacco.

According to the procedure laid down by DSU the claimant, in this case Indonesia should express its concerns to the US and demand that the restriction on clove cigarettes be removed. If the respondent, that is the US, refuse to lift the restrictions, the claimant can then request that a panel be set up and decide in Indonesia's favor thereby instructing the US to lift its ban on clove cigarettes in line with articles 19 & 22 of the DSU.