United States – Measures Affecting the Production and Sale of Clove Cigarettes World Trade Organization, Dispute Settlement DS406

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Flavored Cigarette Prohibition Inconsistent with WTO Trade Agreement

Background

Section 907 of the Food Drug and Cosmetic Act, as amended by the Tobacco Control Act prohibited the production and sale of cigarettes with “characterizing flavors,” including fruit, chocolate, cinnamon, and clove flavors.1  The stated objective of this prohibition was “to protect the public health, including by reducing the number of children and adolescents who smoke cigarettes” by “prohibit[ing] the manufacture and sale of cigarettes with certain 'characterizing flavors' that appeal to youth.”2  Significantly, menthol cigarettes were specifically exempted from the flavoring prohibition.3 The practical result was that the sale of clove cigarettes, which are largely imported from Indonesia, was prohibited in the United States while the sale of menthol cigarettes, which are largely produced by domestic tobacco manufacturers and represent about a quarter of the U.S. cigarette market, remained legal.4  In response to this situation, Indonesia filed a complaint with the World Trade Organization (WTO) in 2010, alleging that section 907 violated international trade agreements by discriminating against flavored tobacco products made in other countries.5 The dispute was referred to a panel established by the WTO’s Dispute Settlement Body (DSB).

The WTO’s Decision

In 2011, the DSB found in favor of Indonesia, determining that section 907 was “inconsistent” with a provision of the WTO Agreement on Technical Barriers to Trade (TBT), which requires member nations to treat products made in other WTO member countries no less favorably than “like” products of domestic origin.6  The panel also found that the U.S. violated procedural requirements of the TBT by failing to notify WTO members of products to be covered by section 907 prior to the enactment of the Tobacco Control Act and by providing only three months between publication and entry into force of the prohibition.7

The U.S. appealed, but on April 4, 2012 the WTO’s appellate body issued a report upholding the panel’s conclusions,8a report that was adopted by the DSB on April 24, 2012.9 One of the U.S.’s arguments on appeal was that menthol and clove cigarettes are not “like” products.10 The appellate body disagreed, determining that the products are in a sufficiently competitive relationship to be “like,” based on their similar physical characteristics and tariff classification, ability to serve similar end-uses (e.g. satisfying addiction, creating a “pleasurable experience”), and high degree of substitutability for a segment of U.S. consumers (young and novice smokers).11

While the appellate body recognized section 907’s aim of reducing youth smoking as “a legitimate objective,”12 the appellate body questioned whether 907 actually operates to serve this aim because “menthol cigarettes have the same product characteristic that, from the perspective of the stated objective of Section 907(a)(1)(A), justified the prohibition of clove cigarettes” – namely a flavor that masks the harshness of tobacco, making cigarettes more palatable to inexperienced smokers.13The appellate body also rejected the United States’ argument that the exemption of menthol was created to address legitimate regulatory concerns, unrelated to national origin: 1) that prohibiting a product used by millions of smokers will overwhelm the health system with nicotine addicts experiencing withdrawal symptoms, and 2) that a prohibition would lead to an increase in smuggling and illicit sales of menthol cigarettes.14 The appellate body did not find these arguments credible, stating that “it is not clear that the risks that the United States claims to minimize by allowing menthol cigarettes to remain in the market would materialize if menthol cigarettes were to be banned, insofar as regular cigarettes [which, like menthol cigarettes, contain nicotine] would remain in the market.”15

On May 24, 2012, the U.S. made a statement to the DSB indicating it “intends to implement the recommendations and rulings of the [Appellate Body] in a manner that protects public health and respects the obligations of the United States under the WTO Agreement.”16 However, the U.S. also reiterated its stance that prohibiting clove and other flavored cigarettes would benefit public health by reducing the likelihood that youth would start smoking.17 On June 14, 2012, Indonesia and the U.S. agreed that the U.S. would have until July 24, 2013 to implement the appellate body’s rulings.18

On July 23, 2013, the U. S. provided a status report to the DSB in which it claimed that it was implementing the recommendations and rulings of the DSB by publishing an Advanced Noticed of Proposed Rulemaking (ANPRM) relating to menthol in cigarettes by the FDA, releasing a scientific evaluation of menthol in cigarettes by the FDA, announcing a youth education campaign targeting menthol cigarettes, sharing cessation tools through BeTobaccoFree.gov, and educating the public about menthol cigarettes through SmokeFree.gov.19 In addition, the U.S. noted that the “statement today was quite clear in that we have taken measures to come into compliance,” and that “our view is that we will not need to revert to this item.”20

Indonesia was not satisfied with the U.S. actions and on August 12, 2013, asked the DSB to allow Indonesia to impose trade sanctions on the U.S.21 Indonesia has set the value of its proposed retaliation at over $40 million per year.22 However, the U.S. objected to Indonesia’s request for sanctions and the matter was referred to arbitration on August 23, 2013.23

In arbitration, the U.S. has raised a number of arguments against sanctions, including that the U.S. has brought section 907 into compliance with trade agreement requirements by: (1) conducting and publishing further scientific evaluation of the “public health implications of menthol cigarettes,” which demonstrates that there is a “legitimate regulatory distinction between menthol and clove cigarettes; (2) issuing the menthol ANPRM,24 which will permit the U.S. to further develop its understanding of the public health implications of menthol cigarettes; and (3) applying provisions of the Tobacco Control Act in an “even-handed manner,” considering the “different regulatory challenges” presented by menthol and clove cigarettes.25 The U.S. also disputes Indonesia’s calculation of sanctions, arguing, among other things, that Section 907 has not caused a decrease in Indonesia’s export of clove cigarettes because at least one major brand of Indonesian clove cigarettes has “adapted” so that it can avoid Section 907 and continue to be imported to the U.S.26

On June 24, 2014, the U.S. and Indonesia jointly requested a suspension of the arbitration proceedings which prevents the arbitrator’s decision from being publicly released.27The decision will remain confidential indefinitely until one of the parties terminates the agreement to suspend the arbitration proceedings.

While the WTO’s decision can be perceived as a threat to the ability of nations to institute health-protective tobacco control regulations, the WTO was careful to clarify that its decision was not to be interpreted as prohibiting WTO member nations from instituting tobacco control measures, or even from specifically implementing restrictions on ingredients that make tobacco products more attractive to young smokers.28 While the United States can prohibit clove cigarettes, it cannot do so in a manner that seems to give more favorable treatment to “like” domestic products – in this case, menthol flavored cigarettes.29

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1 Family Smoking Prevention and Tobacco Control Act, Pub. L. No. 111-31, § 101, 123 Stat. 1776, 1824–25 (amending 21 U.S.C. 387(g)(a)(1)(A) (2006)).       
2 H.R. Rep. No. 111-58(I), at 37 (2009), reprinted in 2009 U.S.C.C.A.N. 468, 486.
3 Family Smoking Prevention and Tobacco Control Act, Pub. L. No. 111-31, § 101, 123 Stat. 1776, 1824–25 (amending 21 U.S.C. 387(g)(a)(1)(A) (2006)).       
4 Appellate Body Report, United States—Measures Affecting the Production and Sale of Clove Cigarettes, ¶¶ 222–23, WT/DS406/AB/R (Apr. 4, 2012) (adopted Apr. 24, 2012) [hereinafter Appellate Body Report] available at http://www.wto.org/english/tratop_e/dispu_e/406abr_e.pdf.
5 Request for the Establishment of a Panel by Indonesia, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/2 (June 11, 2010), available at http://www.worldtradelaw.net/pr/ds406-2%28pr%29.pdf.
6 Panel Report, United States—Measures Affecting the Production and Sale of Clove Cigarettes, ¶¶ 7.293, 8.1(b), 8,6, WT/DS406/R (Sept. 2, 2011) (adopted Apr. 24, 2012), available at http://www.worldtradelaw.net/reports/wtopanels/us-clovecigarettes%28panel%29.pdf.
7 Id. ¶¶ 7.550, 7.551, 7.595, 8.1(f)–(h), 8.6.
8 Notification of an Appeal by the United States, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/6 (Jan. 10, 2012), available at http://trade.ec.europa.eu/doclib/docs/2013/january/tradoc_150276.pdf; Appellate Body Report, ¶ 298.
9 Appellate Body Report and Panel Report: Action by the Dispute Settlement Body, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/9 (May 1, 2012), available at http://trade.ec.europa.eu/doclib/docs/2013/january/tradoc_150280.pdf.
10 Notification of an Appeal by the United States, United States—Measures Affecting the Production and Sale of Clove Cigarettes, supra note 95, ¶ 2; Appellate Body Report, ¶¶ 104–60, 298(a)(i).
11 Appellate Body Report, ¶ 236.
12 Id.
13 Id. at ¶ 225.
14 Id.
15 Id.
16 Statement by the United States at the May 24, 2012, Dispute Settlement Body Meeting, available at http://geneva.usmission.gov/2012/05/24/statement-by-the-united-states-at-the-may-24-2012-dsb-meeting/.
17 Id.
18 Agreement Under Article 21.3(b) of the DSU, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/10 (June 19, 2012), available at http://www.wtocenter.org.tw/SmartKMS/do/www/readDoc?document_id=123095.
19 Statement by the United States at the July 23, 2013, Dispute Settlement Body Meeting, available at http://geneva.usmission.gov/wp-content/uploads/2013/07/July23-DSB.pdf.
20 Id.
21 Recourse to Article 22.2 of the DSU by Indonesia, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/12 (Aug. 13, 2013).
22 Executive Summary of the Opening Statement of the United States of America, Recourse to Article 22.6 of the DSU by Indonesia, United States—Measures Affecting the Production and Sale of Clove Cigarettes, DS406 (Apr. 3, 2014), http://www.ustr.gov/sites/default/files/DS406.Oral_.Stmt_.ExecSummary.Fin_.pdf.
23 Recourse to Article 22.6 of the DSU by the United States, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/14 (Sept. 2, 2013).
24 Referring to Menthol in Cigarettes, Tobacco Products; Request for Comments, 78 Fed. Reg. 44484-01 (proposed July 24, 2013) (to be codified at 21 C.F.R. pt. 1140).
25 Executive Summary of the Opening Statement of the U.S.A., at ¶ 1.
26 Executive Summary of the Opening Statement of the U.S.A., at ¶ 10.
27 Recourse to Article 22.2 of the DSU by Indonesia, Communication from the Arbitrator, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/16 (June 24, 2014).
28 Appellate Body Report, ¶ 235.
29 Id.at ¶ 236.