Indonesia Announces Deal with US on Clove Cigarettes Trade Dispute

9 October 2014

Indonesia announced on Tuesday that it has reached an agreement with the US to settle its WTO dispute (DS406) concerning Washington’s ban on the production and distribution of clove cigarettes, bringing the long-standing row to a close. The deal appears to keep the US ban in place, while making concessions to Indonesia in other trade areas.

The dispute has been one of the WTO’s more high-profile, given that it highlighted the difficult issue of how to reconcile public health goals with international trade rules.

The case has been significant in terms of clarifying specific aspects of WTO law, namely the organisation’s Technical Barriers to Trade (TBT) Agreement.

Together with separate cases on a US dolphin-safe labelling scheme and the US’ country-of-origin labelling requirement for livestock and meat exports, the clove cigarettes case had raised the question of how to design technical regulations – such as those aimed at achieving other public policy objectives, like consumer health – without creating unnecessary obstacles to trade.

According to Jakarta’s trade ministry, the two countries now have a Memorandum of Understanding, or MOU, in place that will bring the dispute to an end “by way of a settlement accommodating to the interests of both parties involved.”

The news comes just a week after Washington announced it had reached a settlement in a separate WTO case with Brazil, this one involving US cotton subsidies. (See Bridges Weekly, 2 October 2014)

Prolonged dispute

Dispute proceedings on the subject had kicked off at the WTO four years ago, with Indonesia filing a request for consultations in April 2010.

At issue in the case was the US’ Family Smoking Prevention and Tobacco Control Act of 2009, which banned the production and sale of clove and most other flavoured cigarettes in the United States in the hopes of discouraging young people from smoking. However, menthol cigarettes were not included in the ban.

Among other claims, Jakarta had argued that menthol and clove cigarettes are like products, and that since menthol cigarettes consumed in the US are primarily US-produced, this gave them an unfair advantage over other flavoured cigarettes.

During the dispute proceedings, Washington had explained that menthol was not included at the time both due to a lack of information over the effects a menthol ban might have, and also the fear that a black market in such cigarettes could emerge. (See Bridges Weekly, 7 September 2011)

The 2009 ban had particular significance for Indonesia, the world leader in clove cigarette production. Prior to the prohibition, clove cigarettes consumed in the US were primarily imported from the island country.

Notably, the ban did not extend to flavoured cigars and cigarillos, a fact that has since been criticised by some public health advocates and American lawmakers. For instance, Representative Henry Waxman – a US lawmaker from the state of California – submitted a letter in 2011 asking that the US Food and Drug Administration (FDA) extend the ban to flavoured cigars.

The lawmaker cited alleged evidence that Kretek International, a company that imports clove tobacco products from Indonesia and had controlled 97 percent of the US clove cigarette market prior to the ban, had introduced clove-favoured cigars to circumvent the measure.

In 2012, the WTO’s Appellate Body had confirmed that the US legislation was discriminatory against imports of Indonesian clove cigarettes, with the US being given until late July of that year to comply with the ruling. The Appellate Body is the WTO’s highest court, with its decisions being final. (See Bridges Weekly, 11 April 2012)

In August 2013, Indonesia asked the WTO’s Dispute Settlement Body (DSB) to authorise retaliatory measures, the value of which was reportedly around US$55 million, against the US, claiming that Washington had not taken the necessary steps to bring its measures into compliance with global trade rules.

Responding to a US request, the DSB then agreed to refer those matters to arbitration, in line with Article 22.6 of the Dispute Settlement Understanding (DSU), which is the WTO agreement that governs the adjudication of trade disputes.

In late June, after the arbitrator made its draft decision, the two parties jointly asked the arbitrator to suspend the circulation of the decision to the public, and to keep the award confidential during that time.

Both parties then conducted a series of ambassador- and ministerial-level meetings in order to come up with the agreement announced on Tuesday.

Ban to remain in place

Under the terms of the MOU, the US ban will apparently remain in place, though Washington has agreed that it will not take steps to impede the market access of imported Indonesian cigars and cigarillos, at least not until new regulations “that are non-arbitrary and non-discriminative” can be enacted.

Though the 2009 prohibition remains, Bachrul Chairi, Jakarta’s Director General of International Trade Cooperation, emphasised that Indonesia is still set to benefit from the agreement in other ways.

“What we gain by settling outside the WTO is more significant than what we would gain by taking retaliatory measures valued at US$55 million out of Indonesia’s total imports from the United States,” said Bachrul.

Beyond just ending the clove cigarette saga, Washington and Jakarta have agreed to intensify their trade and investment cooperation in the context of the Indonesia-US Trade and Investment Framework Arrangement (TIFA).

The US will also refrain from submitting any WTO challenges regarding Indonesia’s controversial mineral export restrictions. (See Bridges Weekly, 16 January 2014)

Other potential benefits to Jakarta from the deal include a pledge by the US to grant additional “facilities” under Washington’s Generalised System of Preferences (GSP) scheme “that exceed certain value limitations for the next five years,” without going into further detail.

The GSP expired in mid-2013, though renewal of the preference scheme is expected.

Additional cooperation in the area of intellectual property rights has also been promised. Furthermore, Bachrul said, the MOU does not eliminate the fact that the DSB has found Washington guilty of violating WTO agreements.

ICTSD reporting.

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