WTO Disputes Roundup: Rulings Issued on Spirits, Tobacco

7 September 2011

Public health concerns over cigarettes and protectionism fears over spirits tariffs featured in some of the WTO Dispute Settlement Body's (DSB) work over the August recess, with the DSB releasing two new panel reports over the last few weeks. These reports concerned a Philippine excise tax for foreign spirits (DS396,403) and a US ban of clove cigarettes (DS406), with the Philippines and the US being at the losing end, respectively.

Panel rejects Philippine spirit taxes - Manila likely to appeal

A panel report circulated in mid-August has sided with the EU and US in a dispute over Filipino excise taxes on foreign distilled spirits (DS396,403). The archipelago applies different tax rates for spirits distilled from domestic resources such as sugar, palm, and coconut, along with spirits based on other feedstock, including wheat and potato. In reality, this measure results in considerably higher taxes for foreign products; as a result, the panel found that these taxes violated the WTO's non-discrimination principle.

Global brands, including Jack Daniels and Jim Beam, have long argued that these excise taxes prevent them from making full use of the market potential in the island-state (see Bridges Weekly, 31 March 2010). The Filipino spirit market is controlled by three large local distilleries in a "rather oligopolistic" manner, the EU had complained during the WTO hearings.

"From 2004 to 2007, EU exports of spirits to the Philippines had more than halved (from around €37 million to €18 million) due to the Excise Tax Regime," the EU reported in a press release on the ruling.

EU Trade Spokesman John Clancy thus welcomed the report as a "confirmation of what is a clear case of tax discrimination which has been and still is an important obstacle to imports into the Philippines."

US Trade Representative Ron Kirk likewise appreciated the ruling and "urge[d] the Philippine government to comply swiftly with the Panel's recommendations and rulings, and level the playing field for our exports immediately," according to a statement.

Signs, however, seem to point to a second round in this trade battle, with Filipino news sources reporting that the government is ready to appeal the decision. Trade and Industry Secretary George Domingo recently announced that Manila is currently reviewing the panel report and consulting with the industry to prepare a strong appeal case, according to reports in the Philippine Star.

The Philippines had maintained that the tax system was nonetheless fair, as different products required different treatment. According to Manila, the products could not be considered ‘like'; WTO law mandates non-discriminatory treatment only for like products.

Sugar and palm are frequently used to produce non-traditional spirits such as brandy, whiskey, tequila, and gin. As these drinks are advertised accordingly, the EU and US had argued that foreign spirits with the same name, even if produced from different feed-stock, were in direct competition with their local counterparts - making them ‘like' in the eyes of WTO law.

The panel agreed with this reasoning and dismissed the Filipino excise taxes as discriminatory. The Philippines have 60 days to appeal the ruling. No formal appeal has been submitted at this stage.

US ban of flavoured cigarettes not strict enough to be justified on public health grounds

Discriminatory treatment was also confirmed by a panel review of a US ban of clove flavoured cigarettes after Indonesia had initiated proceedings on the matter (DS406). While the panel acknowledged that the tobacco ban could generally be justified on public health grounds, it dismissed the current legislation as illegal for targeting primarily foreign products. Indonesia welcomed the decision and called for prompt compliance from the US.

In 2009 America banned cigarettes with fruit, confectionery, or clove flavours, arguing that these encouraged young people to smoke. While flavours such as toffee and strawberry were banned, menthol flavoured cigarettes remained on the market.

Indonesia - accounting for nearly 100 percent of the US clove cigarette market - argued that this partial ban discriminated against its products vis a vis like-products as "virtually all menthol cigarettes sold in the US are produced domestically." All other flavoured cigarettes are also produced abroad.

Menthol cigarettes account for roughly 40 percent of tobacco consumption of American minors and more than a quarter of all cigarette consumption in the US overall. Some domestic firms, including Lorillard, generate up to 90 percent of their revenue from menthol cigarettes.

The credit rating agency Moody's projected earlier this year that the overall cigarette sales volumes in the US would fall by eight to ten per cent if the ban was extended to menthol cigarettes, according to March reports by the Financial Times.

During the course of the litigation, the US argued that menthol cigarettes had not been included in the 2009 Family Smoking Prevention and Tobacco Control Act, due to insufficient information on the effects of a prohibition. In particular, the US expressed fear that a black market might develop in response to such a ban that would include the smuggling of menthol cigarettes; this sort of black market could eventually be more harmful than keeping menthol flavoured tobacco products in sale, it argued.

Indeed, discussions in the US continue on whether to ban menthol cigarettes, with various agencies investigating the issue. In March, the US Food and Drug Administration (FDA) released a report arguing in favour of a ban. Public consultations continue with the tobacco industry, which insists that flavoured cigarettes are no more dangerous than conventional tobacco.

The WTO panel, however, noted that this fear of a black market that the US alluded to was not a legitimate reason to exclude menthol flavoured cigarettes from the ban, which meant that the US was indeed discriminating against foreign like-products that are in direct competition - namely clove cigarettes from Indonesia.

"These reasons which the United States has presented as constituting a legitimate objective by themselves, appear to us as relating in one way or another to the costs that might be incurred by the United States were it to ban menthol cigarettes".

"Indeed, the United States [continues to allow the sale of] menthol cigarettes not because it is not a type of cigarette with a characterizing flavour that appeals to youth, but rather because of the costs that might be incurred as a result of such a ban," the panel concluded.

If the US stands true to its 2009 Family Smoking Prevention Act, it will have to widen the ban to also include menthol flavoured cigarettes. The ruling could thus turn out to be a welcome argument in favour of the stricter legislation proposed by FDA.

The US has not yet responded to the ruling. It could also decide to appeal the ruling (within 60 days after panel report release) which would result in an Appellate Body decision, presumably in the first quarter of 2012.

Other dispute developments

In a 2 September meeting, the Dispute Settlement Body also adopted the panel report in US-Shrimp from Vietnam (DS404), which had once again out ruled the US practice of zeroing in anti-dumping impositions (see Bridges Weekly, 20 July 2011). The Appellate Body furthermore released a final judgment on US safeguard measures against Chinese tyre imports (DS399), agreeing with a previous panel that had found these measures lawful. Meanwhile, tensions between Australia and New Zealand over Kiwi apple imports into Australia continued, as Tasmania vowed to maintain a ninety-year old import ban that had been rejected by the WTO a year ago (DS367).

ICTSD reporting; "Tasmanian attempt to ban New Zealand apples," AFN FOOD FOR THOUGHT, 19 August 2011; "US panel backs menthol cigarette ban," FINANCIAL TIMES, 18 March 2011; "WTO Torpedoes US Ban on Importation of Kretek," JAKARTA GLOBE, 4 September 2011; "Phl to appeal WTO ruling on excise tax on imported liquors," PHILIPPINE STAR, 17 August 2011.

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