Friday, July 13, 2012

Tobacco Tussles Reach the AEC

According to the Malaysian Star, last week the ASEAN Health Ministers meeting in Phuket (held every two years) had agreed to “withdraw tobacco from AFTA”:
            Malaysia and Asean member nations have agreed to withdraw tobacco from the Asean Free Trade Area (AFTA) list for implementation by 2015. Health Minister Datuk Seri Liow Tiong Lai said a consensus was reached at the 11th Asean Health Ministers Meeting at Phuket, Thailand last Thursday. He said Asean Health Ministers discussed how to reduce consumption of tobacco as well as the ways to control the item from becoming widespread in the region. “We agreed that tobacco needs to be withdrawn from the list of AFTA products as it could reduce the number of smokers and create a tobacco-free environment,” he said.
(note that the official ASEAN Health Ministers' joint statement makes no reference to removing tobacco)  Regardless of one’s views on tobacco regulation, the author feels compelled to address several aspects of this report.

First, the governing agreement for trade in goods in the ASEAN Economic Community (AEC) is the ASEAN Trade in Goods Agreement (ATIGA).  Administration of ATIGA falls under the purview of the ASEAN Economic Ministers, not the ASEAN Health Ministers.  The ASEAN Health Ministers can only recommend action to the ASEAN Economic Ministers, and cannot “withdraw” products from ATIGA on their own.

Second, under ATIGA’s tariff reduction schedules, ASEAN member states have already agreed to 0-5 percent duty treatment for ASEAN-origin tobacco products.  Raising the ATIGA import duty rates for tobacco products to MFN levels (e.g. the non-preferential rates applied to goods that do not qualify as ASEAN-origin or for preferential treatment under ASEAN’s free trade agreements (FTAs)) would require consensus to renegotiate ATIGA, which would be difficult given the presence of strong tobacco industries in some ASEAN member states.  Furthermore, increasing the ATIGA rates for tobacco would simply divert the tobacco trade to China, Korea, India, Japan and Australia-New Zealand, which have FTAs with ASEAN which also have reduced preferential tariff rates for tobacco products.  These countries would benefit at the expense of ASEAN domestic producers unless they also agreed to renegotiate the tobacco duty rate provisions of their FTAs with ASEAN. That also appears to be difficult.

Third, ATIGA covers not only tariff measures but also non-tariff measures and other regulations related to trade in goods.  Hence what the ASEAN Health Ministers may have meant by “withdrawing” tobacco from ATIGA would be differential treatment of tobacco products under such measures. This could be justified under ATIGA Article 8(c), which allows for discriminatory measures if “necessary to protect human, animal or plant life or health.”  Other jurisdictions have imposed plain packaging and other special rules applicable to tobacco products, claiming authority, inter alia, under GATT Article XX(c), which ATIGA Article 8(c) is based on.  However, such measures have to be drafted carefully, as they have been subject to much litigation both at the domestic level and before the WTO.

Which brings me to my fourth and final point, which is that any measures aimed at tobacco would be subject to immediate and aggressive dispute resolution procedures. The tobacco industry has actively defended its interests in litigation and arbitration elsewhere, and ASEAN would be no different. 

Hence media reports that ASEAN has decided to “withdraw” tobacco from ATIGA are premature. The ASEAN Health Ministers’ declaration is merely a recommendation to the ASEAN Economic Ministers. Furthermore, modification of tobacco duty rates under ATIGA and other ASEAN FTAs is not realistic.   Whether ASEAN intends to follow the lead of other jurisdictions in imposing non-tariff measures will also remain to be seen, and even then such measures would be subjected to much scrutiny and possible litigation within ASEAN and perhaps at the WTO.  But the ASEAN Health Ministers’ declaration does mean that the tobacco regulatory debates have reached the AEC and will test both the ASEAN institutions and their regulation of the ASEAN single market.