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Friday, September 28, 2012

The Tobacco Control Act’s Ban of Clove Cigarettes and the WTO: A Detailed Analysis

Jane M. Smith
Legislative Attorney

In 2009, Congress passed the Family Smoking Prevention and Tobacco Control Act (Tobacco Control Act), which banned the sale of all flavored cigarettes, except menthol cigarettes, in Section 907(a)(1)(A). Indonesia, a major producer of clove cigarettes, challenged the Tobacco Control Act’s ban on non-menthol flavored cigarettes before a World Trade Organization (WTO) panel, claiming, among other things, that it violated Articles 2.1 and 2.2 of the Agreement on Technical Barriers to Trade (TBT Agreement). Article 2.1 requires WTO members to ensure that domestic regulations setting forth product characteristics treat like imported products no less favorably than like domestic products. Article 2.2 requires that such regulations be no more trade restrictive than necessary to fulfill a legitimate objective. The panel hearing the dispute agreed with Indonesia on Article 2.1 but found for the United States on Article 2.2. The United States appealed the panel’s finding on Article 2.1.

On April 4, 2012, the Appellate Body issued a decision. Although the Appellate Body disagreed with certain legal standards applied by the panel, it ultimately upheld the panel’s conclusion that menthol cigarettes and clove cigarettes are like products and that the Tobacco Control Act’s ban of non-menthol flavored cigarettes treats imported clove cigarettes less favorably than domestic menthol cigarettes. The Appellate Body stated that this case involved de facto discrimination and drew on jurisprudence developed under Article III:4 of the General Agreement on Tariffs and Trade 1994 (GATT 1994), which is similar to Article 2.1 of the TBT Agreement, to hold that “likeness in Article 2.1 [] is based on the competitive relationship between and among products.” The Appellate Body accepted that domestic regulations may legitimately distinguish between products to serve a public health interest. However, it found that the differential treatment of menthol and clove cigarettes in the Tobacco Control Act did not stem from a legitimate regulatory distinction. The Appellate Body, therefore, found that Section 907(a)(1)(A) violated Article 2.1 of the TBT Agreement.

The panel found that Section 907(a)(10)(A), in providing a period of three months before the ban took effect, violated Article 2.12 of the TBT Agreement, which requires a “reasonable interval” between publication of the law and its effective date. The United States appealed. The Appellate Body rejected Indonesia’s argument that paragraph 5.2 of the Doha Ministerial Decision on Implementation-Related Issues and Concerns, which interpreted “reasonable interval” within Article 2.12 to mean “a period of not less than six months,” was a legally binding interpretation of Article 2.12 under Article IX:2 of the Agreement Establishing the World Trade Organization (WTO Agreement). However, the Appellate Body found that paragraph 5.2 was a “subsequent agreement” under Article 31(3) of the Vienna Convention on the Law of Treaties. The Appellate Body stated that under Article 2.12 the complaining Member must establish a prima facie case by demonstrating that the technical regulation provides an interval between publication and effective date of less than six months; then the burden shifts to the responding Member to demonstrate that the interval provided is reasonable.

In response to the Appellate Body’s decision, the United States has suggested that it will likely maintain the ban on clove cigarettes while fulfilling its obligations under the WTO Agreement. It appears the United States has not yet settled on how it will accomplish this. The United States and Indonesia agreed that the United States would comply with the Appellate Body decision by July 24, 2013.

Date of Report: September 17, 2012
Number of Pages: 24
Order Number: R42733
Price: $29.95

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