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United States—Measures Affecting the Production and Sale of Clove Cigarettes

BACKGROUND AND FACTS

The United States has long sought ways to reduce smoking by children. In 2009 the United States enacted the Family Smoking Prevention and Tobacco Control Act [the Act] that prohibited the import or sale of cigarettes with any flavor, herb, or spice, including fruit, chocolate, cinnamon, and clove. Of course, menthol cigarettes are produced primarily in the United States, whereas clove cigarettes are produced primarily in Indonesia. This is a complaint by the government of Indonesia that the ban on clove-flavored cigarettes unlawfully discriminated against flavored tobacco products made in other countries. The United States claimed that it had excluded menthol from the regulations, despite the fact that menthol is also known to make cigarettes more appealing to adolescents, because it feared withdrawal by menthol smokers, and by the likely creation of a black market in menthol cigarettes. After consultations at the WTO, Indonesia requested dispute panel resolution. The panel held that the United States had acted in violation of Article 2.1 of the Agreement on Technical Barriers to Trade (TBT Agreement), and the United States appealed to the Appellate Body.

REPORT OF THE APPELLATE BODY

Article 2.1 of the TBT Agreement provides that, with respect to their central government bodies:

Members shall ensure that in respect of technical regulations, products imported from the territory of any Member shall be accorded treatment no less favourable than that accorded to like products of national origin and to like products originating in any other country.

Article 2.1 of the TBT Agreement contains a national treatment and a most favoured nation treatment obligation. In this dispute, we are called upon to clarify the meaning of the national treatment obligation. For a violation of the national treatment obligation in Article 2.1 to be established, three elements must be satisfied: (i) the measure at issue must be a technical regulation; (ii) the imported and domestic products at issue must be like products; and (iii) the treatment accorded to imported products must be less favourable than that accorded to like domestic products. The United States’ appeal concerns only the second and the third elements of this test …
[T]he determination of likeness under Article 2.1 of the TBT Agreement is a determination about the nature and the extent of a competitive relationship between and among products, and that the regulatory concerns that underlie a measure may be considered to the extent that they have an impact on the competitive relationship. * * *
[W]here the technical regulation at issue does not de jure discriminate against imports, the existence of a detrimental impact on competitive opportunities for the group of imported vis-à-vis the group of domestic like products is not dispositive of less favourable treatment under Article 2.1. Instead, a panel must further analyze whether the detrimental impact on imports stems exclusively from a legitimate regulatory distinction rather than reflecting discrimination against the group of imported products. In making this determination, a panel must carefully scrutinize the particular circumstances of the case, that is, the design, architecture, revealing structure, operation, and application of the technical regulation at issue, and, in particular, whether that technical regulation is even-handed, in order to determine whether it discriminates against the group of imported products.
Given the above, the design … and application of [the Act] strongly suggest that the detrimental impact on competitive opportunities for clove cigarettes reflects discrimination against the group of like products imported from Indonesia. The products that are prohibited under [the Act] consist primarily of clove cigarettes imported from Indonesia, while the like products that are actually permitted under this measure consist primarily of domestically produced menthol cigarettes.
Moreover, we are not persuaded that the detrimental impact of [the Act] on competitive opportunities for imported clove cigarettes does stem from a legitimate regulatory distinction. We recall that the stated objective of [the Act] is to reduce youth smoking. One of the particular characteristics of flavoured cigarettes that makes them appealing to young people is the flavouring that masks the harshness of the tobacco, thus making them more pleasant to start smoking than regular cigarettes. To the extent that this particular characteristic is present in both clove and menthol cigarettes, menthol cigarettes have the same product characteristic that, from the perspective of the stated objective of [the Act], justified the prohibition of clove cigarettes. Furthermore, the reasons presented by the United States for the exemption of menthol cigarettes from the ban on flavoured cigarettes do not, in our view, demonstrate that the detrimental impact on competitive opportunities for imported clove cigarettes does stem from a legitimate regulatory distinction. The United States argues that the exemption of menthol cigarettes from the ban on flavoured cigarettes aims at minimizing: (i) the impact on the U.S. health care system associated with treating “millions” of menthol cigarette smokers affected by withdrawal symptoms; and (ii) the risk of development of a black market and smuggling of menthol cigarettes to supply the needs of menthol cigarette smokers. Thus, according to the United States, the exemption of menthol cigarettes from the ban on flavoured cigarettes is justified in order to avoid risks arising from withdrawal symptoms that would afflict menthol cigarette smokers in case those cigarettes were banned. We note, however, that the addictive ingredient in menthol cigarettes is nicotine, not peppermint or any other ingredient that is exclusively present in menthol cigarettes, and that this ingredient is also present in a group of products that is likewise permitted under [the Act], namely, regular cigarettes. Therefore, 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 would remain in the market.
Therefore, even though [the Act] does not expressly distinguish between treatment accorded to the imported and domestic like products, it operates in a manner that reflects discrimination against the group of like products imported from Indonesia. Accordingly, despite our reservations on the brevity of the Panel’s analysis, we agree with the Panel that, by exempting menthol cigarettes from the ban on flavoured cigarettes [the Act] accords to clove cigarettes imported from Indonesia less favourable treatment than that accorded to domestic like products, within the meaning of Article 2.1 of the TBT Agreement.***
While we have upheld the Panel’s finding that the specific measure at issue in this dispute is inconsistent with Article 2.1 of the TBT Agreement, we are not saying that a Member cannot adopt measures to pursue legitimate health objectives such as curbing and preventing youth smoking. In particular, we are not saying that the United States cannot ban clove cigarettes; however, if it chooses to do so, this has to be done consistently with the TBT Agreement. Although [the Act] pursues the legitimate objective of reducing youth smoking by banning cigarettes containing flavours and ingredients that increase the attractiveness of tobacco to youth, it does so in a manner that is inconsistent with the national treatment obligation in Article 2.1 of the TBT Agreement as a result of the exemption of menthol cigarettes, which similarly contain flavours and ingredients that increase the attractiveness of tobacco to youth, from the ban on flavoured cigarettes.

Decision. The U.S. regulation is not justified. The TBT Agreement prohibits technical regulations that treat imported products less favorably than “like products” of domestic origin. Clove-flavored cigarettes and menthol-flavored cigarettes are “like products” due to their competitive relationship in the marketplace. The less favorable treatment accorded flavored cigarettes from Indonesia was not justified by a “legitimate regulatory distinction.”

Comment. The Dispute Settlement Body requested the United States to remove the ban on clove cigarettes, and if it did not, Indonesia was authorized to impose $15 million in trade sanctions on U.S. exports to Indonesia.

Case Questions

1. Did the U.S. prohibition on clove cigarettes prohibit the import of Indonesian cigarettes on its face, or did it merely prohibit a flavor of cigarette that happens to be produced primarily in Indonesia? Was this de facto or de jure discrimination in this case? How did this affect the Appellate Body’s decision?

2. The report (not reproduced here) noted the similarities between Article 2.1 of the TBT Agreement, under which this dispute was decided, and Article III.4 of GATT 1994. Review Article III.4 of GATT 1994 in the last chapter and explain the differences between the two articles. The TBT Agreement applies to “technical regulations” but GATT 1994 applies to a broader range of discriminatory measures. Explain.

3. What were the options left to the United States after this report? What action did the United States take in response to the report?

4. How well do you think the report balances trade liberalization with a country’s need to protect public health? How well suited do you think a WTO panel is to determining matters of public health?