Why another Legal Victory in Geneva May Not Mean More Indonesian Clove Cigarettes in the US Market

 

by Michelle Ayu Chinta Kristy, Groningen

The World Trade Organization recently repudiated the United States’ barrier to Indonesian clove cigarettes. This is certainly a well deserved victory and reflects well on our government’s brave efforts to facilitate Indonesian trade and thus assist local producers, manufacturers, and distributors.

Indonesia’s bravery in taking on a global superpower over politically sensitive products is clear. And, “cloves”, as the case is known by WTO insiders, certainly reflects the rigorously judicial nature of dispute settlement at the WTO such that a developing country could triumph over the U.S. Indeed, while the Doha Round’s apparent failure leads many to doubt the WTO’s value, it must be recognized as one of the WTO’s resounding accomplishments that it provides all Members, including historically marginalized developing countries, equal access to binding dispute settlement.

However, this does not mean Indonesia’s path to implementing this final Report will be straight forward. Success on the legal merits alone does not mean diplomatic, and thus for the government political, speed-bumps are in the rearview mirror. The implementation of a WTO report can raise unique problems for developing countries, as the fear of diplomatic backlash remains for any Member that is seen as being too aggressive in claiming its rights as WTO Member.

Some would say that this is the main reason for developing countries’ historical reluctance to take their trade disputes against developed countries to Geneva.  At the same time, so long as retaliatory duty adjustments remain an important tool for addressing non-compliance, developing countries will be at a practical disadvantage as their domestic markets tend to be small.

It is worth a closer look at cloves, which started with the enactment of the United States Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) in 2009. The FSPTCA banned the sale of flavored cigarettes, including clove cigarettes, yet allowed a loophole exception for menthol cigarettes, which are mostly produced in the U.S.

Indonesia as a major producer of clove cigarettes saw this as a form of disguised protectionism. At the WTO we claimed that the FSPTCA’s exception infringed WTO non-discrimination principles. The case raised novel questions about the nature of non-discrimination principles within the WTO’s Agreement on Technical Barriers to Trade.

After the failure of consultation, Indonesia filed a dispute at the WTO in April 2010. A year and a half after filing, a three-person Panel circulated its report requiring the U.S. to bring the FSPTCA in to compliance with the TBT Agreement. The U.S., however, appealed the Panel Report’s legal findings. Notably, the U.S. alleged that the Panel had misinterpreted the meaning of like product in Article 2.1 of the TBT Agreement when determining that menthol cigarettes and clove cigarettes are like products.

In its Report of this April the Appellate Body determined that menthol cigarettes and clove cigarettes must be considered as like products. Furthermore, it found that the FSPTCA fails to provide treatment to clove cigarettes that is no less favorable to that provided to menthol cigarettes, as is required by the cardinal non-discrimination principle of national treatment.

However, these legal findings do not solve the problem for Indonesia. We are left with the challenge of convincing the U.S. to amend a regulatory measure that has wide support, as it is seen by supporters as a tool to fix the public health crisis caused by tobacco products and specifically the even more sensitive subject of youth smoking.

Of course, Indonesia has no objection to the U.S.’s public health priorities and shares concern about youth smoking. However, this should not hamper our efforts to do-away with the legislative carve-out for menthol cigarettes, which are equally flavored and thus attractive to youths. This report is unfortunately only the first stepping stone for Indonesia. The fate of the clove cigarettes market post-report of the Appellate Body would apparently depend only on the U.S.

Adherence to Appellate Body report means the U.S. could opt either: firstly, non-discriminatorily banning the menthol cigarettes market which construes no way for Indonesian clove cigarettes in the U.S. market; and secondly, revoking the ban on flavored cigarettes, including the clove cigarettes. Post-report of the Appellate Body, the clove cigarette is supposedly treated equally as menthol cigarette. If the U.S. Should the U.S. expresses its willingness to vigorously continue the ban, they should really consider the first option. Within this report, WTO created roadblock on the U.S. discriminatory measure, not the U.S. anti-smoking initiative.

Ideally, revision of the FSPTCA has to come into existence. If revision is not made nor equal treatment imposed to menthol cigarettes, Indonesia has to not be in silence. Bilateral negotiation to pursue a new trade concession can be a way as retaliatory duty would be the last option for Indonesia. Indonesian reluctance to manage its retaliatory duty in Korea beef case would be a perfect reflection on whether Indonesian winning on the clove cigarette case would be another loss or not, not to mention bearing the fact that South Korea is not as powerful as the U.S. The trade realm which the US still holds a huge amount of power, with the much discussed Trans-Pacific Partnership Agreement can be an obvious example which challenges Indonesian political bravery in the current winning case.

Silence is apparently not golden for Indonesia in this regard. Indonesian silence would mean a lenient way for the U.S. negligence on the Appellate Body report. The legal victory circulated in Geneva would not subsequently mean anything for Indonesian clove cigarettes market in the U.S. Annual export estimated at US$200 million would just fly away due to Indonesian political barriers in the trade realm.

While the U.S. Trade Representative’s office has expressed disappointment, might it not be Indonesia that should be most concerned? Let us hope that our trade diplomats and politicians who have already showed such bravery in pursuing this claim not be exhausted or intimidated now.

The writer is Research Assistant, Center for World Trade Studies of Universitas Gadjah Mada, and LL.M. Candidate, the University of Groningen, The Netherlands.

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