Last year, Indonesia’s clove cigarette suddenly made headlines in several international papers. An unprecedented history happened when Indonesia challenged its superpower-trading partner, the United States, solo before the WTO Dispute Settlement Body over US’ Tobacco Control Act that effectively banned the circulation and importation of Indonesian clove cigarettes.
US’ defense was simply its so-claimed legitimate objective to reduce teen smokers in its country. Setting aside the health effect of cigarettes, many people think that this is a very courageous action to prove that not all policies made by the most developed countries would 100% comply with the international trade rules regardless of the perception that the WTO is the creation of developed countries that only serve the interests of developed countries. Even statistically speaking, 60% of the disputes brought to the WTO were against high-income countries.
In September 2011, the Panel (ad hoc court of first instance in the WTO Dispute Settlement System) issued its report containing mixed ruling, some in favor of Indonesia’s claims and others of the US’ which can be seen in the table below.
The US argued that due to the taste of the clove, teenagers who have just started smoking opt for this type of cigarette due to its less bitter taste. Even though the US understands that cigarette is harmful to health, it did not seek to ban all cigarettes.
As such, Indonesia claimed that such a measure and policy objective is motivated by discriminatory intent. This was done rightly considering that if this was really the case, why the ban was only imposed on all other flavored cigarettes, but menthol cigarette?
With regards to these two main issues, the Panel Report issued mixed ruling. It ruled in favor of the US’ argument that the ban of those cigarettes simply fulfill the legitimate policy objective to reduce teen smokers. However, it also said that the fact that the ban was not applied to menthol cigarette which made up 25% of the cigarette market in the US, meaning that the measure amount to less favorable treatment (discriminatory) towards the other flavored cigarettes (chocolate, strawberry, and clove). Clove cigarette consumption accounted for a mere 0.1% of the US market between 2000 and 2009. In fact, Indonesian clove cigarette constitutes virtually all of the clove cigarettes circulated in the US. This is the reason that the Panel ruled that there was de facto less favorable treatment (discrimination) against Indonesian clove cigarettes.
As seen in the above table the score is 3 v. 5 for Indonesia and the US respectively. Some commentators have been suggesting that Indonesia won the case, while others suggested to the contrary. In order to get this straight, one has to analyze the implication of such a mixed ruling. The WTO dispute settlement system is not a football game. Inconsistency of one provision would result in the obligation to modify or to revoke the inconsistent policy by the losing party.
From the US’ perspective, simply banning flavored cigarette, including clove is not prohibited under WTO law, and the US is entitled to do so for the reason that it had put forward. However, from Indonesia’s perspective, such a ban in this specific case is simply illegal because it was done discriminatorily by not including menthol cigarettes.
Now, even though the Panel Report has been issued, that is not the end of both Indonesia’s and the US’ fight. The US had made an appeal to the WTO Appellate Body (WTO AB) on some of the Panel’s rulings, including the ruling that the Act is discriminatory toward the clove cigarettes. On the other hand, no appeal had been made by Indonesia.
Indonesia seems to be playing the card of “wait and see” for the AB ruling. If the specific appeal on the ruling of discriminatory treatment is accepted, then the US may continue to impose its ban on circulation and importation of all flavored cigarettes, but menthol cigarettes. On the other hand, if the appeal of the ruling is rejected, then the AB will issue recommendations for the US to comply with its report. In such a circumstance, to comply with the WTO, the US might have to choose between two options, namely 1) banning flavored cigarettes all together, including menthol and clove, or 2) lifting the ban on clove cigarettes and other flavored cigarettes.
The general public might think that even if the AB has made such a decision, the enforcement would be problematic because the US is a superpower, and simply it is impossible to force them to comply with its obligation. However, this perception is misleading because the WTO Dispute Settlement System has specific enforcement mechanism that has been proven to be quite effective. From the time span of 1995 to 2012, 80% of the adopted Panel or AB reports have been complied with by the losing countries. Only 20% of the reports have been problematic in its enforcement stage. Only 13.6% out of the adopted Panel or AB reports were not complied with, and parties have sought for retaliation in those cases. It shows that the system is in fact effective. Therefore, in the case where the US refused to adjust its Act, then Indonesia would be able to request for retaliation against American products accordingly.
This is not the first time that Indonesian products are being discriminated by other countries. We might recall the case of Indonesian palm oil and Indonesian wood. Discrimination in trade is simply against the ‘holy principle’ of Most-favored nation treatment in the WTO regime.
The government has taken bold steps in this case, complaining against the long-known “superpower nation” at an international litigation proceeding. This indicates that just like any other nation, Indonesia, will not stand still when its products are being discriminated. It also sends a clear message to our international trading partners that compliance with the international agreements in trade that have been agreed is the utmost foundation of future trade relations. Had the government not taken this step, in the future we might hear of other products originating from Indonesia being discriminated.