We’ve done a quick read through of today’s World Trade Organization (WTO) Appellate Body ruling against the U.S. measures to reduce teen smoking. (For our statement, see here, and for a more detailed background into the lower panel ruling, see our analysis here.)
This is a landmark ruling against one of the few policy achievements of the Obama administration: Rep. Henry Waxman’s (C-Calif.) Family Smoking Prevention and Tobacco Control Act (FSPTCA), which included a targeted measure to reduce teen smoking by targeting “starter flavorings” in cigarettes – like cola, chocolate, strawberry and clove.
The FSPTCA also contemplated an eventual ban on menthol cigarettes, but deferred this for further study. The reason? Not protectionism, nor arbitrary decision making. The reason was because – as we learned with the Prohibition Era with alcohol – banning products consumed by large numbers of adults can create a black market and upsurge in crime if not handled appropriately. Oh, and lest we think that the consumer protection lion Waxman went soft, it was also because the U.S. Supreme Court struck down previous federal tobacco legislation for exactly this reason.
So, wisely, the Waxman bill took a targeted and incremental approach.
But as we pointed out on the blog last September, the key flaw in the WTO’s analysis on whether the FSPTCA discriminated against Indonesian clove cigarettes was that it compared the treatment the FSPCTA gave to cloves and menthol, rather than comparing cloves to cola and other flavors. One of these things – menthol – is not like the other, as Big Bird from Sesame Street might have said. (See killer Big Bird video "app" here.)
The Appellate Body not only did not overturn this aspect of the September 2011 lower panel ruling – it doubled down. Indeed, it seems that the Appellate Body was almost determined to show how poorly suited the WTO is to considering matters of public health. In several key respects, the Appellate Body ruling was even more anti-health than the lower panel ruling.
In the “math is hard” category of boneheaded observations, the AB states that “a panel that is tasked with determining whether two products are like may not be able to reach a coherent result if, in determining likeness, it has to rely on various possible regulatory objectives of the measure.” And folks, coherent trade law, rather than public health, is what we’re after. Just remember that the next time someone tells you that trade agreements can accommodate public health concerns. Trade law is the domain of trade lawyers, and they know what objectives they’re after.
Second, the AB disagreed with the panel that teenage consumers were the most relevant consumer to examine when considering a measure to reduce teen smoking. The US, in its Appellant Submission, wrote that:
Approximately 31% of smokers between the ages of 12 and 25 and approximately 27% of smokers over the age of 25 smoke menthol cigarettes. Overall, 6.8% of the population over age 25, or over 12 million people, are menthol smokers. By contrast, 5.5% of smokers between the ages of 12 and 25 and 1% of smokers over 25 years of age smoked clove cigarettes. Overall, 0.3% of the population over age 25, or approximately 560,000 people, smoked clove cigarettes… clove and other banned flavors were used in a very specific way: they tended to be smoked as an occasional (rather than habitual) cigarette and tended to be smoked very little overall (and at a prevalence of 1% among smokers over 25). Such cigarettes were used primarily as an experimental cigarette because of their unique appeal to novice smokers… (Appellant Submission, paras 33-35)
In other words, far fewer people are impacted by restrictions on clove than menthol (which was an incrementalist approach dictated in part by our own Supreme Court). Moreover, children are more than five times more likely than adults to smoke cloves, which is in line with the targeted nature of the FSPTCA.
The AB did not even comment on these statistics, as, we already have established, math is hard for trade lawyers. Instead, the AB wrote...
“it is the market that defines the scope of consumers whose preferences are relevant. The proportion of youth and adults smoking different types of cigarettes may vary, but clove, menthol, and regular cigarettes are smoked by both young and adult smokers. To evaluate the degree of substitutability among these products, the Panel should have assessed the tastes and habits of all relevant consumers of the products at issue, not only of the main consumers of clove and menthol cigarettes, particularly where it is clear that an important proportion of menthol cigarette smokers are adult consumers…. the mere fact that clove cigarettes are smoked disproportionately by youth, while menthol cigarettes are smoked more evenly by young and adult smokers does not necessarily affect the degree of substitutability between clove and menthol cigarettes.” (para 137, 144)
In other words, patterns of current consumption are irrelevant as far as the WTO is concerned. Instead, what the agency is going to worry about is “the market.” This doesn’t mean actual patterns observed in any actual market, mind you. Instead (in a clear indication of trade law’s debt to reality-starved marginalist revolution in neoclassical economics), the possibility that even one adult consumer (at the margin) might switch from menthol to clove shows that substitution is possible in the market, and competitive conditions can be established.
Third, the AB admonished the panel for not thoroughly evaluating the survey data on consumer preferences presented by the U.S. and Indonesia (para. 151). However, what should have been a legal failure was thrown out the door by the AB, which wrote that its marginalist approach to substitutability meant that the legal error was of no consequence (para 154). In other words, WTO panels can make errors – big ones – so long as the AB comes through with an even more knuckle-dragging interpretation at the end of the day.
Fourth, the AB stated definitively that – just because Indonesia wanted to compare only menthol and cloves in its likeness analysis – the WTO panel was not foreclosed from examining a broader set of products. (para 191). So far, so good, because that was the justification that the panel used for excluding cola and other flavors from the analysis. But, in another indication of the WTO’s doubling down on a flawed analysis, it suggested that it was correct to examine only these products because most cloves come from Indonesia and Indonesia didn’t export other types of cigarettes. (para 196-197) The AB appeared to give no appreciation to the implication of this logic – which we’ve stated many times over - it would pose an unacceptable barrier to public health if any time a good is imported it has to be excluded from regulation.
Fifth, as for the argument that cola and other flavored cigarettes should have been included in the analysis, the AB writes that…
Aside from the Panel's finding that, "at the time of the ban, there were no domestic cigarettes with characterizing flavours other than menthol cigarettes" in the US market—which is challenged by the United States and addressed below—the Panel did not have evidence on the record that flavoured cigarettes other than menthol cigarettes had "any sizeable market share in the United States prior to the implementation of the ban in 2009". To the contrary, in response to a Panel question, the United States confirmed that the non-clove-flavoured cigarettes banned under Section 907(a)(1)(A) "were on the market for a relatively short period of time and represented a relatively small market share". Therefore, we consider it safe to assume that, given their relatively low share in the US market, the inclusion of domestically produced flavoured cigarettes in the comparison would not have altered the Panel's ultimate conclusion that the group of like domestic products essentially consisted of domestic menthol cigarettes. (para 200)
In other words, all of the U.S. evidence that tobacco companies were developing sweet cigarettes aimed at teens, and all of Waxman’s intention to stop the epidemic before it starts, or even Lena Sun’s finding in the Washington Post that a Philip Morris subsidiary actually does operate a line of sweet flavored cigars popular with teens (thanks to an unfortunate loophole in FSPTCA), is irrelevant to the WTO. There needs to be massive penetration in the market of the product the country is trying to keep off the market (and perhaps until sufficient teens have gotten hooked on cola cigarettes and died of lung cancer) before the WTO will consider a broader likeness argument. Pretty sick stuff.
Sixth, as to USTR’s argument that the WTO should take a broader view of the coexistence in the market of clove and cola cigarettes at different points in time, the AB simply states: “it appears that the Panel did not disregard the evidence that, according to the United States, demonstrated the presence of domestically produced flavoured cigarettes other than menthol cigarettes on the US market at the time of the ban. Rather, the Panel reviewed that evidence but was ultimately not persuaded by it.” Boo yea. Just. Not. Persuaded.
Seventh, the AB – despite the now meaningless rote paeans to sovereignty (para 235) – comes pretty damn close to stating that “the design, architecture, revealing structure, operation, and application of” the FSPTCA was intended to be discriminatory, and that the policy was illegitimate. There is no evidence for this whatsoever. The AB writes:
“Moreover, we are not persuaded that the detrimental impact of Section 907(a)(1)(A) on competitive opportunities for imported clove cigarettes does stem from a legitimate regulatory distinction. We recall that the stated objective of Section 907(a)(1)(A) 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 Section 907(a)(1)(A), 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 US 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 Section 907(a)(1)(A), 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.
226. Therefore, even though Section 907(a)(1)(A) 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…” (paras 224-226, emphasis added)
There you go folks, 80 pages into a ruling, and the AB indicates how little it understands of the history of public health regulation, and how little evidence it feels it needs to provide in order to make its rulings. Sheesh, you’d think that they’d at least footnote something on the substitution patterns between regular tobacco and menthol. The point of this passage seems to be to engage in fortune telling: the feared increase in black market activities will not happen because menthol smokers will simply switch to regular tobacco.
What's the real score? Maybe some will, but others might not. I bet there would be at least some increase in black market activity.
Moreover, the WTO seems to be suggesting that the approach endorsed by countless nations and the World Health Organization of incremental regulation is fundamentally flawed. After all, why even target reductions in sweet flavored cigarettes? Under the WTO’s logic, these teens would simply start smoking regular tobacco.
Oh wait. That’s the point of this entire exercise in trade pact-delivered constraints on national policy space: to show that regulation is futile.
Finally, the AB simply dismissed USTR’s arguments that the panel erred by stating that the FSPTCA imposed “no costs” on any U.S. tobacco companies, by simply folding this argument into an argument that the AB had already rejected. (para 231)
It’s funny. I was actually pretty convinced over the last few weeks that the WTO would do the right thing, and save itself by finding a way to overturn the lower panel ruling. Seems they have about as much instinct for preservation of self as they have for preservation of teen health.
(POSTSCRIPT: Now, it does appear that USTR made some slip-ups at both the panel and appeal stage. First, Obama’s trade team expended lots of ink trying to make the esoteric and unconvincing argument that the “end use” of smoking menthols and smoking cloves is significantly different. Neither the panel nor the AB was convinced on this score. (paras 124-127) Now, in USTR’s defense, some of their argumentation in this regard was due to the shackles of what are known as the four Border Tax likeness criteria from a 1970 GATT report, one of which is “end uses.” (The others are tariff classification, consumer preferences and physical characteristics.) If those are the only four criteria a country can use to rebut a likeness argument, the national lawyers will try to fit their defense arguments through the eye of the Border Tax needle. But as this AB ruling shows, the time is now for a TBT-specific likeness criteria, an idea we floated here. Second, it seems that USTR made a procedural error by challenging the likeness of clove and menthol in the wrong section of its appeal. (para 199) The AB, however, appeared to go out of its way to state that, even if USTR had gotten this right, it wouldn’t have mattered.)