Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes, a GATT decision (CPTech)
Editor's note:
The GATT decision in the 1990 Thai tobacco case is important for several different reasons. The GATT ruled against the Thai efforts to ban imports of cigarettes. However, the GATT did establish a precedent by consulting with the World Health Organization (WHO) on a trade issue involving public health, and it did indicate that a ban on the advertising of cigarettes, while potentially harmful to the interests of importers who were not well known, was justified for public health reasons.
The entire opinion is given below. As an introduction, here are a few key parts.
From paragraph 27
Since the health consequences of the opening of cigarette markets constituted one of the major justifications for Thailand's cigarette import regime, Thailand deemed it necessary that the panel consult with experts from the World Health Organization (WHO) on recent experience in countries which had been made to open their markets for cigarettes. This showed that once a market was opened, the United States cigarette industry would exert great efforts to force governments to accept terms and conditions which undermined public health and governments were left with no effective tool to carry out public health policies. Advertising bans were circumvented and modern marketing techniques were used to boost sales. Hence, Thailand was of the view that an import ban was the only measure which could protect public health. Any other measure which allowed imports in any amounts would not be effective.
From paragraph 34
Since May 1989 Thailand had resisted bilateral pressures, under Section 301 of the US Trade Act, to open its market for cigarettes, and faced the imminent threat of retaliation against Thai exports to the United States, valued at US$166 million. Even though exports were the linchpin of Thailand's economic success, such considerations had given way to health concerns. In the course of these bilateral pressures, the United States had made it clear that its objectives were not limited to market opening and national treatment on internal taxation but covered other areas, such as a unilateral reduction of Thailand's import duty on cigarettes to zero, a low specific rate of excise tax on cigarettes (which when converted to an ad valorem basis, would work to the advantage of higher-value American cigarettes) and the right for manufacturers of foreign cigarettes to advertise and conduct point-of-sale promotion even though such a right was denied to manufacturers of domestically-produced cigarettes. Thailand therefore sought from the Panel a recommendation as to whether Thailand was required by GATT provisions to grant such concessions to the United States. Such a recommendation was necessary to protect the credibility of the multilateral dispute settlement mechanism. Thailand also sought from the Panel confirmation of its understanding that, in the event of its market for cigarettes being opened, its obligations with regard to the pricing, distribution, advertising, promotion and labelling of cigarettes were limited to providing national treatment for foreign cigarettes.
From paragraph 62
The United States also stated that the 1989 Report of the United States Surgeon General had concluded that there was no scientifically rigorous study available to the public that provided a definitive answer to the basic question of whether advertising and promotion increase the level of tobacco consumption and that the extent of the influence of advertising and promotion on the level of smoking was unknown and possibly unknowable. ("Surgeon General, Reducing the Health Consequences of Smoking" 512-12(1989).) . . . .
From paragraph 78.
A ban on the advertisement of cigarettes of both domestic and foreign origin would normally meet the requirements of Article III:4. It might be argued that such a general ban on all cigarette advertising would create unequal competitive opportunities between the existing Thai supplier of cigarettes and new, foreign suppliers and was therefore contrary to Article III:4 [2]. Even if this argument were accepted, such an inconsistency would have to be regarded as unavoidable and therefore necessary within the meaning of Article XX(b) because additional advertising rights would risk stimulating demand for cigarettes.
Cecile Crettol, Catherine Gavin
5 October 1990
THAILAND - RESTRICTIONS ON IMPORTATION OF AND INTERNAL TAXES ON CIGARETTES Report of the Panel adopted on 7 November 1990 (DS10/R - 37S/200)
I. INTRODUCTION
1. On 22 December 1989, the United States requested consultations
with Thailand under Article XXIII:1, concerning restrictions on imports of
and internal taxes on cigarettes maintained by the Royal Thai Government
(DS10/1). As these consultations which were held on 5 February 1990 did
not lead to a solution, the United States requested the CONTRACTING
PARTIES to establish a panel under Article XXIII:2, to examine the matter
(DS10/2). The Council agreed to establish the Panel on 3 April 1990 and
authorized its Chairman to designate the Chairman and members of the Panel
in consultation with the parties concerned (C/M/240).
2. On 16 May 1990, the Council was informed that the Panel would
have the following terms of reference and composition:
A. Terms of reference
"To examine, in the light of the relevant GATT provisions, the
matter referred to the CONTRACTING PARTIES by the United States in
document DS1O/2 and to make such findings as will assist the
CONTRACTING PARTIES in making the recommendations or in giving the
rulings provided for in Article XXIII:2" (C/M/241).
B. Composition
Chairman: Mr. Rudolf Ramsauer
Members: Mr. Pekka Huhtaniemi
Mr. Adrian Macey
3. Additionally, the Council took note of the following understanding
between the Parties (C/M/241):
"(i) The United States agreed to present its first submission
in advance of Thailand's first submission and to allow the Thai authorities
a reasonable period to prepare their own first submission;
(ii) The two parties understand that Thailand will make a
request for the Panel to consult with competent international organizations
on technical aspects such as the health effects of cigarette use and
consumption. It is further understood that if Thailand makes
such a request, the Panel may so consult;
(iii) The two parties agree that the "relevant GATT provisions"
referred to in the terms of referenceinclude the Protocol of Accession of
Thailand (BISD, 29S/3) and the CONTRACTING PARTIES decision of 17 June
1987 (BISD 34S/28)."
4. At the meeting of the Council held on 3 April 1990, the European
Communities reserved the right to intervene in the Panel proceedings
(C/M/240).
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5. The Panel held meetings with the parties to the dispute on 2 and
27 July 1990. It consulted with officials of the World Health Organization
on 19 July 1990. The delegation of the European Communities made an oral
submission to the Panel at the meeting held on 27 July 1990. The
Panel submitted its report to the parties on 21 September 1990.
II. FACTUAL ASPECTS
A. Restrictions on imports
6. Under Section 27 of the Tobacco Act, 1966, the importation or
exportation of tobacco seeds, tobacco plants, tobacco leaves, plug
tobacco, shredded tobacco and tobacco is prohibited except by licence of the
Director-General of the Excise Department or a competent officer
authorized by him. Section 4 of the said Act defines tobacco as
"cigarettes, cigars, other tobacco rolled for smoking, prepared shredded
tobacco including chewing tobacco". Licences have only been granted to
the Thai Tobacco Monopoly, which has imported cigarettes on only three
occasions since 1966, namely in 1968-70, 1976 and 1980.
B. Internal taxes
7. Cigarettes are subject to the payment of an excise tax, a
business tax and a municipal tax.
(i) Excise tax:
8. The schedule of fees and tobacco stamp rates appended to the
Tobacco Act, 1966, provides that the ceiling rate of excise tax for
domestic cigarettes is 60 per cent of the retail selling price given in
notifications of the Director-General of the Excise Department, while the
ceiling rate for imported cigarettes is 80 per cent of the retail selling
price given in notifications of the Director-General of the Excise Department
or 0.60 baht/gram. The Act permits the Ministry of Finance to set the rate
of tax at levels which do not exceed those laid down in the schedule.
Until 11 July 1990, the rates of excise tax on domestic cigarettes were
based on the amount of Thai tobacco leaf contained in the cigarette, with
the maximum rate set at a level slightly below the ceiling laid down in
the Tobacco Act.
9. The sales weighted average rate of excise tax on domestically
produced cigarettes in 1989 was 54.69 percent of the retail selling
price. The excise tax which would be applied to imported cigarettes was
set at 0.50 baht per gram. In the absence of cigarette imports, the ad
valorem equivalent of this tax in 1989, as computed by the Thai
authorities, would have been 35.83 per cent, assuming a c.i.f. price of
11.50 baht per packet.
10. On 11 July 1990, the Ministry of Finance issued a regulation
which set the rate of excise tax at 55 percent ad valorem, for both
domestic and imported cigarettes, with immediate effect.
(ii) Business and municipal taxes
11. Business tax is currently assessed on both domestically produced
and imported cigarettes at a rate of 1.5 per cent of the retail selling
price and the municipal tax is set at 10 per cent of the business tax.
Section 5 bis of the Tobacco Act, 1966, exempts from business tax "tobacco
manufacturers on the sale of shredded tobacco or smoking tobacco, and
sellers of shredded tobacco or smoking tobacco made from native tobacco
leaves". As indicated in paragraph 6, the Act defines the term tobacco
to include cigarettes. The Thai Tobacco Monopoly is the only licensed
manufacturer of cigarettes. Under the Municipal Revenue Act of 1954, the
municipal tax is collected as a percentage of the business tax, and products
exempted from the business tax are also exempted from the municipal tax.
On 18 August 1990, the King approved a Royal
<---------------------------------- p 3 --------------------------------->
Decree which explicitly exempts as of 22 August 1990 all imported cigarettes
from payment of business and therefore municipal taxes.
III. MAIN ARGUMENTS
A. Findings and recommendations requested by the Parties
12. The United States requested the Panel to find that:
(i) Restrictions on imports
- the restrictions on imports of cigarettes by Thailand
were inconsistent with Article XI of the General Agreement and were not
justified by the exception contained in Article XI:2(c), because
cigarettes were not an agricultural or fisheries product in the meaning
of Article XI, the restrictions operated as an import prohibition, they
were not imposed in conjunction with domestic supply restrictions and
they had a disproportionate effect on imports;
- the same restrictions could not be justified under
Article XX(b) since as applied by Thailand they were not necessary to
protect human health;
- these restrictions were not covered by Thailand's
Protocol of Accession to the GATT since the Tobacco Act of 1966 on which
they were based did not impose mandatory import restrictions;
- the restrictions were not covered by any other exception
to the General Agreement;
(ii) Internal Taxes
- Thailand's excise tax on cigarettes was inconsistent with
Article III:1 and III:2 because it permitted the application of a higher
rate for imported cigarettes than for like domestic products, in the
event that imports of cigarettes were authorized;
- Thailand's business and municipal taxes on cigarettes
were also inconsistent with Article III:1 and III:2 because only domestic
products or imports effected by local manufacturers were exempted
from payment of the taxes.
13. The United States requested the Panel to recommend that:
- Thailand eliminate its quantitative restrictions on
imports of cigarettes and that it bring its tax laws and practices into
conformity with its obligations under the General Agreement.
14. Thailand requested the Panel to find that:
(i) Restrictions on imports
- its restrictions on imports were justified by Article
XI:2(c) because cigarettes were an agricultural product within the meaning
of Article XI and the Thai cabinet had taken action to reduce the area in
which tobacco could be planted and the production of cigarettes;
<-------------------------------- p 4 -------------------------------->
- Thailand's restrictions on imports were also justified
under Article XX(b) because measures which could only be effective if
cigarette imports were prohibited had been adopted by the government
to control smoking and because chemical and other additives contained in
United States cigarettes might make them more harmful than Thai cigarettes;
- the restrictions were justified by Thailand's Protocol of
Accession to the GATT because the Tobacco Act of 1966, upon which the
restrictions were based, predated Thailand's accession to the GATT in
1982 and was mandatory in its expressed intent;
(ii) Internal taxes
- the excise, business and municipal taxes applied to
cigarettes were not higher for imported cigarettes than for the like
domestic product and were not therefore inconsistent with Article III;
15. Thailand therefore requested the Panel to reject the complaint of
the United States.
B. Article XI:1
16. The United States argued that since 1966 Thailand had implemented
an import licensing regime for cigarettes which was inconsistent with
Article XI. The Thai Tobacco Monopoly had imported cigarettes on only
three occasions and the Government refused to consider import licence
applications from any other entity. The United States had repeatedly
requested that Thailand eliminate its licensing restrictions and
permit imports of cigarettes from other contracting parties. These requests
had been turned down. Recalling that a number of recent panel reports [1]
which had been adopted by the CONTRACTING PARTIES, had confirmed that the
activities of state-controlled import monopolies must conform to a number of
rules contained in the General Agreement, including those of Article XI:1,
the United States asked the Panel not to accept an artificial distinction
between the activities of state-trading monopolies and other government
acts and policies to restrict trade. Such a finding would essentially
vitiate one of the most effective provisions for achieving the objectives
of the General Agreement, i.e. the substantial reduction of tariffs and other
barriers to trade and the elimination of discriminatory treatment in
international trade.
C. Exceptions to Article XI:1
(i) Article XI:2
17. Thailand recognized the existence of a virtual prohibition on
imports of cigarettes. However, it contended that this restriction was
justified under Article XI:2(c). There was a long-standing practice in
GATT which had been accepted in past rounds of trade negotiations and
followed by panels in other cases, to treat products falling under
Chapters 1 to 24 of the CCCN or the HS nomenclatures as agricultural products
within the meaning of Article XI. Therefore, cigarettes which were
classified under the CCCN as 24.02.B and the HS nomenclature as 2402.20 were
agricultural products. Thailand contended that import restrictions on
cigarettes were "necessary to the enforcement of governmental measures
which operated to restrict the quantities of the like domestic product".
Allowing cigarette imports would undermine government policy
to reduce the tobacco planting area and cigarette production.
_______________
1. Report of the Panel - "Republic of Korea's Restrictions on
Imports of Beef, paragraph 115 (L/6503). Report of the Panel - "Japan's
Restrictions on Imports of Certain Agricultural Products", paragraph
5.2.2.2. (BISD, 35S/163).
<-----------------------------------p 5----------------------------->
18. The United States held the view that because of the fundamental
nature of the ban on quantitative restrictions, contained in Article XI:1,
any exceptions to it must be narrowly construed. With respect to each
exception asserted, each and every condition must be met before a
measure may be considered as covered by the exception.
19. The United States argued that the import restrictions maintained
by Thailand on cigarettes could not be justified by Article XI:2(c) for
the following reasons:
(a) the implementation of the import licensing system set
forth in Section 27 of the Tobacco Act of 1966 acted as a de facto
prohibition on imports from the United States and other contracting
parties. At least two prior GATT panels had found that import
prohibitions were not justified under Article XI:2(c)(i) [1]. The Panel on
"Japan - Restrictions on Imports of Certain Agricultural Products" had
cited the conclusion reached by the Panel on "United States - Prohibition of
Imports of Tuna and Tuna Products from Canada", which had noted that in
Article XI:2(a) and (b), the words "prohibitions and restrictions" are used
while in Article XI:2(c) mention is only made of "restrictions", and had
concluded that "the provisions of Article XI:2(c) could not justify the
application of an import prohibition";
(b) the working assumption that a product falling under
Chapters 1-24 of the CCC or HS nomenclatures is considered an agricultural
product should not automatically be applied when that resulted in
unnecessary and unintended exemptions from the provisions of Article XI.
Consequently, a cigarette could not be considered an agricultural product
simply because it is processed, in part, from an agricultural product;
(c) the import restrictions imposed by Thailand on cigarettes
were not necessary to ensure enforcement of governmental measures which
operate to restrict the quantities of the like domestic product
permitted to be marketed or produced since there was no effective
governmental policy to restrict the quantities of Thai cigarettes
permitted to be marketed or produced. The Cabinet resolutions
that the Thai Government presented as measures to restrict marketing and
production of cigarettes did not have the effect of law. Moreover,
Thailand had not presented any concrete plans for implementing the Cabinet
resolutions. The like domestic product referred to in Article XI:2(c)(i) was
cigarettes rather than tobacco leaf. Current constraints consisted of
limited capacity while Thailand had a stated policy of promoting cigarette
exports and a record of increasing levels of production and sales of
cigarettes. In spite of anti-smoking activities in Thailand, no constraints
had been put on cigarette production. Various plans to increase capacity had
been considered but had not been acted upon because of the United States'
request to enter the market. Thailand simply wanted to satisfy domestic
demand in cigarettes through sales of domestic products. It also wanted to
maintain the income of tobacco growers and of those in related
industries, to protect employment in the cigarette industry and ensure a
predictable and high level of government revenue. A recent Panel report [2]
had noted that the drafters of Article XI had agreed that the exception "was
not intended to provide a means of protecting domestic producers against
foreign competition" and "should not be construed as permitting the use of
quantitative restriction as a method of protecting the industrial
processing of agricultural or fisheries products";
_______________
1. Report of the Panel on "Japan - Restrictions on Imports of
Certain Agricultural Products" (BISD,35S/230-231, paragraph 5.3.1.2).
Report of the Panel on "United States - Prohibition of Imports of Tuna
and Tuna Products from Canada", (BISD, 29S/91).
2. Panel report on "Japan - Restrictions on Imports of Certain
Agricultural Products", paragraph 5.1.2(BISD, 35S/163)
<-------------------------------------p 6----------------------------->
(d) a de facto ban on cigarettes which had been in effect
since 1966, could not be considered an act to address unexpected excess
supply of agricultural products, in the meaning of Article XI:2;
(e) the restriction reduced the total of imports relative to
the total of domestic production, as compared with the proportion which
might reasonably be expected to rule between the two in the absence
of restrictions.
20. Thailand recognized that since the first Tobacco Act had been
passed in 1938, no imports of cigarettes had been allowed, except on a few
critical occasions when insignificant quantities had been imported during
short periods of time. Thus, it could not be argued, as the United
States did, that the restriction had the effect of reducing the proportion of
imports which might be expected to rule in the absence of restrictions.
(ii) Article XX(b)
21. Thailand contended that the prohibition on imports of cigarettes
was justified by the objective of public health policy which it was
pursuing, namely to reduce the consumption of tobacco which was harmful to
health. It was therefore covered by Article XX (b). The production and
consumption of tobacco undermined the objectives set out in the Preamble
of the General Agreement which were: to raise the standard of living,
ensure full employment and a large and steadily growing volume of real
income and effective demand, develop the full use of the resources of the
world and expand the production and exchange of goods. Instead, smoking
lowered the standard of living, increased sickness and thereby led to
billions of dollars being spent every year on medical costs, which
reduced real income and prevented an efficient use being made of resources,
human and natural. The production of tobacco had not altogether been prohibited
in Thailand because this might have led to production and consumption of
narcotic drugs having effects even more harmful than tobacco, such as
opium, marijuana and kratom (a plant with fragrant yellow flowers and
intoxicating leaves). Historically, the manufacturing of cigarettes in
Thailand had been aimed at providing a legal substitute for narcotic
products which were themselves outlawed. Cigarette production in Thailand was
a state-monopoly under the Tobacco Act, because the government felt the need
to have total control over such a product which, even though legal, could
be extremely harmful to health. A main objective of the Act was to ensure
that cigarettes were produced in a quantity just sufficient to satisfy
domestic demand, without increasing such demand. While a certain
quantity of foreign cigarettes was smuggled into Thailand, this was unlikely
to be done without the manufacturers' consent, since prior to the total ban on
cigarette advertising which had been implemented on 10 February 1989,
foreign cigarette manufacturers had advertised on Thai television, in mass
circulation newspapers and on billboards. Indirect advertising had also taken
place and the logos of cigarette manufacturers had appeared on clothing
and many other non-tobacco products.
22. The United States noted the intent of the drafters of the General
Agreement that measures which a contracting party seeks to justify under
the provisions of Article XX(b) should reflect similar domestic
safeguards. The drafting history of Article XX(b) indicated that the
language in the preamble to Article XX stating that measures not be
disguised restrictions on international trade had this meaning in the context
of Article XX(b). The United States further noted that safeguards
comparable to an import prohibition did not exist with respect to
domestic cigarettes.
23. The United States noted that a recent panel [1] had found that a
contracting party could not justify a measure inconsistent with another
GATT provision as "necessary" in terms of Article XX(d) if an alternative
measure which it could reasonably be expected to employ and which is not
inconsistent with other GATT provisions is also available to it. It had
also found that in cases where a measure consistent with other GATT provisions
is not reasonably available, a contracting party is bound to use, among
the measures reasonably available to it, that which entails the least
degree of inconsistency with other GATT provisions. The United States
considered that Thailand, like other contracting parties, could pursue
the objective of seeking to prevent the increase in the number of smokers
without imposing a ban on imports. The experience of other countries
<-------------------------------------p 7-------------------------------->
had shown that decreases in the level of smoking resulted from diminished
demand achieved through education and the recognition of the effects of
smoking rather than restraints on the availability of cigarettes.
Moreover, the United States considered that Thailand could not argue that
the ban on imports was necessary to protect human life or health since
domestic production, sales and exports of cigarettes and tobacco remained
at high levels. Between 1979 and 1988, total domestic sales of Thai
cigarettes had risen by 2.6 per cent annually. They had risen by 5.76
per cent in 1987, after the active anti-smoking campaign had started,
and by 7.4 per cent in 1988. Most recent data suggested that sales rose
by about 8 per cent in 1989. They were forecast to rise again in 1990.
These figures indicated that there was an ongoing substantial increase
in the number of smokers or a substantial increase in the number of
cigarettes consumed by current smokers. The anti-smoking campaign had been
unsuccessful in actually diminishing the absolute level of cigarette production
and sales in Thailand, while all legitimate imports had been banned. There
existed in Thailand a well-established demand for foreign cigarettes, met
by illegal imports unauthorized by legitimate producers, which accounted for 4
to 5 per cent of the market.
24. Thailand replied that the exception contained in Article XX(b)
reflected the recognition that public health protection is a basic
responsibility of governments. With the support of non-governmental
organizations, the Thai government had taken action to control smoking
by, inter alia:
- adopting a comprehensive national programme for the
control of tobacco use;
- establishing a body, the National Committee for Control
of Tobacco Use (NCCTU), to implement the national programme;
- imposing a total ban on direct and indirect advertising
of cigarettes in all media, legally enforced under the authority of the
Consumer Protection Act;
- informing the general public about the dangers of smoking;
- requiring the printing of seven rotatory health warnings
on the packages of cigarettes, in accordance with the Consumer Protection
Act;
- prohibiting smoking in all public transport, health
establishments and other public places;
- improving data collection on smoking and health;
- promoting research on smoking and health.
_______________
1. Panel report on "United States - Section 337 of the Tariff Act
of 1930", paragraph 5.26 (L/6439).
<------------------------------------- p 8 ------------------------------>
25. Most recently, on 6 March 1990, the Thai Cabinet had decided to
attack the problem of smoking on both the supply and demand sides by
instructing the relevant authorities to:
- reduce the production of cigarettes on a continuous basis;
- reduce the area where tobacco is grown;
- set aside funds to be used by the NCCTU in its
anti-smoking campaign;
- encourage academic institutions in their role of
expressing or reflecting public opinion on cigarette smoking;
- prohibit exports of cigarettes.
26. According to Thailand, the smoking rate among the Thai population
over 10 years of age declined from 30.1 per cent in 1976 to 27.8 per cent
in 1981, 26.4 per cent in 1986 and 25 per cent in 1988. In addition per
capita consumption of tobacco declined at a rate of 2.2 per cent a year
between 1974-76 and 1984-86. Aggregate consumption had increased at an
average annual rate of 1.1 per cent in 1984-86 but this was largely
accountable to increase in population and a higher standard of living which
had encouraged smokers, particularly in rural areas, to switch from
self-rolled cigarettes and traditional tobacco products to manufactured
cigarettes. At the same time, while total cigarette production in Thailand
was still growing, the annual growth rate had fallen from 2.8 per cent
to 2.72 per cent in recent years.
27. Thailand argued that while competition had desirable effects in
international trade in goods, this did not apply to cigarettes.
Governments in many countries, including the United States and Thailand,
tried to discourage or control tobacco and cigarette consumption.
Competition would lead to the use of better marketing techniques
(including advertising), a wider availability of cigarettes, a possible
reduction of their prices, and perhaps improvements in their quality.
This might have the undesirable effect of leading to an increase in total
consumption, especially among women and the young, which would run contrary to
public health objectives. Some American cigarettes were specifically
targeted at women of whom only 3.5 per cent smoked in Thailand compared
to 30 per cent in Western countries. A recent report of the
Council on Scientific Affairs of the American Medical Association stated
that at a time when cigarette smoking is falling in developed nations, it
is increasing in Africa, Latin America and Asia as tobacco companies seek
new markets. According to this report, the United States leads the world
in tobacco exports, and its cigarette exports to Asia had increased by 75
per cent in 1988 alone. Since the health consequences of the opening of
cigarette markets constituted one of the major justifications for Thailand's
cigarette import regime, Thailand deemed it necessary that the panel consult
with experts from the World Health Organization (WHO) on recent experience in countries which had been made to open their
markets for cigarettes. This showed that once a market was opened, the
United States cigarette industry would exert great efforts to force
governments to accept terms and conditions which undermined public
health and governments were left with no effective tool to carry out
public health policies. Advertising bans were circumvented and
modern marketing techniques were used to boost sales. Hence, Thailand
was of the view that an import ban was the only measure which could
protect public health. Any other measure which allowed imports
in any amounts would not be effective.
28. Thailand also argued that cigarettes manufactured in the United
States may be more harmful than Thai cigarettes because of unknown
chemicals placed by the United States cigarette companies in their
cigarettes, partly to compensate for lower tar and nicotine levels.
United States cigarette companies also used other additives which
increased the health risks of smoking. One such additive
was cocoa, which according to one study increased the risk of cancer.
Others included deer tongue, ethyl butyrate, linayle acetate, isoamyl
acetate, 2,3,5 trimethyl and pyrazine. According to the United States
Surgeon-General's 1984 report, "a
<------------------------------- p 9 ---------------------------------->
characterization of the chemical composition and adverse biological potential
of these additives is urgently required, but is currently impossible
because cigarette companies are not required to reveal what additives they
employ in the manufacture of tobacco" (USDHHS, 1984). According to Thailand,
some United States cigarettes contained nicotine which was extracted from
tobacco leaf, resprayed back into the leaf as part of a process called
"reconstituting" the tobacco. Re-adding nicotine in chemical form to tobacco
leaf may make United States cigarettes different from Thai cigarettes in the
strict sense of the word and make them more addictive, since it could
make inhalation easier and absorption of nicotine by the bloodstream and
the brain more efficient.
29. The United States replied that the health hazards of smoking had
been the subject of extensive documentation in a number of countries. The
existence of such hazards was not the real issue in this dispute.
The United States did not believe that Thailand had established that its
import ban served the purpose of protecting public health or that such a
measure was necessary to accomplish that purpose. The Thai Tobacco
Monopoly produced at least 15 brands of cigarettes appealing to all types
of consumers. It had consciously attempted to imitate "American blend"
cigarettes, clearly in response to perceived consumer demand. These
"American-style" brands were among the Monopoly's best sellers. Its
distribution system was both extensive and well-established at the
wholesale and retail levels. Few barriers were imposed to entry into the retail
cigarette business. Currently, Thailand had over 40,000 licensed
cigarette retailers. The marketing techniques of the Thai Tobacco
Monopoly were as effective as those of American manufacturers. No decision had
been adopted by the Thai Cabinet to reduce cigarette production until 6
March 1990, i.e. after the United States had requested the establishment
of the panel. In the past, the Thai Tobacco Monopoly had ignored earlier
Cabinet decisions. For example, it had not implemented the six labelling
requirements mentioned by Thailand and was negotiating with the
government to weaken two of them. Moreover, three major expansion plans had
been initiated by the Thai Tobacco Monopoly between July 1987 and January 1990,
despite government policy, and new orders had been placed for machinery which
would enable the Monopoly to increase its production by 10 billion
cigarettes in 1991. While the Ministry of Agriculture had been instructed in
January 1988 to formulate a plan for reducing tobacco acreage, this was
not relevant to the object of the dispute which was cigarettes.
Furthermore, Thailand had not presented any information on a concrete
plan to decrease acreage and Thai statistics showed, if anything, that tobacco
acreage increased, rather than decreased, in the 1988/1989 season.
30. According to the United States, the reasons identified by
Thailand for the increasing consumption of cigarettes, namely a switch
from traditional tobacco products to manufactured cigarettes were of
declining importance as the economic situation of Thailand changed.
Increased availability would lead to increased consumption if there was
demand that was not currently satisfied. Thus, as had happened in other Asian
markets which had recently liberalized import policies, opening the Thai
market would lead to a shift in consumption from the Thai Tobacco
Monopoly cigarettes to imported products, rather than to an increase
in total demand. If the real issue was over advertising and concern over
the creation of new customers and new demand, that problem should be
addressed directly and not through a GATT-inconsistent import
prohibition. The United States could not accept the view that the import
ban on cigarettes was justified because of the lack of an alternative
tool to carry out public health policy effectively. Any measures that
could be taken in pursuance of such objectives should be taken on a
national treatment basis.
31. The United States denied that its cigarettes raised special
health concerns. Indeed, the Thai government had recognized that United
States and other foreign cigarettes were less harmful than Thai
cigarettes because of their significantly lower tar and nicotine
content. Cigarettes exported from the United States were the
same product as the ones sold in the United States. Their ingredients
had been disclosed to the Department of Health and Human Services since
1985, in pursuance of the Federal Cigarette Labelling Act. That
Department had raised no issue with any of the items on the list of
ingredients that had been reported each year. None of the other
countries, such as the United Kingdom, France and the Federal Republic of Germany,
which also required disclosure of ingredients, had raised problems with
ingredients in United States cigarettes.
<---------------------------- p 10 ----------------------------------->
Thailand, however, had no regulations or restrictions on ingredients or
flavourings used in cigarettes. The United States noted that the Thai
Government admitted that the Thai Tobacco Monopoly used additives
in its cigarettes. With respect to the ingredients that the Thai
Government cited as raising health concerns, the United States noted that
the US cigarette industry, unlike the Thai Tobacco Monopoly, did not use deer
tongue, also known as coumarin. The Thai Tobacco Monopoly also purchased
cocoa which it used as flavouring and which was on the list of approved
ingredients of every country that maintained one. It was also a
substance frequently consumed as food or beverage. 2,3,5 trimethyl was a
flavoured aroma ingredient commonly used in food products and approved
by the US Food and Drug Administration. Reconstituted tobacco had less
nicotine than full leaf tobacco and the Thai Tobacco Monopoly intended to use
this technique in the future. According to independent studies, tar and
nicotine levels in Thai cigarettes were higher than in foreign cigarettes
illegally imported into Thailand. While it was true that United States
cigarette exports to Asia had increased in recent years, this increase, which
was due to the dismantling of monopolies in several countries, had been
from a zero base which explained the high percentage increase in exports.
32. Thailand replied that it had never recognized that foreign
cigarettes were less harmful than Thai cigarettes. Even though their tar
and nicotine contents might be lower, they were more addictive than Thai
cigarettes because smokers tended to consume a higher number of low tar
and nicotine cigarettes, in order to obtain the amount of nicotine to
which they were used. Artificial flavourings and other ingredients were added
to low tar/nicotine cigarettes to compensate for the milder taste of such
cigarettes. Thailand, like the United States, had regulations on
ingredients and flavourings. The Thai Tobacco Monopoly was required
by a Cabinet resolution of February 1990 to disclose the ingredients of
its cigarettes to the Ministry of Public Health. This Ministry had
requested the Ministry of Finance, which supervised the Thai Tobacco
Monopoly to instruct it to reduce or eliminate three of the ingredients
which were considered particularly dangerous to health. Some of these,
such as cocoa could be harmless when eaten or drunk, but could be
carcinogenic when burned. While it was true that the list of additives
to American cigarettes had been submitted to the Department of Health and
Human Services since 1985, only a consolidated list of additives
which was used by six manufacturers was submitted by these manufacturers,
without identifying the brand (or brands) of cigarettes containing
particular additives and without indicating the amount of each additive
used. Thus, the nature of the information given to the Department of
Health and Human Services limited the ability to conduct a thorough
analysis of the potential health risks of additives. Canada had passed
legislation requiring all cigarette manufacturers to disclose the
additives they used, and as a result one leading United States
manufacturer had withdrawn several of its brands from the
Canadian market. Moreover, Thailand did not agree that cigarettes
exported from the United States were the same product as those sold
on the domestic market. Recent studies had shown that some foreign
cigarettes sold in Asia contained a higher tar level than the same brands
sold in Australia, Europe or the United States.
33. Thailand recognized that consumption of cigarettes had continued
to rise in Thailand, in spite of the efforts by the government with the
support of non-governmental organizations, because such campaigns
took a long time to produce effects, as had been seen in the United
States where consumption had continued to rise until 1981, even though
the first anti-smoking campaign had been initiated in 1965. Thailand denied
that the objective of its policy was to protect domestic production of
cigarettes. No new factory had been built in the last 12 years and a
number of plans to expand existing capacity had been rejected by the
government. Any machinery installed in existing factories was only
replacing equipment whose life-span had expired. While it was true that
the Thai Tobacco Monopoly had delayed implementing the health
warnings required by the Cabinet, and had tried to weaken two of them, it
could not ignore cabinet resolutions and would have to enforce the
warnings. Health considerations overrode any other policy objectives of
the government. Thus, the Ministry of Finance had estimated that the
importation of cigarettes would yield an extra revenue of baht 800
million (about US$30 million) per year which was a substantial sum for a
developing country. However, the government had decided to forego this
sum in deference to public health considerations.
<---------------------------- p 11 ----------------------------------->
34. Since May 1989 Thailand had resisted bilateral pressures, under
Section 301 of the US Trade Act, to open its market for cigarettes, and
faced the imminent threat of retaliation against Thai exports to the
United States, valued at US$166 million. Even though exports were the
linchpin of Thailand's economic success, such considerations had given
way to health concerns. In the course of these bilateral pressures,
the United States had made it clear that its objectives were not limited
to market opening and national treatment on internal taxation but covered
other areas, such as a unilateral reduction of Thailand's import
duty on cigarettes to zero, a low specific rate of excise tax on
cigarettes (which when converted to an ad valorem basis, would work to
the advantage of higher-value American cigarettes) and the right for
manufacturers of foreign cigarettes to advertise and conduct
point-of-sale promotion even though such a right was denied to
manufacturers of domestically-produced cigarettes. Thailand therefore sought
from the Panel a recommendation as to whether Thailand was required by GATT
provisions to grant such concessions to the United States. Such a
recommendation was necessary to protect the credibility of the
multilateral dispute settlement mechanism. Thailand also sought from the
Panel confirmation of its understanding that, in the event of its market
for cigarettes being opened, its obligations with regard to
the pricing, distribution, advertising, promotion and labelling of
cigarettes were limited to providing national treatment for foreign
cigarettes.
35. In the view of the United States, there was a marginal benefit to
be gained from smoking low tar and nicotine cigarettes, rather than high
tar and nicotine cigarettes. With respect to tobacco additives, it
considered that there was no evidence that these additives had any
adverse effects and referred the panel to the findings of the American
Health Foundation which were annexed to the WHO submission. Moreover,
Thailand's import prohibition had always affected all cigarettes and not
simply those containing additives, many of which such as menthol were
also used by the Thai Tobacco Monopoly. United States cigarette
manufacturers complied with the labelling and disclosure requirements of
United States law. Apart from cigarettes sold in countries where local
content requirements resulted in United States companies manufacturing locally
for domestic consumption through licensees, and in consequent variations in
tar and nicotine levels, all other cigarettes exported from the United
States were identical to the product sold on the domestic market. Unless
Thailand amended the Tobacco Act of 1966 to eliminate the monopoly on the
manufacture of cigarettes, foreign firms would have to supply the Thai market
through imports. In the case of Canada, only 1 per cent of the market
had been held by United States cigarette manufacturers prior to the
introduction of a reporting requirement for additives. That did not change
after the implementation of the requirement as much of US manufacturing
and sales were effected through Canadian licensees. Some firms had expressed
concern about the protection of their trade secrets and had considered that
the size of the market did not justify continuing their export effort,
especially as each Canadian province had enacted individual requirements thus
atomizing the market. The United States denied that it was seeking anything
other than the application of national treatment in measures taken by
Thailand to control the consumption of cigarettes and objected to the Panel
making recommendations on issues not raised by it, as these issues were
outside the terms of reference of the Panel.
(iii) Protocol of Accession
36. Thailand argued that the Thai import regime for cigarettes was in
full conformity with Thailand's rights and obligations under the General
Agreement as the Tobacco Act of 1966 on which the import restrictions
were based, was covered by paragraph 1(b) of the Protocol for the
Accession of Thailand by the General Agreement according to which:
"Thailand ... shall apply to contracting parties provisionally
and subject to this Protocol, ... (b) Part II of the General Agreement
to the fullest extent not inconsistent with the legislation existing on
the date of this Protocol" (BISD, 29S/3).
<---------------------------- p 12 ----------------------------------->
37. Recalling that the recent panel report [1], adopted by the
CONTRACTING PARTIES, on "Norway's Restrictions on Imports of Apples and
Pears" had concluded that in order to be eligible under the Protocol,
existing legislation must (a) be legislation in a formal sense, (b)
predate the Protocol and (c) be mandatory in character by its terms or
expressed intent, the United States argued that Thailand's restrictions on
cigarette imports were not covered by its Protocol of Accession, because
although they predated its accession to the GATT, they were not
mandatory. Section 27 of the Tobacco Act, 1966, did not impose a mandatory
prohibition on importation of cigarettes, but only empowered the Director-
General of the Excise Department to issue import licences. Moreover,
imports had occurred under the Act.
38. According to Thailand, the Tobacco Act of 1966, which was the
legal basis for restrictions on the importation of cigarettes, constituted
existing legislation within the meaning of the Protocol. The Act could
satisfy each and every condition specified in the recent Panel report on
Norway - "Restrictions on Imports of Apples and Pears" (L/6474, paragraph
5.7). The Act, which was adopted in 1966, predated the Protocol,
which had itself been adopted in 1982. Even though the Act did not state
explicitly the intent of minimizing harm to public health, it was
self-evident that its intent was identical to that of its predecessor, namely the
Opium Act of 1929, which was to control consumption in order to minimize
the harm to health. The Tobacco Act shared the same features as the
Opium Act in requiring strict control over the production, distribution,
consumption etc. of the product from beginning to end. As in the case
of the legislation which it had replaced, namely the Tobacco Acts of 1938
and 1943, the 1966 Act required the Thai government to control
production, consumption, internal and international trade of cigarettes.
The purpose of the Act was to ensure that the quality and quantity of
tobacco products were such that they did not jeopardize public health. With
this objective, the law regulated the supply of tobacco products from
both domestic and foreign sources. The importation of tobacco,
including cigarettes, was explicitly prohibited under Section 27 of the Tobacco
Act of 1966. Although such prohibition could be relaxed by the
Director-General of the Excise Department, the mandatory intent of the
law had to be respected.
D. Article III
39. The United States recalled that paragraph 3 of the Protocol of
Accession of Thailand to the GATT stated that Thailand "intends to bring
into line with Article III of the General Agreement, the business and
excise taxes with respect to items on which the incidence of these taxes
varies according to whether the items are locally produced or imported"
(BISD, 29S/3), and that the CONTRACTING PARTIES had decided
to allow Thailand until 30 June 1987 to bring these taxes into line with
Article III. In 1987, noting that steps had been taken to align the
rates of business and excise taxes applied in Thailand to domestic and
imported products and that the Thai government was in the process of
introducing a value-added tax system which would impose uniform taxes on
domestic and imported products, the CONTRACTING PARTIES had granted
Thailand a further extension of time until 30 June 1990, for
it to bring aspects of its tax system into conformity with Article III.
40. According to the United States, the discriminatory and protective
aspects of the tax system applied by Thailand on cigarettes had not been
addressed in the eight years which had passed since Thailand had
stated in its Protocol of Accession to the GATT its intention to bring
its excise and business taxes into conformity with Article III.
Legislation to implement a value-added tax system had not yet been introduced
in Parliament.
_______________
1. Panel on "Norway - Restrictions on Imports of Apples and Pears"
(L/6474).
<------------------------------ p 13 --------------------------------->
41. In the view of the United States, adoption and implementation of
a value-added tax system was not the only means to address the problems
raised by the application to cigarettes of the Thai business and
municipal taxes. These problems should be addressed promptly and
directly. Furthermore, adoption of a value-added tax on cigarettes, as
planned by the Thai government, would not eliminate all of the
discriminatory aspects of cigarette taxation in Thailand because the
value-added tax on imported and domestic cigarettes would replace the
business and municipal taxes but the excise tax, with rates tied to the amount
of domestic tobacco in the cigarette and higher ceiling rates for
imported cigarettes, would continue to be applied. Thus domestic
production of cigarettes would still be protected by a tax system
permitting imposition of a higher rate of tax on imported products than
on the like domestic product.
(i) Excise Tax
42. In the view of the United States, cigarettes of varying tobacco
mixtures were directly substitutable for the same end use. Although
consumers may have different preferences resulting in a number of different
brands being offered in a particular market, manufactured cigarettes
shared the same general and many specific characteristics. They were
therefore like products in the meaning of Article III. By imposing higher
excise taxes on foreign cigarettes than on domestic ones Thailand applied
internal taxes on imported products in excess of those applied to like
domestic products and thus acted inconsistently with its obligations under
Article III.
43. Thailand accepted that the ceiling rate for the excise tax on
foreign cigarettes was 80 per cent of the retail price or 0.60 baht/gram
whereas the ceiling rate for domestic cigarettes was 60 per cent of the
retail price. It also recalled that Article III:2 referred specifically to
applied rates of tax and not to ceiling rates. The Thai Cabinet had
decided on 20 June 1990, to apply a single rate of excise tax on all
cigarettes, regardless of their origin and local tobacco content, thus
eliminating any possibility for the excise tax to be applied
in such a manner as to afford protection to domestic production of
cigarettes. On 11 July 1990, the Ministry of Finance had issued a
regulation stipulating that the excise tax would be applied to domestic and
imported cigarettes at a single rate of 55 per cent. Hence, Thailand had
fulfilled its Article III obligations with respect to the excise tax on
cigarettes.
44. The United States contended that the new regulations had not
changed the statutory rate of tax that could be applied to imported and
domestically produced cigarettes. Thus, the Thai law, on its face, permitted
the application of a higher rate of tax on imported products than on
domestically-produced cigarettes. In response to Thailand's assertion
that, since no action had been taken which was inconsistent with Thailand's
GATT obligations, it would be premature to claim that the Thai excise tax
regime could be discriminatory, the United States stated that the Panel
on "United States - Section 337 of the Tariff Act of 1930" had looked at the
potential for discriminatory action rather than at specific instances of
discrimination.
(ii) Business and Municipal Taxes
45. The United States argued that Thailand imposed business and
municipal taxes on imported cigarettes, while exempting manufacturers and
sellers of cigarettes made from domestic tobacco leaf from payment
of their taxes. Thai officials had informed the United States that the
Thai Tobacco Monopoly did not pay business and municipal taxes on any of
its cigarette sales. This clearly resulted in imposition of internal
taxes on imported products in excess of those applied to like domestic
products and was thus inconsistent with Thailand's obligations under
Article III.
46 Thailand responded that exemption from business and municipal
taxes was not conditional upon whether the cigarettes were imported or
domestically produced since cigarettes imported by "licensed tobacco
manufacturers" were also exempted from payment of the taxes.
<-------------------------- p 14 ------------------------------------>
47. The United States considered that exempting cigarettes imported
by licensed tobacco manufacturers from payment of business and municipal
taxes failed to resolve the issue of application of an additional
tax on some imported products, in that only Thai entities, with facilities in
the country, had been licensed as tobacco manufacturers. Thus, only the
Thai Tobacco Monopoly or one of the other entities manufacturing tobacco
products in Thailand could be exempted from the business and municipal taxes,
in the event that they were authorized to import cigarettes. Importers
without such facilities and licenses were not exempted. The panel on "United
States - Section 337 of the Tariff Act of 1930" [1] had concluded that the
applicability of Article III:4 could not "be denied on the ground that
most of the procedures in the case before the Panel are applied to
persons rather than products, since the factor determining whether persons
might be susceptible to Section 337 proceedings or federal district court
procedures is the source of the challenged products, that is whether they
are of United States origin or imported". In the view of the United States
a tax exemption based on the identity of the importer was inconsistent with
Article III.
48. While disagreeing with this view, Thailand subsequently informed
the Panel that the Ministry of Finance had decided to streamline the
business and municipal tax regime on cigarettes and had proposed that a Royal
Decree be issued under the Revenue Code to explicitly exempt all
cigarettes, whether imported or domestically produced, from payment of
these taxes. On 27 August 1990, Thailand informed the Panel that the Royal
Decree was adopted on 18 August 1990 and stated that Thailand had thereby
fulfilled its Article III obligations with respect to business and
municipal taxes on cigarettes.
IV. Submission by the European Communities
49. The European Communities stated that, as an important
manufacturer and exporter of cigarettes, they had a significant interest
in the opening of the Thai market for cigarettes which was estimated to
be worth approximately US$1,500 million annually. The Communities
believed that the operation of Thailand's import licensing regime for
cigarettes constituted a de facto prohibition inconsistent with Article XI:1,
which wasnot covered by the exceptions set out in Article XI:2 or Article XX(b)
and could not be justified under Thailand's Protocol of Accession to the
GATT. The Communities also believed that there was insufficient evidence that
Thailand was bringing its internal taxes into conformity with Article III as
it had undertaken to do at the time of its accession to GATT. The
maintenance on cigarettes of discriminatory excise and business taxes could
not be justified under the terms of paragraph 3 of Thailand's Protocol, eight
years after its accession. The Communities therefore supported the United
States in its request that the Panel recommend that Thailand eliminate
the quantitative restrictions maintained on imports of cigarettes and
bring its tax laws and practices on cigarettes into conformity with its
obligations under the General Agreement.
V. Submission by the WHO
50. On the basis of the Memorandum of Understanding between the
parties (see paragraph 3 above) and in pursuance of Thailand's request
(paragraph 27 above), the Panel asked the World Health Organization(WHO)
to present its conclusions on technical aspects of the case, such as the
health effects of cigarette use and consumption, and on related issues
for which the WHO was competent.
51. In submissions to the Panel which were generally supported by
Thailand, representatives of the WHO explained that one of the best known
effects of smoking was lung cancer but that pulmonary and cardiovascular
diseases were also attributable to it, as were increased risks of miscarriage,
still-births
______________
1. Panel report on "United States - Section 337 of the Tariff Act
of 1930" (L/6439).
<---------------------------------- p 15 ------------------------------>
or reductions in birth weights. Many other health problems had also been
linked with smoking. Cigarette smoking had been shown to be the leading
cause of preventable death and disease in developed nations.
As far as Thailand was concerned, smoking-related cancer was not as high
as in many other developing countries and was relatively low in
comparison to more affluent countries. However, an increase in cigarette
smoking would lead to an increase in mortality due to lung cancer and
hypertension, which was already rising because of the increase in
cigarette consumption which had occurred 10 to 20 years ago.
52. According to the representatives of the WHO, cigarette smoking
was declining in industrialized nations at a rate of 1.1 per cent a year,
but rising in developing countries by 2.1 per cent a year. Smoking
prevalence was high among males in developing countries, but low among
women and children. There were sharp differences between the cigarettes
manufactured in developing countries such as Thailand and those available
in developed countries. In Thailand like in other developing countries,
the market was dominated by a state-owned monopoly which promoted smoking
minimally, in the absence of competition. Locally grown tobacco leaf was
harsher and smoked with less facility than the American blended tobacco used
in international brands. Locally-produced cigarettes were unlike those
manufactured in western countries in that sophisticated manufacturing
techniques such as the use of additives and flavourings, or the downward
adjustment of tar and nicotine were not generally available, or were primitive
in comparison to the techniques used by the multinational tobacco
companies. These differences were of public health concern because they made
smoking western cigarettes very easy for groups who might not otherwise smoke,
such as women and adolescents, and create the false illusion among many
smokers that these brands were safer than the native ones which consumers were
quitting. In Thailand, half of the tobacco crop was consumed in the
form of hand-rolled cigars or cigarettes which yielded large amounts of
nicotine and tar and were popular among the elderly. However, their use
was fading as old people died. There was no indication that young
women turned to manufactured cigarettes instead of the self-made ones
which their elders had smoked. Approximately half of all tobacco was used in
the manufacturing of cigarettes by the government-owned monopoly which had
produced 30.4 billion cigarettes in 1987. An additional 1.5 billion
cigarettes had been smuggled into the country the same year, and foreign
cigarette companies had advertised these allegedly imported cigarettes on
television and billboards despite the administrative ban on advertising which had
been in effect prior to the legislative ban. Current adult smoking rates
were 67 per cent for males and 6 per cent for females. The male rate had
declined by 6 per cent since 1981. Adult per capita consumption
had also declined from 1,100 cigarettes per person in the late 1970s to
900 in 1985. The per capita rate was far lower than in the United States
where it stood at 3,200 per person per year. A major factor in
the recent decline in per capita consumption of cigarettes in Thailand
had been the adoption of recommended WHO smoking control policies by the
small but growing Thai tobacco control programme which had recently
secured passage of a law prohibiting all forms of tobacco advertising,
including a ban on events sponsorship and forceful warning labels on
packages. A number of events and numerous educational programmes had
been held in Thailand on "World No Tobacco Day" by the Thai Anti-Smoking
Group which had been critical of the Thai Government's support of tobacco
and had acted independently of the Government. If the multinational
tobacco companies entered the market, the poorly-financed
public health programmes would be unable to compete with the marketing
budgets of these companies, as had been the case in other Asian
countries whose markets had been opened. As a result, cigarette
consumption and, in turn, death and disease attributable to smoking would
increase.
53. The representatives of the WHO stated that the use of additives
in American cigarettes had increased greatly during the 1970s with the
introduction of low-yield cigarettes. They were used to restore the lost
flavour of the cigarette brought about by the reduction in tar and
nicotine. The US Surgeon-General reports had concluded that the lowering
of tar and nicotine had only a marginal benefit in contrast to quitting.
Smokers of low-yield cigarettes had been found to increase their
consumption or to inhale more deeply. The health effects of cigarette additives
were being analysed by the US Department of Health and Human Services which
considered this task to be "enormously complex and expensive". Serious
concerns about the presence in cigarettes of certain additives had been
raised by the American Health Foundation which
<---------------------------- p 15 ----------------------------------->
acted as a consultant to the Department of Health and Human Services on this
issue. However, there was no scientific evidence that one type of
cigarette was more harmful to health than another.
54. According to the WHO representatives, another major difference
between manufacturers of American cigarettes and of Thai cigarettes was
that the former designed special brands aimed at the female market.
These cigarettes contained a much lower tar and nicotine level, thus
making it easier for women to inhale the smoke. Some were also made to
appeal to women by the addition of perfume or were made long and
slender to suggest that smoking would result in thinness.
55. The WHO representatives stated that the experience in Latin
America and Asia showed that the opening of closed cigarette markets
dominated by a state tobacco monopoly resulted in an increase in smoking.
Multinational tobacco companies had routinely circumvented national
restrictions on advertising through indirect advertising and a variety of
other techniques. However, one country outside Latin America and
Asia had recently taken action to ban the utilization in advertising of
brand imagery linked to tobacco products. Particularly concerned by the
threats posed by advertising, the member states of WHO had adopted
in May 1990, resolution WHO 43.16 which urged all member states:
"to consider including in their tobacco control strategies plans
for legislation or other effective measures at the appropriate government
level providing for:
...
(c) progressive restrictions and concerted actions to
eliminate eventually all direct and indirect advertising, promotion and
sponsorship concerning tobacco;"
56. The representatives of the WHO stated that their organization had
convened in 1982 an Expert Committee on "Smoking Control Strategies in
Developing Countries" which had made a number of recommendations
designed to reduce smoking. In particular, this Committee, many of whose
recommendations had already been adopted in Thailand, had recommended to
developing countries that all advertising and promotion of tobacco
products be prohibited, including through the sponsorship of
sporting events, that where tobacco is a commercial crop, its rôle be
reduced in the economy through alternative use of land and labour for
which the assistance of organizations within the UN system, such as FAO
and the World Bank, would be sought. The same Committee had recommended
to developed countries, inter alia, that any action possible be taken to
curb activities aimed at promoting and selling tobacco products and that any
exported tobacco products conform to standards obtaining in the exporting
country in terms of health warnings, emissions and product information.
57. The representatives of WHO also stated that policies which raised
the price of cigarettes, for instance through taxation, could result in a
reduction in smoking. Studies showed that price elasticities were higher
for younger smokers than for dependent ones. A recent study carried out
in a developing country indicated that the price elasticity of smoking
was higher in developing countries than in developed ones, thus making
measures which raise the price of cigarettes, such as excise taxes,
effective public health policy tools in such countries.
58. Responding to the submission of the WHO, the United States did
not take issue with its statements regarding the effect of cigarette use
or consumption on human health because this was within the WHO's
area of recognized expertise. However, the United States took issue with
some of the conclusions drawn by the WHO on the effect of lifting the
import ban on cigarettes in Thailand as well as with the factual
basis for these conclusions. The United States did not consider that the
WHO was specially competent to address the "health consequences of the
opening of the market for cigarettes" as requested by Thailand,
<------------------------------- p 17 ------------------------------->
but urged the Panel to limit the issues presented to the WHO to those
aspects referred to in the Memorandum of Understanding between the
parties (see paragraph 3 above).
59. On the question of additives contained in American cigarettes,
the United States noted that the American Health Foundation had stated
that for the great majority of agents in the list of tobacco additives
contained in the 1988 report of the Independent Scientific Committee on
Smoking and Health, they had no knowledge of adverse health effects.
Nevertheless, some of the agents aroused concern.
60. The United States disagreed with the assertion that Thai
cigarettes were unlike western cigarettes. In the view of the United
States, the Thai Tobacco Monopoly had used additives and flavourings for some
time and had imitated United States cigarettes with the help of imports
of United States tobacco. While the equipment presently used by the Thai
Tobacco Monopoly was not very modern, some of the machinery
being purchased would permit the reconstitution of tobacco and the use of
other modern cigarette manufacturing techniques. Neither did the United
States agree with the view that prior to the imposition of the total ban
on cigarette advertising, foreign companies had been advertising smuggled
cigarettes. Some of the actions complained of could have been instances of
trademark infringements or marketing of legitimate goods. Moreover, the
Thai Tobacco Monopoly had been advertising its cigarettes during the period
when the administrative ban had been in force. The United States noted that
Thailand cited the figure of 3.5 per cent for the smoking rate among
women whereas the WHO reported the figure of 6 per cent. While such
statistics did not appear reliable, what seemed certain was that the level of
production of cigarettes in Thailand was rising at a large and steady pace.
61. As to the effect of the lifting of restrictions on imports in
other Asian countries, the United States considered that in these
countries such restrictions as may have been implemented had not been
effective in decreasing the level of consumption. In one of these countries
consumption had declined after the cigarette market had been opened and
had been accompanied by a shift in consumption from domestic to foreign
cigarettes. In another country, the growth rate of consumption had
slowed down after the market had been opened while in the third,
consumption had not changed in the 18 months which had passed since the market
had been opened. Comparisons between one of these countries and in particular
Thailand were not appropriate because of developmental and cultural
differences. It was therefore not accurate to draw the conclusion on the
basis of the experience of these countries, that smoking among Thai women
would increase as a result of opening of the Thai market.
62. The United States also stated that the 1989 Report of the United
States Surgeon General had concluded that there was no scientifically
rigorous study available to the public that provided a definitive answer to
the basic question of whether advertising and promotion increase the
level of tobacco consumption and that the extent of the influence of
advertising and promotion on the level of smoking was unknown and
possibly unknowable. ("Surgeon General, Reducing the Health Consequences
of Smoking" 512-12(1989).) Even if it were accepted that advertising
had an effect on the level of consumption of cigarettes, restrictions
on advertising and fiscal measures to affect the price of cigarettes were
available to control the level of consumption. Such measures could be
applied on the basis of national treatment and thus provide a GATT
consistent measure of addressing the problem. The United States could
not share the view that the Thai government and the anti-smoking lobby
would not be able to resist the efforts of the foreign cigarette interests
to permit the marketing practices that they opposed.
VI. FINDINGS
<------------------------------- p 18 -------------------------------->
A. Introduction
63. The Panel noted that the issues before it arise essentially from
the following facts: Thailand restricts the importation of cigarettes
under the Tobacco Act of 1966, which states that "the importation ... of
tobacco is prohibited except by licence of the Director-General".
Tobacco is defined in the Act to include cigarettes.
Import licences for cigarettes have not been granted for the past ten
years. Thailand also imposes on cigarettes an excise tax and, until
recently, business and municipal taxes. The Tobacco Act enables the Thai
Government to impose a maximum excise tax of 60 per cent on domestic
cigarettes and the higher of 80 percent or 0.60 baht/gram on imported
cigarettes. Until 11 July 1990, the excise tax on domestic cigarettes
varied in proportion to their foreign tobacco content; the more foreign
tobacco they contained, the higher the excise tax rate. On 11 July 1990,
Thailand modified its regulations to provide for an excise tax of
55 per cent for all cigarettes. Until 18 August 1990 business and
municipal taxes were payable on all cigarettes except those sold by
licensed cigarette manufacturers or which were made from domestic
tobacco. On 18 August 1990 Thailand modified its regulations with the
effect that all cigarettes were exempt from business and municipal taxes.
64. Thailand's 1982 Protocol of Accession records its intention to
bring as soon as possible its business and excise taxes into conformity
with Article III of the General Agreement. The Protocol provided for
a review by the CONTRACTING PARTIES if during the period ending 30 June
1987 Thailand had not made the necessary modifications. This period was
subsequently extended by the CONTRACTING PARTIES until 30 June 1990, when
it lapsed.
65. The United States requested the Panel to find that the cigarette
import restrictions were inconsistent with Article XI:1 of the General
Agreement and were not covered by any of the exceptions in the General
Agreement, in particular Articles XI:2(c)(i) and XX(b), or by the
provisions of Thailand's Protocol of Accession. It further requested the
Panel to find that the taxes on cigarettes were contrary to the national
treatment provisions of Article III. The United States asked the Panel
to recommend that Thailand eliminate its quantitative restrictions on the
importation of cigarettes, and that it bring its taxes on cigarettes into
conformity with its obligations under the General Agreement.
66. Thailand requested the Panel to find that its restrictions on the
importation of cigarettes were justified under Articles XI:2(c)(i) and
XX(b) and by the provisions of Thailand's Protocol of Accession, and that
its taxes on cigarettes were consistent with Article III.
B. Restrictions on the Importation of Cigarettes
(i) Article XI:1
67. The Panel, noting that Thailand had not granted licences for the
importation of cigarettes during the past 10 years, found that Thailand
had acted inconsistently with Article XI:1, the relevant part of which
reads:
"No prohibitions or restrictions ... made effective through ...
import licences ... shall be instituted or maintained by any contracting
party on the importation of any product of the territory of any other
contracting party ...".
(ii) Article XI:2(c)(i)
<------------------------------------- p 19 -------------------------->
68. The Panel then examined Thailand's claim that its restrictions on
the importation of cigarettes were necessary to enforce domestic marketing
or production restrictions for leaf tobacco and cigarettes and that
they were therefore justified by Article XI:2(c)(i), the relevant part of
which reads:
"The provisions of paragraph 1 of this Article shall not extend
to the following:
...
(c) Import restrictions on any agricultural or
fisheries product, imported in any form, necessary to the enforcement of
governmental measures which operate:
(i) to restrict the quantities of the like
domestic product permitted to be marketed or produced..."
The Panel noted that this provision refers to "agricultural products" and
agricultural products "imported in any form", and defines the latter in
the Note ad Article XI:2(c) [1] as covering
"the same products when in an early stage of processing and still
perishable, which compete directly with the fresh product and if freely
imported would tend to make the restriction on the fresh product
ineffective."
69. In the view of the Panel, the reference to "the fresh product" in
this Note makes clear that the agricultural products subject to marketing
or production restrictions must be fresh products. It noted that a previous
panel had reached the same conclusion, stating that "the focus of this
provision was limited to a fresh product" and that
"the domestic product subject to restrictions had to be the
product produced by farmers" [2].
The Panel noted that this interpretation was borne out by the drafting
history, which suggested that the provision was intended to enable
governments to protect farmers and fishermen who, because of the
perishability of their produce, often could not withhold excess supplies
of fresh product from the market. At Havana, the relevant sub-committee
agreed that the exception
"should not be construed as permitting the use of quantitative
restrictions as a method of protecting the industrial processing of
agricultural or fisheries products" [3].
70. The Panel found for these reasons that the only domestic
marketing and production restrictions that would be relevant under Article
XI:2(c)(i) were those that Thailand claimed to have imposed on the production
of leaf tobacco - not those on cigarettes - and that consequently this
provision would cover import restrictions only on (a) products that were
"like" domestic leaf tobacco and (b) products
_______________
1. Article XXXIV makes this Note an integral part of the General Agreement.
2. Report of the panel on "Canada - Import Restrictions on Ice
Cream and Yoghurt" (L/6568, paragraph 66,adopted on 4 December 1989).
See also: Report of the panel on "Japan - Restrictions on the Import of
Certain Agricultural Products" (BISD 35S/163, paragraph 5.3.12, adopted
on 22 March 1989).
3. United Nations Conference on Trade and Employment, Reports of
the Committees and PrincipalSub-Committees, ICITO/I/8, page 94. See
also: Report of the panel on "Canada - Import Restrictions
on Ice Cream and Yoghurt" (L/6568, paragraph 60, adopted on 4 December
1989); Report of the panel on "Japan - Restrictions on the Import of
Certain Agricultural Products" (BISD 35S/163, paragraph 5.1.2,
adopted on 22 March 1988).
<--------------------------------- p 20 ------------------------------->
processed from such "like" products that met the conditions of the Note
ad Article XI:2(c). The Panel, noting that cigarettes were not "like"
leaf tobacco, but processed from leaf tobacco, examined whether
cigarettes fell within the range of products covered by this Note. It
recognized that a central requirement of the Note was that the product
processed from the fresh product was still "in an early stage of processing".
It noted that a previous panel had found that agricultural products not
normally intended for further processing such as ketchup could not be
regarded as eligible for import restrictions under Article XI:2(c)(i) [1].
Since cigarettes could not be described as "leaf tobacco in an early stage of
processing" because they had already undergone extensive processing and,
moreover, were not intended for further processing, the Panel found that they
were not among the products eligible for import restrictions under Article
XI:2(c)(i).
71. Having made this finding, the Panel did not consider it necessary
to examine whether Thailand had met the other requirements of Article
XI:2(c)(i), in particular whether the quantities of leaf tobacco permitted
to be marketed or produced had in fact been restricted; whether, in
spite of the absence of imports of cigarettes during ten years,
Thailand's import measure could nevertheless be regarded as an import restriction
rather than an import prohibition; and whether Thailand had fulfilled
the public notice and the proportionality requirements of the last
paragraph of Article XI:2.
(iii) Article XX(b)
72. The Panel proceeded to examine whether Thai import measures
affecting cigarettes, while contrary to Article XI:1, were justified by
Article XX(b), which states in part:
"... nothing in this Agreement shall be construed to prevent the
adoption or enforcement by any contracting party of measures:
...
(b) necessary to protect human ... life or health".
73. The Panel then defined the issues which arose under this
provision. In agreement with the parties to the dispute and the expert
from the WHO, the Panel accepted that smoking constituted a serious risk
to human health and that consequently measures designed to reduce the
consumption of cigarettes fell within the scope of Article XX(b). The
Panel noted that this provision clearly allowed contracting parties to give
priority to human health over trade liberalization; however, for a
measure to be covered by Article XX(b) it had to be "necessary".
74. The Panel noted that a previous panel had discussed the meaning
of the term "necessary" in the context of Article XX(d), which provides an
exemption for measures which are "necessary to secure compliance
with laws or regulations which are not inconsistent" with the provisions
of the General Agreement. The panel had stated that
"a contracting party cannot justify a measure inconsistent with
other GATT provisions as "necessary" in terms of Article XX(d) if an
alternative measure which it could reasonably be expected to employ and
which is not inconsistent with other GATT provisions is available to it.
By the same token, incases where a measure consistent with other GATT
provisions is not reasonably available, a contracting party is bound to use,
among the measures reasonably available to it, that which entails the least
degree of inconsistency with other GATT provisions."(emphasis supplied) [2]
_______________
1. Report of the panel on "Japan - Restrictions on the Import of
Certain Agricultural Products" (BISD35S/163, paragraph 5.3.12, adopted on
22 March 1988).
2. Report of the panel on "United States - Section 337 of the
Tariff Act of 1930" (L/6439, paragraph 5.26,adopted on 7 November 1989).
<---------------------------------- p 21 ------------------------------>
The Panel could see no reason why under Article XX the meaning of the
term "necessary" under paragraph (d) should not be the same as in
paragraph (b). In both paragraphs the same term was used and the same
objective intended: to allow contracting parties to impose trade
restrictive measures inconsistent with the General Agreement to pursue
overriding public policy goals to the extent that such inconsistencies were
unavoidable. The fact that paragraph (d) applies to inconsistencies
resulting from the enforcement of GATT-consistent laws and regulations
while paragraph (b) applies to those resulting from health-related
policies therefore did not justify a different interpretation of the term
"necessary".
75. The Panel concluded from the above that the import restrictions
imposed by Thailand could be considered to be "necessary" in terms of
Article XX(b) only if there were no alternative measure consistent with the
General Agreement, or less inconsistent with it, which Thailand could
reasonably be expected to employ to achieve its health policy
objectives. The Panel noted that contracting parties may, in accordance with
Article III:4 of the General Agreement, impose laws, regulations and
requirements affecting the internal sale, offering for sale, purchase,
transportation, distribution or use of imported products provided they do
not thereby accord treatment to imported products less favourable than
that accorded to "like" products of national origin. The United States
argued that Thailand could achieve its public health objectives through
internal measures consistent with Article III:4 and that the
inconsistency with Article XI:1 could therefore not be considered to be
"necessary" within the meaning of Article XX(b). The Panel proceeded to examine
this issue in detail.
76. The Panel noted that the principal health objectives advanced by
Thailand to justify its import restrictions were to protect the public
from harmful ingredients in imported cigarettes, and to reduce the
consumption of cigarettes in Thailand. The measures could thus be seen
as intended to ensure the quality and reduce the quantity of cigarettes
sold in Thailand.
77. The Panel then examined whether the Thai concerns about the
quality of cigarettes consumed in Thailand could be met with measures
consistent, or less inconsistent, with the General Agreement. It noted that
other countries had introduced strict, non-discriminatory labelling and
ingredient disclosure regulations which allowed governments to control,
and the public to be informed of, the content of cigarettes. A
non-discriminatory regulation implemented on a national treatment basis
in accordance with Article III:4 requiring complete disclosure of
ingredients, coupled with a ban on unhealthy substances, would be an
alternative consistent with the General Agreement. The Panel considered
that Thailand could reasonably be expected to take such measures to
address the quality-related policy objectives it now pursues through
an import ban on all cigarettes whatever their ingredients.
78. The Panel then considered whether Thai concerns about the
quantity of cigarettes consumed in Thailand could be met by measures
reasonably available to it and consistent, or less inconsistent, with the
General Agreement. The Panel first examined how Thailand might reduce
the demand for cigarettes in a manner consistent with the General
Agreement. The Panel noted the view expressed by the WHO that the demand
for cigarettes, in particular the initial demand for cigarettes by the
young, was influenced by cigarette advertisements and that bans on
advertisement could therefore curb such demand. At the Forty-third World
Health Assembly a resolution was approved stating that the WHO is:
"Encouraged by ... recent information demonstrating the
effectiveness of tobacco control strategies, and in particular ...
comprehensive legislative bans and other restrictive measures to
effectively control the direct and the indirect advertising, promotion
and sponsorship of tobacco" [1].
_______________
1. Forty-third World Health Assembly, Fourteenth plenary meeting,
Agenda Item 10, 17 May 1990(A43/VR/14; WHA43.16).
<------------------------------- p 22 ------------------------------->
The resolution goes on to urge all member states of the WHO
"to consider including in their tobacco control strategies plans
for legislation or other effective measures at the appropriate government
level providing for:
...
(c) progressive restrictions and concerted actions to
eliminate eventually all direct and indirect advertising, promotion and
sponsorship concerning tobacco" [1]
A ban on the advertisement of cigarettes of both domestic and foreign
origin would normally meet the requirements of Article III:4. It might
be argued that such a general ban on all cigarette advertising would
create unequal competitive opportunities between the existing Thai
supplier of cigarettes and new, foreign suppliers and was therefore
contrary to Article III:4 [2]. Even if this argument were accepted, such an
inconsistency would have to be regarded as unavoidable and therefore necessary
within the meaning of Article XX(b) because additional advertising rights
would risk stimulating demand for cigarettes. The Panel noted that Thailand
had already implemented some non-discriminatory controls on demand, including
information programmes, bans on direct and indirect advertising, warnings
on cigarette packs, and bans on smoking in certain public places.
79. The Panel then examined how Thailand might restrict the supply of
cigarettes in a manner consistent with the General Agreement. The Panel
noted that contracting parties may maintain governmental monopolies,
such as the Thai Tobacco Monopoly, on the importation and domestic sale
of products [3]. The Thai Government may use this monopoly to regulate the
overall supply of cigarettes, their prices and their retail
availability provided it thereby does not accord imported cigarettes less
favourable treatment than domestic cigarettes or act inconsistently with
any commitments assumed under its Schedule of Concessions [4]. As to the
pricing of cigarettes, the Panel noted that the Forty-third World Health
Assembly, in its resolution cited above, stated that it was:
"Encouraged by ... recent information demonstrating the
effectiveness of tobacco control strategies, and in particular ...
policies to achieve progressive increases in the real price of tobacco."
It accordingly urged all member states
"to consider including in their tobacco control strategies plans
for ... progressive financial measures aimed at discouraging the use of
tobacco" [5]
For these reasons the Panel could not accept the argument of Thailand
that competition between imported and domestic cigarettes would
necessarily lead to an increase in the total sales of cigarettes and that Thailand
therefore had no option but to prohibit cigarette imports.
_______________
1. Forty-third World Health Assembly, Fourteenth plenary meeting,
Agenda Item 10, 17 May 1990(A43/VR/14; WHA43.16).
2. On the requirement of equal competitive opportunities, see the
Report of the panel on "United States- Section 337 of the Tariff Act of
1930" (L/6439, paragraph 5.26, adopted on 7 November 1989).
3. Cf. Articles III:4, XVII and XX(d).
4. Cf. Articles III:2 and 4 and II:4.
5. Forty-third World Health Assembly, Fourteenth plenary meeting,
Agenda Item 10, 17 May 1990(A43/VR/14; WHA43.16).
<------------------------------- p 23 --------------------------------->
80. The Panel then examined further the resolutions of the WHO on
smoking which the WHO made available. It noted that the health measures
recommended by the WHO in these resolutions were non-discriminatory and
concerned all, not just imported, cigarettes. The Panel also examined the
Report of the WHO Expert Committee on Smoking Control Strategies in
Developing Countries. The Panel observed that a common consequence of import
restrictions was the promotion of domestic production and the fostering
of interests in the maintenance of that production and that the WHO
Expert Committee had made the following recommendation relevant in this
respect:
"Where tobacco is already a commercial crop every effort should
be made to reduce its role in the national economy, and to investigate
alternative uses of land and labour. The existence of a tobacco
industry of any kind should not be permitted to interfere with the
implementation of educational and other measures to control smoking." [1]
81. In sum, the Panel considered that there were various measures
consistent with the General Agreement which were reasonably available to
Thailand to control the quality and quantity of cigarettes smoked and
which, taken together, could achieve the health policy goals that the
Thai government pursues by restricting the importation of cigarettes
inconsistently with Article XI:1. The Panel found therefore that Thailand's
practice of permitting the sale of domestic cigarettes while not
permitting the importation of foreign cigarettes was an inconsistency
with the General Agreement not "necessary" within the meaning of Article
XX(b).
(iv) Protocol of Accession
82. The Panel then proceeded to examine whether Thailand's Protocol
of Accession exempted import measures taken under the Tobacco Act from the
application of Article XI:1 of the General Agreement. Paragraph 1(b) of the
Protocol contains the usual existing legislation clause which states:
"Thailand ... shall apply to contracting parties provisionally
and subject to this Protocol ... (b) Part II of the General Agreement to
the fullest extent not inconsistent with its legislation existing on the date
of this Protocol." [2]
Section 27 of the Tobacco Act states that "the importation ... of tobacco
is prohibited except by licence of the Director-General". The United
States argued that the existing legislation clause covered only legislation
which was mandatory and that Section 27 of the Tobacco Act, although
expressed as a prohibition, in fact provided for licensing of tobacco
imports. Thailand argued that the intent of the Tobacco Act was to restrict
imports of cigarettes and that it was therefore mandatory.
83. The Panel noted that previous panel reports had concluded that
legislation had to meet three criteria in order to qualify under the
existing legislation clause. It had to
"(a) be legislation in the formal sense,
(b) predate the Protocol and
(c) be mandatory in character by its terms or expressed intent"[3]
_______________
1. 1982 Expert Committee on "Smoking Control Strategies in
Developing Countries", page 69; citedat page 16 in the WHO Submission to
the Panel of 19 July 1990.
2. Thailand Protocol of Accession (BISD 29S/3).
3. Report of the panel on "Norway - Restrictions on Imports of
Apples and Pears" (L/6474, paragraph 5.7,adopted on 21 June 1989).
<------------------------------- p 24 -------------------------------->
The mandatory character required for such legislation was examined in a
1949 Working Party report which stated that the existing legislation
clause applied only to
"legislation which is of a mandatory character by its terms or expressed
intent - that is, it imposes on the executive authority requirements
which cannot be modified by executive action" [1]
The Panel noted that, while the Tobacco Act was legislation in the formal
sense and predated the Protocol of Accession of Thailand, it did not, by
its terms or expressed intent, impose on the Thai executive authorities
a requirement to restrict imports that could not be modified by executive
action. On the contrary, Section 27 of the Act explicitly gives the Thai
executive authorities the power to grant import licences. The Panel
therefore found that the existing legislation clause in Thailand's
Protocol of Accession did not exempt the restrictions on the importation
of cigarettes from Thailand's obligations under the General Agreement.
C. Internal Taxes on Cigarettes
(i) Excise Tax
84. The Panel then turned to the issue of internal taxation and
examined whether excise taxes which could be levied by Thai authorities on
foreign cigarettes were consistent with Article III. The United States
argued that the higher ceiling (80 per cent versus 60 per cent) on imported
cigarettes was inconsistent with Article III:2 which provided for
national treatment on internal taxes. In addition, the actual rate charged
for domestic cigarettes was calculated as a proportion of the domestic
tobacco content which, by affording protection to domestic production,
contravened Article III:1. Thailand replied that on 11 July 1990 the
Ministry of Finance had issued a regulation stipulating that the excise
tax would be applied at a single effective rate of 55 per cent for all
cigarettes, domestic or imported. The United States argued that it was
not sufficient under Article III for the rates effectively levied to be
the same; the maximum rates that could be levied under the legislation
also had to be non-discriminatory. The Panel noted that previous panels
had found that legislation mandatorily requiring the executive authority
to impose internal taxes discriminating against imported products was
inconsistent with Article III:2, whether or not an occasion for its actual
application had as yet arisen; legislation merely giving the executive
the possibility to act inconsistently with Article III:2 could not, by
itself, constitute a violation of that provision [2]. The Panel agreed
with
the above reasoning and found that the possibility that the Tobacco Act
might be applied contrary to Article III:2 was not sufficient to make it
inconsistent with the General Agreement.
(ii) Business and Municipal Tax
85. The Panel then examined whether the exemption from Thai business
and municipal taxes, which benefited local manufacturers and sellers of
cigarettes made from domestic tobacco leaf, was contrary to Article III.
The United States argued that this provision was inconsistent with
Article III since it resulted in the imposition of internal taxes on the
imported product in excess of those on the domestic product. Thailand replied
that on 18 August 1990 it had issued a regulation which would remove
business and municipal taxes on cigarettes.
_______________
1. Working Party on "Notifications of existing measures and
procedural questions" (BISD III/49,paragraph 99 at 62; approved by the
CONTRACTING PARTIES on 10 August 1949); Report of the panel
on "Norway - Restrictions on imports of apples and pears" (L/6474 at
paragraph 5.6, adopted on 21 June 1989).
2. Report of the panel on "EEC - Regulation on Imports of Parts and
Components" (L/6657 atparagraph 5.25, adopted on 16 May 1990). Report of
the panel on "United States - Taxes on Petroleum and Certain Imported
Substances" (BISD 34S/160, 164, adopted on 17 June 1987).
<----------------------------- p 25 ------------------------------->
86. The Panel observed that the new Thai measure, by eliminating
business and municipal taxes on cigarettes, removed the internal taxes
imposed on imported cigarettes in excess of those applied to domestic
cigarettes. The Panel noted that, as in the case of the excise tax, the
Tobacco Act continued to enable the executive authorities to levy the
discriminatory taxes. However, the Panel, recalling its findings on the
issue of excise taxes, found that the possibility that the Tobacco Act
might be applied contrary to Article III:2 was, by itself, not sufficient
to make it inconsistent with the General Agreement.
VII. CONCLUSIONS
87. The quantitative restrictions on the importation of cigarettes
maintained by Thailand under Section 27 of its Tobacco Act of 1966 are
contrary to Article XI:1 and are not justified by Article XI:2(c)(i),
Article XX(b), or paragraph 1(b) of Thailand's Protocol of Accession.
88. The current regulations relating to the excise, business and
municipal taxes on cigarettes are consistent with Thailand's obligations
under Article III of the General Agreement
89. The Panel recommends that the CONTRACTING PARTIES request
Thailand to bring its application of Section 27 of the Tobacco Act into
conformity with its obligations under the General Agreement.