oversight

Tobacco Exports: USDA's Foreign Agriculture Service Lacks Specific Guidance for Congressional Restrictions on Promoting Tobacco

Published by the Government Accountability Office on 2003-05-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to Congressional Requesters




May 2003
             TOBACCO EXPORTS

             USDA’s Foreign
             Agricultural Service
             Lacks Specific
             Guidance for
             Congressional
             Restrictions on
             Promoting Tobacco




GAO-03-618
                                               May 2003


                                               TOBACCO EXPORTS

                                               USDA’s Foreign Agricultural Service
Highlights of GAO-03-618, a report to          Lacks Specific Guidance for
congressional requesters
                                               Congressional Restrictions on Promoting
                                               Tobacco


Since 1994, the Agriculture                    Commerce, State, and USTR have issued timely guidance implementing the
Appropriations Act has prohibited              tobacco-related restrictions specified in their annual appropriations act.
the funding of tobacco export                  However, USDA’s Foreign Agricultural Service (FAS) has not issued
programs and restricted the U.S.               guidance specific to its appropriations act. Instead, since 1998, FAS has
Department of Agriculture’s                    relied on the tobacco-related guidance in a periodic cable sent to the
(USDA) tobacco-related activities.
                                               overseas staffs of USDA, State, Commerce, and USTR. This guidance does
Since 1998, the Commerce, Justice,
and State Appropriations Act has               not address whether certain FAS activities, such as providing tobacco-
placed similar restrictions on the             related information reports and assisting in trade negotiations on tobacco-
Departments of Commerce and                    related issues, are consistent with USDA’s 1994 restrictions. GAO did not
State and the Office of the U.S.               seek to determine whether ongoing FAS activities are prohibited by the
Trade Representative (USTR),                   appropriations restrictions.
although it has not prohibited them
from addressing foreign                        The agencies have discontinued some tobacco-related activities and
discriminatory trade practices.                continued others. For instance, Commerce overseas staff ceased providing
Congressional requesters asked                 market research information to tobacco exporters, but staffs of Commerce
GAO to (1) assess the agencies’                and State still provide routine business assistance to exporters. FAS ended
guidance on the restrictions to                the tobacco component of USDA’s Export Credit Guarantee Program,
their overseas personnel, (2)
describe how the agencies’
                                               Foreign Market Development Program, and Market Access Program.
activities changed in response to              However, FAS has continued, as part of its commodity-reporting program, to
the restrictions, and (3) identify the         gather and disseminate tobacco-related information that identifies foreign
mechanisms that the agencies use               production and consumption rates, import trends, and changes in foreign
to monitor compliance.                         regulations. Our analysis showed that some of FAS’s reports provided
                                               insights into market niches for tobacco exporters.

                                               To monitor compliance with the restrictions, senior FAS and Foreign
To ensure that FAS fully addresses
                                               Commercial Service officers at overseas posts review their staffs’ tobacco-
congressional restrictions on the
promotion of tobacco or tobacco-               related activities. Overseas staffs refer to headquarters U.S. firms’ requests
related products, we recommend                 for assistance that could violate the restrictions contained in the periodic
that the Secretary of Agriculture              guidance.
(1) develop guidance that reflects
FAS’s specific restrictions and (2)
review FAS’s tobacco-related
activities to determine whether
they are consistent with the
restrictions. In response to our
draft, FAS stated it will issue
guidance but does not believe that
the restrictions cover the collection
and dissemination of tobacco
related information.



www.gao.gov/cgi-bin/getrpt?GAO-03-618.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact David Gootnick
at (202) 512-3149 or gootnickd@gao.gov.
Contents


Letter                                                                                  1
               Results in Brief                                                         2
               Background                                                               4
               Commerce, State, and USTR Provided Guidance on Tobacco
                 Restrictions, but FAS Did Not                                          5
               Agencies Have Stopped Some Activities and Continued Others               7
               Agencies Rely on Staff to Monitor Compliance with Restrictions on
                 Promoting Tobacco                                                     13
               Conclusions                                                             13
               Recommendations                                                         13
               Agency Comments and Our Evaluation                                      14

Appendix I     Scope and Methodology                                                   17



Appendix II    Excerpts from 2001 and 2002 Foreign Agricultural
               Service Tobacco Attaché Reports                                         18



Appendix III   Comments from the U.S. Department of Agriculture                        20



Figures
               Figure 1: FAS Tobacco-Related Programs and Activities                    9
               Figure 2: Subscribers to FAS Worldwide Tobacco Reports                  10




               Page i                                          GAO-03-618 Tobacco Exports
Abbreviations

FAS               Foreign Agricultural Service
FCS               Foreign Commercial Service
HHS               Department of Health and Human Services
USDA              U.S. Department of Agriculture
USTR              Office of the U.S. Trade Representative



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Page ii                                                     GAO-03-618 Tobacco Exports
United States General Accounting Office
Washington, DC 20548




                                   May 30, 2003

                                   The Honorable Richard J. Durbin
                                   Ranking Minority Member
                                   Subcommittee on Oversight of Government Management,
                                   the Federal Workforce, and the District of Columbia
                                   Committee on Governmental Affairs
                                   United States Senate

                                   The Honorable Henry A. Waxman
                                   Ranking Minority Member
                                   Committee on Government Reform
                                   House of Representatives

                                   The Honorable Lloyd Doggett
                                   House of Representatives

                                   Since fiscal year 1994, the annual Agriculture Appropriations Act has
                                   prohibited the U.S. Department of Agriculture’s (USDA) Foreign
                                   Agricultural Service (FAS) from using appropriated funds to promote the
                                   sale or export of tobacco or tobacco products. Additionally, since fiscal
                                   year 1998, the Commerce, Justice,1 and State Appropriations Act similarly
                                   has prohibited those agencies, including the Office of the U.S. Trade
                                   Representative (USTR), from using appropriated funds to promote the sale
                                   or export of tobacco or tobacco products and from seeking the removal of
                                   nondiscriminatory foreign restrictions on the marketing of tobacco. While
                                   both appropriations acts prohibit agencies from helping U.S. firms market
                                   tobacco products overseas, they differ in that the 1998 Act allows the
                                   Departments of Commerce and State and USTR to address potentially
                                   discriminatory trade practices faced by U.S. tobacco firms.

                                   As you requested, this report (1) assesses the tobacco-related policy
                                   guidance on restrictions issued to overseas personnel by USDA,
                                   Commerce, State, and USTR; (2) describes how the agencies’ past and
                                   present activities changed in response to the legislative restrictions on the




                                   1
                                    Although the Department of Justice is included in the legislated appropriations and is also
                                   subject to the tobacco-related restrictions, we did not examine its activities because it does
                                   not promote U.S. exports.



                                   Page 1                                                        GAO-03-618 Tobacco Exports
                   marketing of tobacco and tobacco products; and (3) identifies how the
                   agencies monitor compliance with restrictions on promoting tobacco.

                   In conducting this review, we reviewed agency documents, performed
                   legal analyses, and conducted interviews with responsible agency officials.
                   We analyzed tobacco-related publications, including all FAS tobacco
                   commodity reports for 2001 and 2002. We did not seek to determine
                   whether ongoing agency activities are, or are not, prohibited under the
                   appropriations restrictions. (See app. I for further details of our scope and
                   methodology.)


                   Commerce, State, and USTR have issued timely guidance implementing
Results in Brief   tobacco-related restrictions in their annual appropriations act, but the
                   USDA’s FAS has not. Since fiscal year 1998, USDA, Commerce, State, and
                   USTR have issued guidance to diplomatic posts as a periodic cable that
                   implements the restrictions in the agencies’ appropriations. Between 1993
                   and 1997, FAS issued no guidance implementing its tobacco-related
                   restrictions. Since 1998, FAS has relied on the periodic cables to provide
                   policy guidance to its overseas personnel. However, this guidance—
                   developed through an ongoing interagency process that includes FAS—
                   does not provide specific direction to FAS staff. For example, it does not
                   specify whether certain FAS activities, such as providing tobacco-related
                   information reports on foreign market conditions and assisting in trade
                   negotiations on tobacco-related issues, are consistent with its
                   appropriations act’s restrictions.

                   In response to the legislative restrictions, the agencies discontinued some
                   tobacco-related activities and continued others. Commerce overseas staff
                   ceased providing market research information to potential U.S. tobacco
                   exporters. Consistent with the 1998 cable guidance, the staffs of both
                   Commerce and State still provide routine business assistance to exporters
                   needing security, customs, or regulatory information. In fiscal year 1994,
                   FAS ended the tobacco component of USDA’s major export programs—
                   specifically, the Export Credit Guarantee Program, the Foreign Market
                   Development Program, and the Market Access Program.2 FAS has
                   continued, as part of its commodity-reporting program, to gather and
                   disseminate tobacco-related information that identifies foreign production
                   and consumption rates, import trends, and changes in foreign regulations


                   2
                   Formerly the Market Promotion Program.




                   Page 2                                             GAO-03-618 Tobacco Exports
that may assist tobacco exporters. Additionally, FAS, like other U.S.
agencies, has provided USTR negotiators with information on foreign tariff
rates, U.S. market shares, and trade concessions’ potential impact on
exports.

To monitor implementation of the legislated restrictions, Commerce,
State, and FAS rely on their overseas staffs to identify U.S. firms’ requests
for tobacco-related assistance not covered in the periodic guidance.
Overseas staff are instructed to refer such requests to headquarters for
review, and headquarters staff make case-by-case determinations on the
permissibility of each request. Overseas staff have asked, for instance,
whether they can help U.S. tobacco firms address different types of
potentially unfair trade practices and whether to list tobacco as an export
prospect in publicly available country commercial guides that highlight
export opportunities.

We are recommending that the Secretary of Agriculture (1) develop
guidance to implement the legislative restrictions on promoting the sale or
export of tobacco or tobacco products that fully reflects FAS programs
and activities and (2) review FAS’s ongoing activities to determine
whether they are consistent with those restrictions.

In commenting on a draft of this report (see app. III), USDA disagreed with
our finding that the guidance of the State cable does not fully implement
FAS’s tobacco-related prohibitions, but USDA noted that, in response to
our recommendation, it will prepare separate guidance for FAS staff
overseas and will cite any needed clarifications. USDA also disagreed with
our recommendation that FAS assess its tobacco-related activities—
specifically, the collection and dissemination of information on tobacco—
to clarify whether these activities are consistent with FAS’s legislative
restrictions on the promotion of tobacco exports. USDA stated that it does
not consider these activities to be within the scope of its restrictions.
However, USDA has not provided us with any documentation in support of
this position. Because FAS’s mission is largely promotional, we maintain
our recommendation that FAS review its ongoing activities and determine
whether they are consistent with its restrictions. Commerce, State, and
USTR did not comment on the draft report.




Page 3                                             GAO-03-618 Tobacco Exports
             In general, the overseas staffs of USDA, Commerce, and State help
Background   facilitate a broad range of U.S. exports. Specifically, USDA’s FAS and
             Commerce work to improve export opportunities for U.S. products in
             foreign markets.3 Their activities include developing export opportunities
             for U.S. businesses, participating in trade agreement negotiations and
             countering foreign discriminatory trade practices, and collecting and
             analyzing statistics and market information. Each agency produces
             information reports on foreign market conditions. For example, FAS staff
             provide monthly reports on various commodities and annual reports on
             foreign markets, and Commerce overseas staff prepare country
             commercial guides that identify targeted industry sectors for U.S. exports
             and discuss the country’s political, regulatory, and economic climate. State
             overseas staff’s trade responsibilities include facilitating trade
             negotiations, providing economic analysis, and providing commercial
             assistance in countries where Commerce has no presence. These agencies
             are part of an interagency process established under the Trade Expansion
             Act of 1962, which provides for an interagency structure and process that
             consults and advises USTR on trade policy and negotiations.

             In the early 1990s, these agencies, as well as the Departments of Health
             and Human Services (HHS) and the Treasury, were also members of an
             interagency group, called the Trade Policy Staff Committee Task Force on
             Tobacco Exports, that examined the dichotomy between tobacco-related
             health concerns and the economic benefit of tobacco exports.4 Charged
             with assessing U.S. tobacco policy in light of trade and health concerns,
             the group outlined the agencies’ tobacco-related responsibilities.5 Those
             responsibilities included collecting and analyzing production, trade, and
             consumption data on tobacco and related products; addressing unfair
             regulations inconsistent with international trade agreements; combating
             discriminatory trade practices; and supporting foreign government health
             policies.



             3
              In 2001, USDA had 244 staff in 73 overseas offices, and Commerce had 1,245 staff in 157
             overseas offices. USDA has responsibility for marketing nonmanufactured agricultural
             products, while Commerce has responsibility for marketing manufactured agricultural and
             other products. In 2002, State had 6,103 staff located in 259 overseas offices.
             4
              U.S. General Accounting Office, Trade and Health Issues: Dichotomy Between U.S.
             Tobacco Export Policy and Antismoking Initiatives, GAO/NSIAD-90-190 (Washington,
             D.C.: May 15, 1990).
             5
             Members of the interagency group included representatives from the National Economic
             Council, State, Commerce, USDA, HHS, Treasury, and USTR.




             Page 4                                                     GAO-03-618 Tobacco Exports
                             In August 1992, Congress passed the Agricultural Appropriations Act for
                             fiscal year 1993, prohibiting the use of appropriated funds to pay the
                             salaries of personnel who carry out USDA’s Market Promotion Program
                             with respect to tobacco. In October 1993, Congress broadened the
                             tobacco-related prohibition, as part of the fiscal year 1994 appropriation
                             act, to include FAS in the prohibitions. Specifically, since fiscal year 1994
                             Congress has prohibited FAS from using appropriated funds to promote
                             the sale or export of tobacco or tobacco products.

                             In November 1997, Congress passed the fiscal year 1998 Commerce,
                             Justice, and State Appropriations Act, prohibiting agencies funded by the
                             act, including USTR, from using appropriated funds to promote the sale or
                             export of tobacco or tobacco products. This act also prohibited the use of
                             appropriated funds to reduce or remove nondiscriminatory foreign
                             country restrictions on the marketing of tobacco or tobacco products. The
                             act allows the use of funds to address foreign-country, tobacco-marketing
                             restrictions that discriminate against U.S. products. Subsequent
                             appropriations acts have retained these prohibitions.


                             Guidance implementing the fiscal year 1998 restrictions on Commerce,
Commerce, State, and         State, and USTR’s promotion of tobacco and tobacco-related products was
USTR Provided                first issued in February 1998; about 3 months after the restrictions went
                             into effect. The guidance, issued in a State cable to overseas posts,
Guidance on Tobacco          identified prohibited and permitted activities. By contrast, from 1994
Restrictions, but FAS        through 1997, FAS did not provide any written guidance to its overseas
                             staff regarding the restrictions on its tobacco-related activities. Since fiscal
Did Not                      year 1998, according to FAS officials, the agency has participated in
                             developing the guidance contained in the periodic State cables.


Commerce, State, and         The cabled guidance, first issued in February 1998, implements the
USTR Issued Guidance on      tobacco restrictions contained in the fiscal year 1998 Commerce, State,
Their Tobacco Restrictions   and Justice Appropriations Act. This guidance prohibits the agencies from

                         •   promoting the sale or export of tobacco or tobacco-related products and
                             assisting with the efforts of U.S. firms or individuals that do,

                         •   participating in trade events or receptions sponsored by tobacco interests,
                             and

                         •   challenging host country laws and regulations directed toward reducing
                             the negative impact of tobacco.



                             Page 5                                               GAO-03-618 Tobacco Exports
                            The guidance also clarifies the activities that overseas staff may engage in,
                            specifically permitting these agencies to provide

                        •   routine business facilitation services to all U.S. citizens or firms, such as
                            providing information on foreign country conditions, policies, laws, and
                            regulations;

                        •   assistance in resolving business problems, such as customs or port
                            clearances; and

                        •   assistance in resolving potentially discriminatory trade restrictions.

                            Since February 1998, State has periodically updated and reissued this
                            guidance to overseas staffs of State, Commerce, and USDA. The February
                            1999 cable reiterated the same guidance and encouraged overseas staff to
                            refer to headquarters any issues not covered by the guidance. This cable
                            also encouraged overseas posts to report on their actions supporting
                            foreign-country, tobacco-control efforts. The February 2000 cable again
                            encouraged posts to assist in foreign tobacco-control efforts and provided
                            suggestions for doing so. The cable specifically recommended that posts
                            help foreign governments to

                        •   identify and promote tobacco-control programs;

                        •   find funding for tobacco prevention and control projects, including from
                            U.S. sources;

                        •   report on the country’s tobacco-control projects and progress; and

                        •   track, and report on, tobacco-control legislation.


FAS Has Not Issued          FAS did not develop guidance implementing the statutory restrictions,
Guidance Implementing Its   effective in fiscal year 1994, that specifically prohibit it from using
Tobacco Restrictions        appropriated funds to promote the sale or export of tobacco or tobacco-
                            related products. FAS did cease funding certain tobacco-related activities
                            in 1994. However, FAS officials could not cite or produce any internal
                            policy or guidance implementing their restrictions, nor could they explain
                            what guidance they relied on from 1994 through 1997.

                            FAS officials stated that since fiscal year 1998, when the restrictions on
                            State, Commerce, and USTR activities became effective, FAS has relied on
                            the February 1998 and subsequent State cables containing guidance to



                            Page 6                                               GAO-03-618 Tobacco Exports
                            overseas posts as a means to inform its overseas staff of the tobacco-
                            related restrictions. All of the FAS officials we interviewed were aware of
                            this guidance. For example, FAS staff at headquarters and overseas were
                            aware that they were prohibited from promoting tobacco and its products,
                            and the overseas staff members we communicated with were aware that
                            participation in trade events promoting tobacco and attendance at tobacco
                            company-sponsored functions was prohibited.

                            Although FAS participated in drafting the original 1998 State-issued
                            guidance cables, the cables do not specifically address what FAS activities
                            are prohibited under the USDA appropriations act restrictions. In
                            particular, the cables do not address FAS’s continuing activities related to
                            (1) collecting and disseminating information on foreign tobacco markets
                            or (2) participating in negotiations on tobacco-related trade agreements.


                            USDA, Commerce, State, and USTR have altered their activities in
Agencies Have               response to the legislated tobacco restrictions by discontinuing the
Stopped Some                tobacco-related component of export programs and stopping direct
                            assistance to tobacco exporters, but the agencies have continued certain
Activities and              other activities related to information gathering and dissemination and
Continued Others            trade negotiations. For example, the agencies routinely collect and publish
                            information on foreign countries’ commercial environment, which may
                            include information related to tobacco. Such information might be useful
                            to U.S. tobacco exporters. These agencies also provide information useful
                            to USTR when it negotiates trade agreements or addresses discriminatory
                            trade barriers.


Commerce Stopped            Commerce’s Foreign Commercial Service (FCS) staff have ceased
Providing Market Research   assistance to potential tobacco exporters but continue to provide basic
Information                 assistance to all potential exporters. FCS representatives told us that FCS
                            staff no longer (1) provide market information on tobacco in FCS’s
                            country commercial guides; (2) facilitate meetings with foreign tobacco
                            buyers; (3) set up trade shows for tobacco products; or (4) provide
                            customized fee-based research that identifies key competitors, the price of
                            comparable products, customary distribution and promotion practices, or
                            possible business partners. However, FCS identified a few instances in
                            which its overseas staff inadvertently assisted tobacco exporters. In 2001,
                            for example, FCS staff prepared research reports on Pakistan’s tobacco
                            market for a U.S. tobacco firm—an activity clearly prohibited in the
                            guidance provided to overseas posts. FCS reminded its staff of these
                            prohibitions in 2002 by resending the 2000 cable to its posts. FCS policy is


                            Page 7                                            GAO-03-618 Tobacco Exports
                        to limit assistance to tobacco firms to the same routine business
                        facilitation services provided to any U.S. firm, such as briefing them on the
                        security, political, and commercial situation in a country and helping them
                        resolve customs or tax issues. Commerce staff, in conjunction with other
                        agency staff here and abroad, also helps resolve potential discriminatory
                        trade practices.


Commerce, State, and    Commerce, State, and other federal agencies assist USTR by providing
USTR Provide Trade      trade information on foreign markets, commodities, or barriers to trade,
Agreement-Related       and they work together to assist exporters faced with potential
                        discriminatory trade practices. In 2001, for example, representatives from
Support                 USTR, State, Commerce, and the Centers for Disease Control and
                        Prevention negotiated with the Republic of Korea to reduce proposed
                        import tariffs on tobacco that would have violated an existing market
                        access agreement between the United States and Korea. In another
                        instance, U.S. agencies worked together to address Thailand’s proposed
                        cigarette ingredient disclosure requirement—a potential infringement of
                        the intellectual property rights of U.S. cigarette brands. U.S. agencies
                        assist exporters in other ways, such as working with foreign governments
                        to address cigarette counterfeiting, as U.S. agencies did in Pakistan in
                        1998.

                        USTR is responsible for developing and coordinating trade policy,
                        negotiating trade agreements, and addressing unfair trade practices. USTR
                        relies on an interagency structure, established in the Trade Expansion Act
                        of 1962,6 to provide information on foreign trade policies, regulations, and
                        practices. Since 1998, the Commerce, Justice, and State Appropriations
                        Act has specifically allowed the use of appropriated funds to address
                        foreign-country, tobacco-marketing restrictions that discriminate against
                        U.S. products. This allowance is reflected in the implementing guidance
                        contained in the periodic State cable.


FAS Discontinued Some   Beginning in fiscal year 1994, when the tobacco restrictions contained in
Tobacco Programs        USDA’s appropriations went into effect, FAS ceased funding the tobacco
                        component of USDA’s export programs (see fig. 1). The tobacco
                        component of USDA’s Export Credit Guarantee Program had provided
                        U.S. tobacco exporters with guaranteed credit to facilitate U.S. tobacco


                        6
                        Public Law 100-418.




                        Page 8                                             GAO-03-618 Tobacco Exports
                                       exports and had provided subsidy payments that allowed the tobacco
                                       exporters to compete in world markets against the subsidized exports of
                                       other countries. USDA also stopped funding the tobacco component of the
                                       Foreign Market Development Program, which was designed to encourage
                                       commercial exports through federal subsidies for advertising, trade
                                       servicing, and technical assistance. The tobacco component of the Market
                                       Access Program (formerly the Market Promotion Program) ended in fiscal
                                       year 1993. This program funded the promotional activities of U.S. tobacco
                                       producers, exporters, private companies, and trade organizations.

Figure 1: FAS Tobacco-Related Programs and Activities




                                       a
                                        Now the Market Access Program.


FAS Continues to Report                FAS continues to produce tobacco-related reports that can be useful to
on Foreign Tobacco                     tobacco exporters. Historically, FAS has reported on foreign-country
Markets                                tobacco imports and provided production, pricing, and consumption data,
                                       as it routinely does for other commodities. Currently, FAS continues to put
                                       monthly tobacco trade statistics on its Internet Web site, and it publishes
                                       printed copies of its quarterly report Tobacco: Worldwide Markets and



                                       Page 9                                           GAO-03-618 Tobacco Exports
                                       Trade. (FAS officials said that they would stop publishing the report at the
                                       end of 2003 but that the information would continue to be available on
                                       their Web site.) FAS also makes available on the Internet annual
                                       commodity reports on tobacco, referred to as “attaché reports.”7 These
                                       reports contain numerous data tables and some evaluative information on
                                       major foreign consumers and producers of tobacco products.

                                       We examined the subscription lists for FAS’s quarterly reports and found
                                       that the majority of subscribers are tobacco industry-related organizations
                                       such as U.S. and foreign tobacco firms and tobacco-related organizations
                                       such as investment banks, trade associations, and tobacco control
                                       organizations (see fig. 2).

Figure 2: Subscribers to FAS Worldwide Tobacco Reports




                                       7
                                       FAS attaché reports are issued on numerous commodities.




                                       Page 10                                                   GAO-03-618 Tobacco Exports
    We also analyzed the content of all FAS annual attaché reports covering
    tobacco during 2001 and 2002 and found that they provide information on
    foreign market conditions that may be useful to tobacco exporters. The 62
    annual reports from 2001 and 20028 that we analyzed commonly contained
    discussions on marketing, consumption and production, trade issues, and
    policies. (See app. II for detailed information on the nature of these
    reports.) General FAS guidance on commodity reporting encourages posts
    to view the countries as markets for U.S. exports and competitors to U.S.
    products, and the attaché reports identified import and export trends.
    Each report narrative was supplemented with an average of 14 tables,
    including estimates on projected production and consumption of leaf
    tobacco and cigarettes. Additionally, some reports contained information
    on health and safety policies, market share, advertising regulations, and
    brand or tobacco preference. The following excerpts from selected reports
    illustrate the kind of information that might be useful to U.S. tobacco
    exporters.

•   Malaysia, 2002: “Younger Malaysians prefer to smoke American-blended
    cigarettes. With about half of the population below age 25, the demand for
    these cigarettes should continue to climb. The local market share for
    American-blend cigarettes has expanded from 38 percent in 1998 to 45
    percent in 2001.”

•   Italy, 2002: “Prospects for U.S. tobacco into the Italian market…are
    unfavorable, in view of both the continued reduction of domestic brand
    cigarettes sold on the Italian market, and stronger competition from other
    suppliers, such as Brazil and Zimbabwe.”

•   Dominican Republic, 2002: “The Dominican Republic continues to be one
    of the most important trading partners with the United States in
    tobacco…. U.S. exports to the Dominican Republic surpassed US$85



    8
     Attaché reports for 2002 cover Argentina, Brazil, Bulgaria, China, Croatia, Dominican
    Republic, Egypt, France, Germany, Greece, Guatemala, Hong Kong, Hungary, India,
    Indonesia, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, Pakistan, the Philippines,
    Poland, the Russian Federation, Spain, South Africa, Taiwan, Thailand, Turkey, and the
    United Kingdom. The European Union annual report was not included.
    Attaché reports for 2001 cover Argentina, Austria, Brazil, Bulgaria, China, Egypt, France,
    Germany, Guatemala, Hong Kong, Hungary, India, Indonesia, Italy, Japan, Korea, Malaysia,
    Mexico, Moldova, the Netherlands, Pakistan, the Philippines, Poland, the Russian
    Federation, South Africa, Spain, Taiwan, Thailand, Turkey, the United Kingdom, and
    Zimbabwe.




    Page 11                                                      GAO-03-618 Tobacco Exports
                           million in CY 2001, positioning the Dominican Republic among the top five
                           largest importers of U.S. tobacco.”

                           Moreover, an analysis of report narratives in combination with
                           information contained in the data tables might provide insight into market
                           niches for potential exporters. For example, from the narratives and tables
                           of the FAS 2002 report on Taiwan, we learned that (1) domestic
                           unmanufactured tobacco production had declined because of privatization
                           of the country’s tobacco monopoly, and the remaining production will
                           incorporate U.S. leaf tobacco; (2) competitors’ imports of unmanufactured
                           tobacco were projected to decrease; (3) Taiwanese consumers considered
                           U.S. tobacco desirable; and (4) small, steady increases in total tobacco
                           consumption were forecast. Taken together, this information identifies an
                           opportunity for U.S. tobacco exporters of unmanufactured leaf. The report
                           itself claims that in Taiwan there are “opportunities and challenges for
                           U.S. tobacco and tobacco product exports.”9

                           The 2001 report from the Netherlands is another example in which
                           combined reported information gives U.S. tobacco exporters insight into
                           the Dutch market.10 The tobacco report indicates (1) increased domestic
                           production of cigarettes, (2) a Dutch preference for U.S. flue-cured
                           unmanufactured tobacco, and (3) the importance of competitive pricing
                           for U.S. exports to be able to compete with imports from Brazil and
                           Zimbabwe. Additionally, information on the European Union’s lower tar
                           and nicotine requirements provides the exporter with useful information.


FAS Continues to Provide   FAS supports USTR and State regarding trade policy and trade agreement
Tobacco-Related            issues. FAS staff participate in the interagency process that supports trade
Information to USTR        negotiations and addresses discriminatory trade practices, providing data
                           and analysis on a variety of commodities, including tobacco. The Secretary
                           of Agriculture, under the Food, Agriculture, Conservation, and Trade Act
                           of 1990,11 has authority to “provide technical services to the USTR on
                           matters pertaining to agricultural trade and with respect to international
                           negotiations on issues related to agricultural trade.” FAS, for example, has


                           9
                            Foreign Agricultural Service, Taiwan Tobacco and Products, number TW2020, June 3,
                           2002.
                           10
                            Foreign Agricultural Service, The Netherlands Tobacco and Products, number NL1055,
                           August 10, 2001.
                           11
                               Public Law 101-624.




                           Page 12                                                  GAO-03-618 Tobacco Exports
                         supported USTR’s efforts to foster free trade agreements with Australia,
                         Chile, Jordan, Morocco, and Singapore by providing tobacco-related data
                         and information on production, supply and demand, and tariff-rate quotas.


                         Senior FAS and FCS officers at overseas posts oversee their staffs’
Agencies Rely on Staff   tobacco-related activities. Overseas staff are aware that they are to refer to
to Monitor               these officers any requests for assistance or other activities that could
                         violate the restrictions outlined in the periodic guidance they receive.
Compliance with          When clarification of a requested activity is required, these officers, as
Restrictions on          outlined in the periodic State cables, seek headquarters-level approval
                         before assisting U.S. tobacco firms. Headquarters staff make case-by-case
Promoting Tobacco        determinations on the permissibility of each request. Agencies do not
                         systematically collect information on requests made for assistance by
                         tobacco exporters; therefore, information on the exact number of requests
                         was unavailable. However, overseas staff have, for example, asked
                         whether they should discuss proposed tariff increases on imported
                         cigarettes with foreign governments, whether it would be appropriate to
                         hold embassy meetings with tobacco firms, and whether to include
                         tobacco as a good export prospect in Commerce’s Country Commercial
                         Guide for Russia. To each of these requests, headquarters staff said no.


                         Since 1998, USDA, Commerce, State, and USTR have participated in an
Conclusions              interagency process that has developed and periodically updated guidance
                         to their overseas staff, outlining restrictions on the promotion of tobacco
                         and tobacco-related products. However, this guidance appears to
                         implement only the restrictions of the Commerce, State, and USTR
                         appropriations and does not provide specific direction to FAS staff
                         regarding restrictions on its tobacco-related programs and activities. FAS
                         discontinued funding the tobacco components of its major export
                         programs in 1994. However, FAS has not assessed whether its activities
                         regarding the collection and dissemination of information—information
                         that is used by tobacco producers and exporters of tobacco products—are
                         consistent with FAS’s statutory restrictions on the promotion of tobacco
                         or tobacco products.


                         To ensure that the Foreign Agricultural Service has fully addressed its
Recommendations          restriction on the promotion of tobacco or tobacco-related products, we
                         recommend that the Secretary of Agriculture (1) develop guidance to
                         implement the legislative restrictions on promoting the sale or export of
                         tobacco or tobacco-related products that fully reflects FAS programs and


                         Page 13                                            GAO-03-618 Tobacco Exports
                     activities. We also recommend that the Secretary (2) review all ongoing
                     activities that pertain to tobacco or tobacco-related products—
                     specifically, the collection and dissemination of information on tobacco—
                     to determine whether these activities are consistent with the Department
                     of Agriculture’s restrictions in its appropriations.

                     We provided a draft copy of this report to USDA, Commerce, State, and
Agency Comments      USTR. We received written comments from USDA. Commerce, State, and
and Our Evaluation   USTR did not comment on the draft report.

                     USDA disagreed with our conclusion that the State cable, formulated to
                     implement the restrictions that apply to Commerce, State, and USTR and
                     adopted by FAS, provides insufficient guidance to FAS staff. Specifically,
                     FAS claims that the Commerce, Justice and State Appropriations Act
                     restricts agency action to a greater degree than the USDA amendment
                     covering FAS because it adds an additional restriction on trade
                     negotiations not found in the USDA amendment. By following this
                     guidance, FAS states, it is therefore implementing its restrictions and
                     voluntarily adopting additional limitations.

                     We disagree. The tobacco-related restrictions contained in FAS’s annual
                     appropriation act and the restrictions contained in Commerce, State, and
                     USTR’s appropriation act are essentially the same and only differ in one
                     respect. The restriction in the Commerce, State, and USTR appropriation
                     act prohibits those agencies from seeking the reduction or removal of
                     foreign-country restrictions on the marketing of tobacco, but allows those
                     agencies to address, in limited circumstances, foreign-country restrictions
                     on the marketing of tobacco that potentially discriminate against U.S.
                     products. Because FAS programs and activities differ from those of the
                     other agencies and its overall mission is largely promotional,12 we continue
                     to recommend that FAS develop guidance that fully reflects its own
                     activities.

                     FAS also disagreed with our recommendation that it review its tobacco-
                     related activities—specifically, the collection and dissemination of market
                     intelligence regarding tobacco—to determine whether these activities are
                     in keeping with USDA’s tobacco restrictions. FAS states that it does not
                     consider market intelligence reporting (the collection and dissemination
                     of information on tobacco) to be within the scope of their amendment’s


                     12
                      7 U.S.C. §1761-1768.




                     Page 14                                           GAO-03-618 Tobacco Exports
restrictions. It states that the legislative history does not address this
activity and that an interagency task force considered it to be outside the
amendment’s scope. During the course of our review, we asked FAS for,
but did not receive, documentation that supports their contention that
such reporting falls outside the scope of the restrictions.

In recommending the need for such a review of current tobacco-related
activities, we note that FAS’s overall mission is to promote the export of
U.S. agricultural products—and one of the primary responsibilities of the
FAS officers overseas is market development.13 The attaché reports we
examined identify (1) changes in domestic production or consumption
that could affect tobacco leaf or cigarette sales; (2) foreign competitors,
characterizing the competitiveness of their products; and (3) potential
market impediments, such as regulations or duties. Some reports also
make suggestions on commodity pricing that could increase U.S. firms’
sales over foreign competitors’ and help U.S. firms market their tobacco
and tobacco products overseas. USDA does not permit FAS officers
overseas to discuss or provide this type of information with potential
exporters. We would expect FAS to assess its market intelligence reports
by the same standards.

In addition, FAS stated that the USDA amendment is a limitation on the
use of FAS’s Salaries and Expenses appropriations, and not, as
represented in our draft report, “a general restriction on the Department of
Agriculture’s tobacco-related activities.” Nowhere in our report do we
state that the USDA amendment constitutes such a general restriction. In
this report’s highlight sheet, we do summarize that “Since 1994, the
Agriculture Appropriations Act has prohibited the funding of tobacco
export programs and restricted the Department of Agriculture’s tobacco-
related activities.” We believe this latter statement accurately summarizes
the amendments provisions as reflected in the statement made throughout
this report that the USDA amendment prohibits FAS, which is responsible
for USDA’s agricultural export promotion programs and activities, from
using appropriated funds to promote the sale or export of tobacco or
tobacco-related products.

FAS also stated that a review of the USDA amendment’s legislative history
demonstrates that tobacco interests’ participation in “FAS sponsored trade
shows and other promotional activities” were the type of activities that


13
 7 U.S.C. §5693.




Page 15                                            GAO-03-618 Tobacco Exports
were encompassed by the prohibition. We do not contest FAS’s
interpretation of the of the legislation. As FAS correctly points out in its
comments, we did not seek to determine whether ongoing agency
activities are, or are not, prohibited. However, FAS assertions regarding
the types of activities demonstrated by the legislative history to be
encompassed by the prohibition beg the question of what FAS means by
“…promotional activities.” This underscores our point regarding the need
for FAS-specific guidance for implementing the prohibition.


As you requested, unless you publicly announce its contents earlier, we
plan no further distribution of this report until 30 days from its issue date.
At that time, we will send copies of this report to the appropriate
congressional committees. Copies of this report will also be sent to the
Secretary of Agriculture, the Secretary of Commerce, the Secretary of
State, and the U.S. Trade Representative. Copies will also be made
available to others on request. In addition, the report will be available at
no additional charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions regarding this report, please call me
at (202) 512-3149. Key contributors to this assignment were Virginia
Hughes, Patricia Martin, Ella Mann, Ernie E. Jackson, Reid Lowe, and
Daniel Gage.




David Gootnick
Director, International Affairs and Trade




Page 16                                             GAO-03-618 Tobacco Exports
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             To assess the tobacco-related policy guidance on tobacco restrictions
             issued to overseas personnel by the Departments of Agriculture (USDA),
             Commerce, and State and the Office of the U.S. Trade Representative
             (USTR), we obtained and analyzed copies of the legislation governing the
             agencies’ tobacco-related restrictions. We also analyzed, when available,
             State cables containing guidance implementing the restrictions contained
             in the laws, as well as reports and E-mails detailing the development or
             provision of guidance to the overseas staffs of these agencies. We
             discussed the process for establishing the evolution and implementation of
             the guidance with cognizant officials of these agencies. However, we
             found few officials remained at the agencies from the time of the
             legislation. Although the Department of Justice is included in the legislated
             appropriations and is also subject to the tobacco-related restrictions, we
             did not examine its activities because it does not promote U.S. exports.

             To determine how USDA, Commerce, State, and USTR adjusted their
             activities in response to their legislative restrictions on the marketing of
             tobacco and tobacco products, we identified these agencies’ past tobacco
             export promotion programs and current activities related to tobacco.
             However, we did not seek to determine whether the agencies’ ongoing
             activities are prohibited. We obtained funding histories for USDA’s
             tobacco programs and discussed the nature of the programs and activities
             with agencies’ officials here and abroad, obtaining documentation when
             available. We communicated with USDA’s Foreign Agricultural Service
             (FAS) and Commerce’s Foreign Commercial Service (FCS) staffs in
             Croatia, Italy, Turkey, and the Philippines. We also obtained information
             on trade agreements and discussed the interagency process used to
             develop trade policy and negotiating positions. In addition, we contacted
             officials of antitobacco organizations, such as the American Cancer
             Society and Campaign for Tobacco Free Kids, and asked them to identify
             federal tobacco export promotion programs.

             We conducted our review from October 2002 to March 2003 in accordance
             with generally accepted government auditing standards.




             Page 17                                            GAO-03-618 Tobacco Exports
              Appendix II: Excerpts from 2001 and 2002
Appendix II: Excerpts from 2001 and 2002
              Foreign Agricultural Service Tobacco Attaché
              Reports


Foreign Agricultural Service Tobacco Attaché
Reports




              Page 18                                        GAO-03-618 Tobacco Exports
Appendix II: Excerpts from 2001 and 2002
Foreign Agricultural Service Tobacco Attaché
Reports




Page 19                                        GAO-03-618 Tobacco Exports
              Appendix III: Comments from the U.S.
Appendix III: Comments from the U.S.
              Department of Agriculture



Department of Agriculture




              Page 20                                GAO-03-618 Tobacco Exports
Appendix III: Comments from the U.S.
Department of Agriculture




Page 21                                GAO-03-618 Tobacco Exports
           Appendix III: Comments from the U.S.
           Department of Agriculture




(320155)
           Page 22                                GAO-03-618 Tobacco Exports
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