oversight

Trade and Health Issues: Dichotomy Between U.S. Tobacco Export Policy and Antismoking Initiatives

Published by the Government Accountability Office on 1990-05-15.

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

                          United       States   General   Accounting   Office
                          Report to Congressional Requesters




May 1990
                          TRADE AND
                          HEALTH ISSUES
                          Dichotomy Between
                          U.S. Tobacco Export
                          Policy and
                          Antismoking
                          Initiatives




                  -.-SW   --   -   -




GAO/NSIAD-90490
National security and
International Affairs Division

B-235805

May 15,199O

Congressional Requesters

This report is in response to requests received from the Committees and Members of Congress
listed at the end of this letter. It reviews the role of the U.S. government in assisting the
export of tobacco and tobacco products and the health-related implications of these
activities.

In recent years, the US. Trade Representative (USTR)has been successful in negotiating
removal of unfair foreign trade barriers that had restricted the export of U.S. cigarettes.
Despite the fact that cigarettes meet current trade policy criteria, USTR’S efforts to remove
the trade barriers are controversial because of the health risks associated with smoking.

In some ways, a policy level conflict exists between U.S. trade goals and health policy
objectives in regard to the export of tobacco products. On the one hand, federal resources are
used to facilitate the export of U.S. tobacco and tobacco products, while on the other hand,
the federal government has directed a major domestic antismoking effort and is a participant
in the international antismoking movement.

Because of the importance of the issues address in this report and the wide interest in these
matters, we plan to distribute copies of the report to each member of Congress, appropriate
congressional committees, and other interested parties.

Unless you publicly announce its contents, we plan no further distribution of this report until
11:00 a.m., May 17. At that time, as agreed with your offices, we will distribute this report to
other congressional offices and will make it available to additional interested parties.

The report was prepared under the direction of Allan I. Mendelowitz, Director, International
Trade, Energy, and Finance Issues. If you have any questions on the report, he can be
reached on (202) 275-4812. Other major contributors to this report are listed in appendix V.




Frank C. Conahan
Assistant Comptroller General
List of Requesters

The Honorable Henry Waxman
Chairman, Subcommittee on Health
  and the Environment
Committee on Energy and Commerce
House of Representatives

The Honorable Pete Stark
Chairman, Subcommittee on Health
Committee on Ways and Means
House of Representatives

The Honorable Chet Atkins
The Honorable Michael A. Andrews
The Honorable Jim Bates
The Honorable Barbara Boxer
The Honorable Richard Durbin
The Honorable James Hansen
The Honorable Mel Levine
The Honorable Mike Synar
The Honorable Robert Torricelli
The Honorable Pete Visclosky
House of Representatives




Page 2                             GAO/NSIAD~lBO   Trade and Health   Issues
Page 3   GAO/NW180   ‘bade and Health   hmea
Executive Summ~


                   In recent years, the US. government has been successful in negotiating
Purpose            the removal of unfair foreign trade barriers that restricted the export of
                   U.S. cigarettes. These efforts have been controversial because of the
                   adverse health effects associated with smoking.

                   GAO was requested by the Chairman of the House Subcommittee on
                   Health and the Environment, Committee on Energy and Commerce; the
                   Chairman of the Subcommittee on Health, Committee on Ways and
                   Means; and other members of Congress to review the role of the U.S.
                   government in helping the export of tobacco and tobacco products and
                   the health-related implications of these activities.


                   U.S. manufacturers had tried for many years to export their cigarettes
Background         to such protected markets as Japan, Taiwan, South Korea, and Thailand.
                   However, their efforts were only minimally successful. Largely through
                   the targeted efforts of the U.S. Trade Representative, beginning in 1986
                   the governments of Japan, Taiwan, and South Korea agreed to substan-
                   tially remove their cigarette trade barriers, including high import tar-
                   iffs, discriminatory taxes, and discriminatory marketing and
                   distribution restrictions. US. negotiations with Thailand are currently
                   in progress.

                   Since 1964, the United States has actively pursued a domestic policy to
                   discourage smoking. As a result, the incidence of smoking among adults
                   in the United States has decreased significantly. In addition, the United
                   States has also supported international antismoking efforts.


                   US. cigarette companies faced clearly identified foreign government
Results in Brief   imposed trade barriers in marketing their product. U.S. government
                   assistance was provided in removing such unfair foreign trade barriers,
                   consistent with current trade policy criteria.

                   U.S. Trade Representative officials maintain that because cigarettes are
                   legally sold in the United States and abroad, they should be treated no
                   differently than other products in trade negotiations. The Trade Repre-
                   sentative’s policy is that when petitioned by an industry with a legally
                   sound complaint dealing with unfair trade practices, it must act on the
                   petition.




                   Phge 4                                 GA0/190         Trade and Health   hen
                            Executive   Summa-y




                            The health consequences of cigarette exports are not considered when
                            developing trade policy, and the Department of Health and Human Ser-
                            vices plays no role in the interagency trade policy formulation process,

                            In some ways, a policy level conflict exists between U.S. trade goals and
                            health policy objectives in regard to the export of tobacco products. On
                            the one hand, federal resources are used to facilitate the export of US.
                            cigarettes, while on the other hand, the federal government has directed
                            a major domestic antismoking effort and is a participant in the interna-
                            tional antismoking movement.


                            Overall, GAO found that U.S. policy and programs for assisting the
Principal Findings          export of tobacco and tobacco products work at cross purposes to U.S.
                            health policy and initiatives, both domestically and internationally.
                            GAO'S findings on tobacco trade and health-related implications reflect
                            this dichotomy.


Trade in Tobacco Products   The United States presently has a favorable balance of trade in tobacco
                            and tobacco products. In 1989, the U.S. tobacco and tobacco product
                            trade surplus was $4.3 billion, up from $2 billion in 1986. U.S. tobacco
                            growers are benefiting from the recent increases in cigarette exports,
                            despite reduced domestic cigarette consumption, and tobacco production
                            has increased to meet growing export demand. In addition, three feder-
                            ally funded market development programs assist the export of U.S.
                            tobacco. They are the Cooperator Market Development Program, the
                            Targeted Export Assistance Program, and the Export Credit Guarantee
                            programs.

                            In its efforts to remove unfair foreign trade barriers, the U. S. Trade
                            Representative did not appear to give preferential treatment to tobacco
                            products over other items. However, it is difficult to quantify these
                            efforts for comparison purposes because the U.S. Trade Representative
                            pursues multiple cases concurrently and does not track time spent on
                            individual cases.

                            GAO  found that U.S. government representational activities on behalf of
                            U.S. cigarette companies in the four targeted Asian nations have been
                            extensive. Although the negotiations to remove foreign barriers to U.S.
                            cigarette exports were sensitive, at this time there seem to be no long-
                            term adverse implications for U.S. relations with the four targeted
                            countries.


                            Page 6                                 GAO/NSLUHO-190   Trade and Health   bsnes
                         Executive   Summary




                         GAO  found few reported incidents of U.S. cigarette companies violating
                         cigarette trade agreements and industry codes.


Health Implications of   The Surgeon General has determined that smoking is hazardous to
Cigarette Exports        health, and the U.S. government through the Department of Health and
                         Human Services actively works to discourage smoking internationally,
                         as well as domestically. Over the past 26 years, Congress has enacted a
                         number of laws concerning the health hazards of cigarettes that include
                         requiring health warnings on cigarettes, banning all cigarette television
                         and radio advertisements, and banning smoking on domestic flights.

                         The U.S. government supports the World Health Organization and its
                         smoking prevention programs. Also, the Overseas Private Investment
                         Corporation, a government agency, has made a policy decision to deny
                         assistance to U.S. cigarette companies wishing to promote their enter-
                         prises overseas because of the adverse health effects of smoking. Never-
                         theless, health issues were not considered during negotiations for the
                         removal of foreign trade barriers to the export of U.S. cigarettes. And,
                         until recently, the Department of Health and Human Services has been
                         discouraged from participating in the cigarette trade policy process. A
                         high level Department of Health and Human Services official informed
                         GAO that the Department of Health and Human Services was invited to
                         participate in the current market access case in Thailand and declined
                         on the basis that it perceives cigarette export issues as a trade rather
                         than a health matter.

                         Statistics show that the prevalence of smoking in Japan, Taiwan, and
                         South Korea is higher than in the United States. In the past decade, an
                         antismoking movement has been established in the four targeted Asian
                         countries. While the smoking rate in Japan has gradually declined, ciga-
                         rette consumption in Taiwan and South Korea has increased since the
                         removal of barriers to US. cigarette exports. Since the opening of the
                         Asian cigarette markets, cigarette advertising and promotional activities
                         have increased appreciably in terms of volume and sophistication as a
                         result of the competitive marketing of US. cigarettes. In addition, socio-
                         economic factors, such as rapid rises in disposable income and more
                         women entering the work force, are generally considered to have played
                         a role in increasing cigarette use in certain Asian countries.




                         Page 6                                 GAO/NS~Wl!Kl    Trade and Health   lssuea
                  Recutive   Fhmmary




                  The U.S. government’s role in helping the export of cigarettes and other
Matters for       tobacco products raises important policy issues. On the one hand, the
Congressional     government is committed to help U.S. exporters overcome foreign mar-
Consideration     ket barriers to the export of legal products. On the other hand, the U.S.
                  government has determined that smoking is hazardous to health and is
                  actively working to reduce smoking and the use of other tobacco prod-
                  ucts both domestically and abroad.

                  If the Congress believes that trade concerns should predominate, then it
                  should do nothing to alter the current trade policy process. The U.S. gov-
                  ernment can simultaneously continue to actively help U.S. cigarette
                  exporters overcome foreign trade barriers and promote awareness of the
                  dangers of smoking and further restrict the ciroumstances in which
                  smoking may take place.

                  If Congress believes that health considerations should have primacy, the
                  Congress could grant the Department of Health and Human Services the
                  responsibility to decide whether to pursue trade initiatives involving
                  products with substantial adverse health consequences.

                  Alternatively, rather than having one policy dominate, the Congress
                  could specifically require that health matters be included in the inter-
                  agency trade policy process so that health issues receive some consider-
                  ation on a case-by-case basis. Such a change would necessitate that the
                  Department of Health and Human Services actively participate in the
                  interagency trade policy decision-making process.


Agency Comments   As requested, GAO did not obtain agency comments on a draft of this
                  report. However, during the course of this review, GAO did discuss the
                  matters addressed in this report with U.S. government agencies and
                  tobacco industry officials.




                  Page 7                                 GAO/NSlAD9O-190   ‘bade   and Hedth   lava
Contents


Executive Summary                                                                                             4

Chapter 1
Introduction                  Background
                              Objectives, Scope, and Methodology

Chapter 2                                                                                                   15
Access for U.S.               Formulation of U.S. Trade Policy                                              16
                              Section 30 1 Process                                                          16
Tobacco Products in           HHS Discouraged From Participation in Cigarette Trade                         18
Certain Restricted                 Policy Process Formulation
Asian Markets                 Section 301 Process Allows for Consideration of
                                   Implications for U.S. Foreign Relations
                                                                                                            19

                              Representational Activities on Behalf of U.S. Cigarette                       21
                                   Companies in Targeted Section 301 Countries
                              USTR Does Not Appear to Give Preferential Treatment to                        23
                                   Tobacco Products in Section 301 Actions
                              Few Reported Instances of U.S. Cigarette Companies                            26
                                   Violating Cigarette Trade Agreements and Applicable
                                   Industry Code Provisions

Chapter 3                                                                                                   30
Health Considerations Socioeconomic Factors
                      Current Smoking Trends in the Targeted Asian Countries                                30
                                                                                                            31
of Cigarette Market   New Cigarette Marketing Strategies                                                    32
Access                Antismoking Awareness Has Intensified in the Targeted                                 33
                                   Asian Countries
                              U.S. Antismoking Efforts                                                      36
                              Matters for Congressional Consideration                                       37

Appendixes                    Appendix I: Impact of Increased U.S. Cigarette Exports on                     38
                                  U.S. Tobacco Farmers
                              Appendix II: Tobacco and Tobacco Product Balance of                           42
                                  Trade
                              Appendix III: U.S. Foreign Market Development Programs                        44
                                  for Tobacco
                              Appendix IV: Cigarette Marketing Restrictions in                              46
                                  Targeted Asian Nations
                              Appendix V: Major Contributors to This Report                                 48




                              Page 8                                GAO/NSlAB9O-1BO   Trade and Health   Iesues
         content8




Tables   Table II. 1: U.S. Tobacco and Tobacco   Product Trade                            42
             Balance
         Table 11.2:U.S. Tobacco and Tobacco     Product Trade                            42
             Balance With Japan
         Table 11.3:U.S. Tobacco and Tobacco     Product Trade                            43
             Balance With South Korea
         Table 11.4:U.S. Tobacco and Tobacco     Product Trade                            43
             Balance With Taiwan




         Abbreviations

         ccc        Commodity Credit Corporation
         CEA        Cigarette Export Association
         GAO        General Accounting Office
         GATT       General Agreement on Tariffs and Trade
         Ims        Department of Health and Human Services
         JASH       Japan Action on Smoking and Health
         KASH       Korean Association on Smoking and Health
         OPIC       Overseas Private Investment Corporation
         USDA       United States Department of Agriculture
         USTR       United States Trade Representative
         WI-IO      World Health Organization


         Page D                                   GAO/NBIADBo-180   Trade and Health   huea
Chapter 1

Introduction


               U.S. trade policy for tobacco and tobacco products is the same as that
Background     for any other legal product that is traded between countries. A U.S.
               exporter of legal products faced with unfair foreign trade barriers can
               turn to the U.S. government for assistance in removing those barriers.
               Hence, such assistance is available to U.S. cigarette exporters.

               U.S. cigarette companies tried for many years to expand their sales to
               Japan, South Korea, Taiwan, and Thailand, whose markets were sub-
               stantially closed to cigarette imports by government imposed barriers
               and monopolies.l After generally unsuccessful efforts to gain access to
               those markets, the U.S. cigarette companies sought the assistance of the
               U.S. Trade Representative (U~TR)under section 301 of the Trade Act of
               1974, as amended,2 in eliminating these alleged unfair trade barriers to
               U.S. cigarette exports.

               Access to these markets is important to the U.S. cigarette companies
               because of the significant and steady decline in U.S. cigarette consump-
               tion. (It is also important to U.S. farmers because tobacco is their sixth
               largest cash crop, and 86 percent of tobacco is used in the manufacture
               of cigarettes. See app. I for details on the global tobacco situation and
               how U.S. cigarette exports benefit the tobacco grower.) Since 1981,
               domestic consumption of cigarettes has fallen by 17 percent, In 1989,
               there was a S-percent decline in U.S. cigarette consumption from the
               previous year. These decreases are attributed to (1) increases in ciga-
               rette prices (excluding taxes) of over 200 percent since 1980, (2) greater
               concern over the health effects of smoking, (3) higher taxes on ciga-
               rettes, (4) further public smoking restrictions, and (5) the growing social
               unacceptability of smoking.

               Despite the fact that cigarettes meet current trade policy criteria, the
               USTR’Spursuit of the cigarette section 301 cases is controversial because
               of the health risks associated with smoking. The Department of Health
               and Human Services (HIIS) has issued several Surgeons General’s reports
               warning about the harmful effects of smoking. I-EE is also directing a
               number of domestic antismoking efforts. In addition, the United States
               participates on a multilateral level with the World Health Organization
               (WI-IO) to develop greater antismoking and health awareness programs
               throughout the world.

               ‘These monopolies controlled the manufacture, and to varying degrees, the supply and distribution of
               clgarett~~ in each of these countries.
               ‘A section 301 action is authorized by the 1974 Trade Act, as amended, and allows the USTR to
               negotiate for the removal of foreign trade barriers.



               Page 10                                              GAO/NSIAD-Q&lQQ Truie and Henltb Iambs
                         Thus, we have a situation in which one government body, USTR,negoti-
                         ates for the removal of import restrictions on U.S.-produced cigarettes
                         as provided for by U.S. trade law. At the same time, another govem-
                         ment body, HIIS, attempts to decrease the use of cigarettes in the United
                         States and abroad.


Action Against Foreign   Section 301 of the Trade Act of 19743 has been used 6 times to address
Trade Barriers           unfair foreign trade barriers affecting the export of cigarettes and other
                         tobacco products. Cigarettes were viewed as well suited for section 301
                         cases because the U.S. cigarette companies faced clearly identified, gov-
                         ernment-imposed trade barriers in Japan, Taiwan, South Korea, and
                         Thailand, and U.S. cigarettes are very competitive in world markets.

                         Baaed on presidential direction, USTRinitiated section 301 actions
                         against Japan in 1986 and Taiwan in 1986. USTRinitiated a section 301
                         action against Korea in 1988 after evaluating a petition from the U.S.
                         Cigarette Export Association (cEA).” These section 301 actions were
                         taken in the context of rising trade friction with these countries and
                         growing U.S. trade deficits with them. By 1988, USTRhad successfully
                         negotiated agreements with the targeted countries to open their markets
                         to U.S. cigarette exports. For example, in Japan, where an agreement
                         was reached in 1986, the U.S.’ share of the Japanese cigarette market
                         increased from 3 percent to over 13 percent in a Cyear period. During
                         the period 1986-1989, the U.S.’ trade surplus in tobacco and tobacco
                         products increased from $2 billion to $4.3 billion. (See app. II for addi-
                         tional details.)

                         In May 1989, in response to another cigarette industry petition, the USTR
                         initiated a section 301 action against Thailand with the objective of
                         eliminating Thai barriers against the importation of U.S. cigarettes. In
                         this case, two of the four main issues have been referred to the General
                         Agreement on Tariffs and Trade6 (GATT) for dispute resolution. The
                         deadline for resolving this section 301 case is November 1990.

                         3’hrough   February   1990, the USTFt had initiated 79 section 301 trade cases.

                         ‘The U.S. Cigarette Export Association was formed in 1981 by Philip Morris, Inc., R.J. Reynolds
                         Tobacco Company, and Brown & Win              Tobacco Corp. The association was formed under provi-
                         sions of the WebbPomerene Act of 1918, which permits U.S. companies to form associations to com-
                         pete more effectively in foreign markets. The act provides qualified exemptions from prosecution
                         under U.S. antitrust laws for associations formed for the purpose of, and actually engaging in, export
                         trade when such associations do not interfere with domestic commerce.

                         ‘?he GATT is the multilateral agreement whose rules govern trade between member nations, techni-
                         cally referred to as contracting parties.



                         Page 11                                                 GAO/NSL4D4%190        Trade and Health   Iewes
                              chapter         1
                              hltl,OdUCtlO~




Health Implications of U.S.   On gaming access to the markets of Japan, Taiwan, and South Korea,
Cigarette Entry Into Asian    the U.S. cigarette manufacturers have achieved a measure of success in
                              taking market share from the national cigarette monopolies. In part, in
Markets                       response to the growing competition from U.S. companies, advertising
                              has increased in volume and sophistication. Many health advocates
                              believe that these cigarette advertisements have also grown in sophisti-
                              cation and are targeting segments of the population in which the inci-
                              dence of smoking has traditionally been very low, e.g., women.

                              Concurrent with this expanded cigarette marketing, there have been
                              increases in antismoking efforts overseas. For example, all four of the
                              targeted countries require health caution labels to be placed on packs of
                              cigarettes produced for domestic consumption. Also, WHOhas stepped up
                              its efforts to spread the smoking awareness message throughout the
                              world. The United States participates in WHOand supports its efforts to
                              develop greater antismoking and health awareness programs.

                              In Japan, Taiwan, South Korea, and Thailand, there are growing anti-
                              smoking activities and organizations. Some believe these activities
                              represent serious efforts to reduce smoking because of the adverse
                              health effects. Others contend that antismoking movements were
                              exploited by local governments in their efforts to protect local markets
                              and the associated jobs and government revenue.


                              We were requested by the Chairman of the House Subcommittee on
Objectives, Scope,and         Health and the Environment, Committee on Energy and Commerce,
Methodology                   Henry Waxman, and the Chairman of the House Subcommittee on
                              Health, Committee on Ways and Means, Pete Stark, and other members
                              of Congress to review the role of the U.S. government in the export of
                              tobacco and tobacco products and the related health implications of
                              such exports. The other requesters are Chet Atkins, Mike Andrews,
                              Jim Bates, Barbara Boxer, Richard Durbin, James Hansen, Mel Levine,
                              Mike Synar, Robert Torricelli, and Pete Visclosky.

                              We examined the formulation and implementation of U.S. trade policy as
                              it relates to the export of tobacco and tobacco products. We reviewed
                              U.S. government programs that assist U.S. tobacco exporters and the
                              government assistance provided to U.S. cigarette companies to gain
                              access to restricted foreign markets.




                              Page 12                                GAO/lWIADWlSO   Trade and Health   Iameu
We reviewed the extent to which foreign policy ramifications are consid-
ered when developing trade policy and the implications that the ciga-
rette trade actions have had for U.S. relations with targeted Asian
countries. We sought to determine whether the usr~ gives preferential
treatment to tobacco products in the trade negotiations process, and
whether U.S. cigarette exporters comply with marketing restrictions
imposed in the newly opened Asian markets.

We also assessed whether increased U.S. cigarette exports have bene-
fited the U.S. tobacco growers and what impact tobacco exports have
had on the U.S. tobacco and tobacco product trade balance.

We examined to what extent health issues were given consideration in
the section 301 interagency process. We attempted to analyze the mar-
keting approaches of the U.S. cigarette companies to determine whether
increased advertising and promotional activities have had an impact on
smoking prevalence in Japan, Taiwan, and South Korea. In addition, we
reviewed the status of the antismoking movement overseas and whether
it has had an impact on health awareness and smoking in the targeted
countries.

To obtain information to respond to these issuesin the United States, we
reviewed documents and interviewed officials of the U.S. Trade Repre-
sentative, the Departments of Commerce, Agriculture, State, and Health
and Human Services; the American Cancer Society; the World Health
Organization; miscellaneous antismoking and health advocacy groups;
representatives of the flue-cured and burley tobacco industries, Tobacco
Associates, the U.S. Cigarette Export Association, and the three major
U.S. cigarette exporters -Philip Morris, Inc., R.J. Reynolds Tobacco
Company, and Brown & Williamson Tobacco Corp.

In Japan, South Korea, Taiwan, and Thailand, we interviewed represent-
atives of the U.S. Departments of State, Agriculture, and Commerce; for-
eign governments’ ministries of Foreign Affairs, Health, Agriculture,
Commerce/Trade, and Finance; the tobacco monopolies; tobacco trade
organizations; antismoking and health organizations; and foreign
tobacco farmer representatives. We also met with the European Commu-
nity’s health organizations and the United Nations Food and Agriculture
Organization.

Our access to documents relating to section 301 cases was limited to the
extent that we did not see documents developing the U.S.’ negotiating
positions or the USTR’Srecommendations to the President. However, this


P8ge 18                                GAO/NSIAD=@@lBO   Trade and Health   Iames
clmpter          I
llItFOdUCtIOll




lack did not adversely affect the overall results of our work. Our work
was conducted during the period March 1989 through April 1990 in
accordance with generally accepted government auditing standards.

As requested, we did not obtain agency comments on a draft of this
report. However, during the course of this review, we did discuss the
matters addressed in this report with federal agency and tobacco indus-
try officials.




 Page 14
Access for U.S. Tobacco Products in Certain
Restricted Asian Markets

                      A fundamental objective of U.S. trade policy is to achieve the elimina-
                      tion of unfair foreign trade barriers that restrict U.S. exports. This
                      objective applies equally to all products legally sold in the United States
                      and abroad. For years, U.S. cigarettes were blocked from certain Asian
                      markets, which were dominated by governmentcontrolled monopolies.
                      To maintain their monopolies, these governments largely prevented the
                      import of foreign cigarettes and certain tobacco products. Import barri-
                      ers included high import tariffs, discriminatory taxes, and discrimina-
                      tory marketing and distribution restrictions. The U.S. government
                      responded to the problems by investigating the alleged market restric-
                      tions and negotiating with the foreign governments to remove these bar-
                      riers. To date, the United States has gained access to cigarette markets
                      in Japan, Taiwan, and South Korea, and is involved in negotiations to
                      gain access in Thailand.

                      USIX representatives told us that as long as cigarettes remain a legal
                      commodity in the United States and abroad, there is no legal basis to
                      deny cigarette manufacturers assistance in gaining market access. USTR
                      officials further report that they only seek national treatment for U.S.-
                      produced products in their negotiations for market access. That is, the
                      U.S.-produced product should be treated no differently in the foreign
                      market than its domestically produced and marketed counterpart. For
                      example, the Thailand tobacco monopoly produces and sells cigarettes in
                      Thailand subject to certain marketing restrictions. A senior WTR official
                      explained that U.S.-produced cigarettes should be treated equally-they
                      should be given the same market access and be subject to the same mar-
                      keting restrictions as the monopoly-produced cigarettes.


                      U.S. trade policy is formulated through an interagency process that
Formulation of U.S.   involves three interagency committees-the     cabinet-level Economic Pol-
Trade Policy          icy Council, the subcabinet-level Trade Policy Review Group, and the
                      Trade Policy Staff Committee. The U.S. Trade Representative chairs
                      both the Group and the Committee. Through the interagency process,
                      information is gathered from a number of federal agencies that are sup
                      ported by industrial and agricultural technical advisory committees
                      that, in turn, communicate industry’s concerns and interests to U.S.
                      trade policy officials. The Department of Health and Human Services is
                      not included in this interagency process.




                      P8ge 16                                 GAO/NSL4DWlSO   Tmde and He&h   Imma
                      Cbrpter 2
                      Aceem for US. TOW        Produm   in Certdn
                      RestrIcted Asian Markets




                      Section 301 of the Trade Act of 1974, as amended, allows industry to
Section 301 Process   ask the U.S. government for help in removing unfair foreign trade barri-
                      ers. Section 301 authorizes the USTRto investigate and negotiate for the
                      removal of these foreign trade barriers. A strong section 301 case
                      includes the presence of clear-cut ‘foreign government-imposed import
                      restrictions and involves a U.S. export that is competitive in foreign
                      markets.

                      USTRhas the authority to decide whether to initiate a section 301 case.
                      However, in practice, the usrn consults with the interagency section 301
                      committee, a subcommittee of the Trade Policy Staff Committee, when
                      determining whether to accept a petition or to self-initiate a case. The
                      interagency 301 committee is chaired by a USTRrepresentative and is
                      composed of representatives from the Departments of Commerce, State,
                      Treasury, Agriculture, Labor, Justice, and Defense; the Council of Eco-
                      nomic Advisers; and the Office of Management and Budget.

                      Once USTRinitiates a section 301 action, it has up to 18 months to reach
                      a mutually acceptable resolution with the targeted country. If negotia-
                      tions are not successful, urn may be required to take retaliatory mea-
                      sures including the denial of trade agreement concessions or the
                      imposition of import restrictions on selected products from the targeted
                      country. Agreements to remove restrictions on foreign market imports,
                      without resort to retaliatory action, have been reached with the govern-
                      ments of Japan, Taiwan, and South Korea in the tobacco product cases.
                      USTRis currently pursuing a section 301 action against Thailand for the
                      removal of its cigarette import barriers.

                      In certain cases, trade disputes may be referred to the GATT for resolu-
                      tion. Certain issues in the Thailand section 301 cigarette case are cur-
                      rently being pursued through GAIT’S procedures for settling disputes.

                      Through February 1990, USTRhad initiated 79 section 301 trade cases.
                      These cases run the gamut from agricultural products, such as alleged
                      quantitative restrictions on the import of U.S. leather in Japan, to
                      alleged violations of intellectual property right protection, such as
                      Argentina’s denial of patent protection for U.S. pharmaceuticals. Six of
                      the cases involve tobacco products. Three of these actions were filed
                      against Japan for the removal of its import restrictions on cigars, pipe
                      tobacco, and cigarettes, respectively. One 301 action was filed against
                      South Korea and another against Thailand for removal of their cigarette
                      import restrictions. The 301 action against Taiwan was for the removal



                      Page 16                                       GAO/Nf3IAD9MBO   Trnde and Health   Iesnea
                            Chapter 2
                            Aecem for US. Tobacco   Pmdmta   in Certain
                            ReatitiAai8uMuLete




                            of its import barriers on U.S. cigarettes, wine, and beer. USIT self-initi-
                            ated the cigarette 301 actions against Japan and Taiwan, and tobacco
                            product trade associations petitioned USTR for initiation of the cigarette
                            301 actions against Japan for cigars and pipe tobacco and against South
                            Korea and Thailand for cigarettes.


Status of Tobacco Product   Japan-Cigars-The       Cigar Association of America filed a petition with
Section 301 Cases           the USTRon March 14,1979, alleging that Japan imposed (1) unreasona-
                            ble import restrictions and taxes on imported cigars, and (2) discrimina-
                            tory restrictions on the marketing, advertising, and distribution of
                            imported cigars. This case was later combined with the Japan pipe-
                            tobacco case discussed below.

                            Japan-Pipe Tobacco-The       Associated Tobacco Manufacturers filed a
                            petition on October 22,1979, alleging that Japan set unreasonable prices
                            for imported pipe tobacco and restricted its distribution and advertising.
                            In November 1979, the USTRconsolidated this case with the Japan cigar
                            case discussed above, alleging that the market restrictions were identi-
                            cal. The United States and Japan reached an agreement that decreased
                            the market restrictions and reduced the import duty on foreign cigars
                            and pipe tobacco. USTRterminated the 301 investigation on January 6,
                            1981.

                            Japan-Cigarettes-On        September 16, 1985, at the direction of the Pres-
                            ident, USTRinitiated a section 301 action against Japan because of the
                            restrictions it imposed on the import of U.S.-produced cigarettes. These
                            barriers included high tariffs on imported cigarettes, monopoly restric-
                            tions on the manufacture of foreign cigarettes in Japan, and restrictions
                            on the distribution of foreign cigarettes. On October 3, 1986, the United
                            States and Japan signed an agreement that included the elimination of
                            the cigarette tariff, the discriminatory excise tax payment procedures,
                            and discriminatory distribution practices. On October 6, 1986, the Presi-
                            dent approved the agreement and suspended the section 301
                            investigation.

                            Taiwan-Cigarettes-On      October 27, 1986, the President determined
                            that the restrictions imposed by Taiwan on the distribution and sale of
                            U.S. beer, wine, and tobacco products allowed action to be taken under
                            section 301. He directed USTRto propose appropriate countermeasures.
                            On December 12,1986, Taiwan signed an agreement to discontinue the
                            unfair practices. As a result, USTRannounced that no retaliatory action
                            would be proposed.


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                         South Korea-Cigarettes-On        January 22,1988, the CEA filed a petition
                         complaining that the South Korean government, in conjunction with the
                         Korean Monopoly Corporation, unreasonably denied the U.S. cigarette
                         companies access to the Korean cigarette market. On February 16,1988,
                         the USTBinitiated an investigation and requested consultations with the
                         government of Korea. USTRsigned an agreement with Korea on May 27,
                         1988, providing open, nondiscriminatory access to the Korean cigarette
                         market. Based on this agreement, U~TRterminated its investigation on
                         May 31,1988.

                         ‘I’hailand-Cigarettes-On      April 10, 1989, the CEAfiled a petition alleg-
                         ing that the Royal Thai government and its instrumentality, the Thai-
                         land Tobacco Monopoly, were engaging in practices that were
                         unreasonable or discriminated against the import of U.S. cigarettes. The
                         petition requested the removal of all restrictions on the importation and
                         sale of cigarettes, removal of discriminatory cigarette import duties and
                         taxes, and the right to distribute, advertise, and promote cigarettes in
                         Thailand. U~TRinitiated an investigation on May 25, 1989. Consultations
                         with the Thai government were initiated on July 31,1989, and a public
                         hearing was held in Washington on September 19,1989. At this hearing,
                         health emerged as an issue in the case, with the appearance of witnesses
                         who represented U.S. and Thai health advocacy groups. On December
                         22,1989, USTRsubmitted the import prohibition and discriminatory tax-
                         ation issues to GA!IT for formal dispute resolution. Consultations were
                         held with the Thais in Geneva on February 5-6,199O. The deadline by
                         which dispute settlement must be concluded is November 25,199O.


                         H~ISis not precluded by law from participating in trade policy matters.
HHS Discouraged          However, HHShas not been a part of the interagency trade policy formu-
From Participation in    lation process and, therefore, played no role in the development of the
Cigarette Trade Policy   U.S.’ position in the section 301 cigarette cases. When HHSactivities
                         appeared to intrude on the trade process, they were discouraged. For
ProcessFormulation       example, in February 1988, the Interagency Committee on Smoking and
                         Health, a committee established in 1984 under the Comprehensive
                         Smoking Education Act and chaired by the Surgeon General, attempted
                         to hold an interagency meeting entitled “Tobacco Trade Policies.” The
                         Surgeon General invited representatives from the Departments of State,
                         Commerce, and Agriculture to speak on the health implications of recent
                         U.S. efforts to open foreign markets to U.S. cigarettes. However, White
                         House officials, some members of Congress, and USTRofficials objected
                         to the meeting, claiming that the Committee had no authorization to ana-
                         lyze a trade issue. Consequently, the meeting title was changed to


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                             “Tobacco and Health Internationally,” and the representatives from
                             State, Commerce, and Agriculture did not attend.

                             A high level HHSofficial told us that HHSwas invited to participate in the
                             Thai section 301 cigarette case but chose not to because HI%’ position is
                             that cigarette exports is a trade issue, not a health issue, and because
                             mrs officials were too busy with other government activities in the
                             United States.


                             The implications of section 301 actions for U.S. relations with targeted
Section 301 Process          countries are considered during the section 301 process. The State
Allows for                   Department has a representative on USTR’Ssection 301 investigative
Consideration of             committee and on the bilateral negotiating team. Representatives from
                             State or from any of the other 301 committee member agencies are free
Implications for U.S.        to bring their concerns to the attention of the section 301 committee or
Foreign Relations            the negotiating team. Although there is no legal requirement to do so, a
                             USTRofficial told us that, as a practical matter, it must consider the opin-
                             ions of other section 301 committee or negotiating team members.
                             According to a USTR official, if there is a major foreign policy concern, it
                             may be sent to higher level interagency committees and, if necessary, to
                             the President for resolution.


Views of Government          We found that in general, government officials from Japan, Taiwan, and
Officials on the Impact of   South Korea viewed the cigarette section 301 actions as the culmination
                             of just another irritating trade dispute with the United States. Although
Cigarette Section 301        the issue was sensitive during the negotiations, the disputes have been
Actions on Foreign           substantially resolved and replaced by other trade problems. At this
Relations                    time, there appear to be no long-term adverse implications for U.S. rela-
                             tions with any of the targeted countries.

                             The current Thai cigarette section 301 case appears to have attracted
                             the attention of Thai and international antismoking and health advocacy
                             groups and the media to a greater extent than its predecessors. How-
                             ever, it is unclear whether, as a result, this case will have a more signifi-
                             cant impact on U.S/Thai bilateral relations compared to bilateral
                             relations with other countries targeted under section 301.


Japan                        A U.S. embassy official who was intimately involved in the section 301
                             negotiations told us that the U.S.’ image in Japan has not been adversely
                             affected by the cigarette section 301 action. He admitted that when the


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              section 301 action was active, it was an irritant in U.S. relations with
              Japan, but only to an extent similar to other section 301 actions against
              Japan.

              A Japanese Foreign Ministry official told us essentially the same thing.
              He said that the cigarette section 301 action was initially sensitive
              because it was among the first section 301 actions against Japan. How-
              ever, since the conclusion of the cigarette section 301 agreement, other
              equally painful trade disputes with the United States have emerged;
              Japan considers the cigarette case to be closed. The foreign ministry
              official said that currently the “public outcry” against US. cigarettes is
              fairly weak. However, he speculated that the Japanese public may
              revive the issue to symbolize its displeasure if the United States contin-
              ues to pursue its aggressive trade policies with Japan.


Taiwan        An official with the Washington, DC., office of the American Institute in
              Taiwan believes that the section 301 cigarette case has not had a lasting
              negative impact on U.S./Taiwan relations. However, the case was sensi-
              tive because of the substantial employment and government revenue
              derived from the cigarette monopoly and because of a growing anti-
              smoking movement in Taiwan. Further, Taiwan is in the midst of a
              democratization process with emotional and popular appeal. The ciga-
              rette section 301 action has given the opposition parties an issue with an
              anti-American slant. The section 301 case projected a negative U.S.
              image in Taiwan newspapers and led to inflammatory statements by a
              major Taiwan antismoking group.

              Authorities with Taiwan’s Coordination Council for North American
              Affairs told us that the United States should not be promoting
              unhealthy products such as cigarettes. Thus, the U.S. cigarette section
              301 action against Taiwan was unwise and has not enhanced the U.S.’
              image in Taiwan. However, the Taiwan officials noted that the cigarette
              section 301 agreement has had little long-term effect on U.S./Taiwan
              relations.


SCuth Korea   U.S. embassy officials in South Korea claim that the cigarette section
              301 action against Korea has not had a negative long-term effect on rela-
              tions between the United States and Korea. They view the section 301
              cigarette agreement as a market-opening agreement similar to other
              trade agreements. They believe that security issues are still the overrid-
              ing concern in the U.S./Korean relationship.


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                          A South Korean foreign ministry official told us that the cigarette sec-
                          tion 301 cigarette agreement did not, in and of itself, have a significant
                          impact on U.S./South Korean relations. The official stated that it was
                          just one of “many painful experiences” that Korea has recently had
                          with the United States on trade issues. Nevertheless, he claimed the cig-
                           arette agreement had a negative impact on Korean tobacco growers, and
                          their frustrations might cause political disturbances and affect future
                          elections.


Thailand                  The section 301 action against Thailand is an open case with ongoing
                          negotiations. It has much in common with the earlier cases, except that
                          the growing Thai antismoking movement has been used as part of the
                          Thai effort to strengthen its hand in the negotiations. The United States
                          views the dispute as a trade action. The Thais, on the other hand, view
                          it as a health and political issue, as well. The Thais claim that the United
                          States has a double standard in reference to cigarettes, i.e., that the
                          United States is pursuing an antismoking effort domestically whil? at
                          the same time “pushing” cigarettes on countries like Thailand. Because
                          negotiations in this caseare still proceeding, any current assessmentof
                          its impact on U.S./Thai relations would be purely speculative and inap
                          propriate at this time.

                          A number of parties have represented the interests of U.S. cigarette
Representational          exporting companies in their efforts to open restricted Asian markets
Activities On Behalf Of   for U.S. tobacco products. These parties have included (1) Members of
U.S. Cigarette            Congress; (2) congressional committee staff members; (3) executives of
                          major U.S. cigarette exporting companies; and (4) former senior White
Companies in Targeted     House officials serving as private consultants.
Section 301 Countries

Congressional Support     Several Congressmen have demonstrated their support for U.S. govem-
                          ment efforts to gain access to foreign cigarette markets. These Congress-
                          men have corresponded and met with executive branch officials as well
                          as with government officials of the four targeted countries. Prior to
                          negotiations with Korea, for example, at least 28 Senators and 4 Repre-
                          sentatives signed letters to senior administration officials urging aggres-
                          sive action to open the Korean cigarette market. These letters cited the
                          incompatibility of a large Korean trade surplus with the United States
                          and a Korean cigarette market virtually closed to U.S. exports.



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                            Aecem for U.S. Tobncco Products   in Certain
                            Reatrlcted Aaiau Markets




                            There were also several meetings between Congressmen and government
                            officials from Taiwan and Thailand prior to and during market-opening
                            consultations. For example, at least three of the congressional delega-
                            tions that visited Thailand between early December 1989 and February
                            1990 raised the issue of cigarette exports with Thai officials.

                            Congressional committee staff members have also met with foreign gov-
                            ernment officials. In October 1989, for example, two House Committee
                            staff members met with officials from the Thai Ministry of Finance. The
                            staffers told the Thai government officials that there was no likelihood
                            of Congress passing proposed legislation that would preclude the use of
                            section 301 on behalf of cigarette exporting companies.


USTR and State              USTRand State Department officials were not opposed to congressional
Department Officials Do     representational activities. A USTRofficial claimed that she did not
                            object to these activities provided that they were consistent with USTR’S
Not Object to               negotiating position. A State Department official contended that the
Congressional               information conveyed to foreign officials, as during the October 1989
Representational            visit cited above, “served to reinforce what the embassy and Washing-
Activities                  ton have been telling the Thais on cigarettes.”


Representational            US. cigarette exporting companies have sought to influence cigarette
Activities by U.S.          trade policies in several ways. Senior executives from the three major
                            U.S. cigarette exporting companies have met frequently with U.S. and
Cigarette Industry          foreign government officials. Also, the CEAhas offered market and tech-
                            nical information to U.S. government officials and trade negotiators.
                            Moreover, the two largest U.S. cigarette exporting companies have
                            retained former senior White House officials as consultants to promote
                            their interests in Taiwan and Korea.


The U.S. Cigarette Export   The CEA is a not-for-profit corporation chartered in Delaware in 1981 aIts
Association                 membership is comprised of the three largest U.S. cigarette exporters-
                            Philip Morris, Inc., R.J. Reynolds Tobacco Company, and Brown & Wil-
                            liamson Tobacco Corp. According to its by-laws, the CEA“shall take such
                            measures as it deems appropriate to improve the competitive position of
                            U.S.-produced cigarettes in foreign markets.”




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                           CEAexecutives met frequently with U.S. government officials during the
                           cigarette market-opening negotiations with all four of the targeted coun-
                           tries. These meetings have taken place at U.S. embassies and in Wash-
                           ington. In addition to facilitating the flow of technical and market
                           information to U.S. government officials, these meetings served to main-
                           tain the high visibility of cigarette trade issues. CEAexecutives have also
                           met with senior foreign government officials. In at least one instance, a
                           CEA executive met with the Prime Minister of Thailand.




Former Senior White        Two of the major U.S. cigarette exporting companies have retained for-
House Officials Employed   mer senior White House officials to represent their interests in gaining
                           access to foreign markets. The consultants met with senior government
as Consultants by U.S.     officials in Taiwan and Korea and discussed possible commercial ven-
Cigarette Companies        tures between their client companies and the local tobacco monopolies.
                           These discussions were generally unsuccessful, and the consulting
                           arrangements were terminated in the mid-1980s. Such representational
                           activities by former senior White House officials are not prohibited by
                           law.


                           We have found no evidence to indicate that USTRhas given preferential
USTR Does Not              treatment to the section 301 tobacco product cases. Section 301 does not
Appear to Give             exclude tobacco products from its application. The first section 301 case,
Preferential               dealing with cargo preference issues, was based on an industry petition
                           filed on July 1, 1975. It was not until more than 3 l/2 years later, on
Treatment to Tobacco       March 14, 1979, that the first tobacco product section 301 petition was
Products in Section        filed with usm-this became the seventeenth section 301 case.
301 Actions                The 6 tobacco product cases amount to less than 8 percent of the 79
                           total section 301 cases and about 16 percent of the 38 agricultural prod-
                           uct cases initiated through February 1990. USTRself-initiated 17 (about
                           22 percent) of the total 79 section 301 cases. USTRself-initiated two of
                           the six tobacco product cases based on explicit directions from the Presi-
                           dent. This amounts to a little less than 12 percent of the 17 self-initiated
                           cases. Initiation of the remaining four tobacco product cases was based
                           on USTRacceptance of industry petitions that met the legal requirements
                           for section 301 action. These 4 cases represent less than 7 percent of the
                           total 62 cases initiated through industry petitions.

                           USTR does not maintain records that would allow us to measure the time
                           and effort that they have spent on each of the section 301 cases. At best
                           any such measures would be imprecise. Because trade cases vary in


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                            Clupter 2
                            Accem for US. Tobacco    Pmdud   in Certdn
                            lkestrlctedhi8nMarketa




                            their complexity, they require varying amounts of UNIX time and other
                            resources for their resolution. Moreover, during the course of a given
                            section 301 action, negotiations and consultations may encompass issues
                            related to more than one trade case, further complicating an accurate
                            measure of resource expenditure.


USTR Officials Claim That   USTRdid not appear to give preferential treatment to tobacco products
the Cigarette Section 301   over other items in its efforts to remove unfair foreign trade barriers.
                            USTRofficials said that they have not given preferential treatment to the
Actions Have Not Received   resolution of the cigarette section 301 cases and claim that they have
a Disproportionate Share    not,spent a disproportionate share of their resources on these cases. We
of USTR’s Resources         found no basis on which to disagree with this statement. According to
                            USTRofficials, it is usrn’s policy that if it is petitioned by an industry
                            with a legally sound complaint dealing with unfair trade practices, it
                            would be remiss in its responsibility not to aggressively act on the peti-
                            tion. The officials told us that tobacco products are legally sold in for-
                            eign markets and, when it comes to trade negotiations, they should be
                            treated no differently than other products. Evcin if cigarettes were to be
                            viewed as toxic substances, there are no official guidelines that preclude
                            the use of section 301 to remove existing foreign import restrictions. For
                            example, certain pharmaceuticals and pesticides can be viewed as toxic
                            chemicals; nevertheless, they are traded and can take advantage of the
                            section 301 process.

                            An assistant U.S. Trade Representative involved in the cigarette section
                            301 actions told us that USTRis a complaint-driven organization, and it
                            does not look for extra business. He noted that when a section 301 case
                            is active, USTRcontinues to equally push its agenda for other products
                            and commodities. For example, in the case of Taiwan, this agenda
                            included handling merchandise trade problems, service industry
                            problems such as life insurance, the customs valuation system, and pro-
                            tection of intellectual property rights.

                            A USTRofficial stated that if the petitioner’s allegations pass “statutory
                            muster” (i.e., show clear-cut discriminatory import barriers), the case is
                            difficult to turn down. This decision was the case in both the South
                            Korea and Thailand cigarette section 301 industry petitions. The Taiwan
                            cigarette section 301 case, on the other hand, was self-initiated by USTR
                            because Taiwan failed to abide by an initial nonsection 301 agreement.

                            USTRself-initiated the cigarette section 301 action against Japan on Sep
                            tember 16,1985, based on instructions from the President. As related in


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                             Chapter 2
                             Aaxss for U.S. Tobacco   Producta   in Certain
                             ltestrltiA8janMarket8




                             his September 7, 1985, radio address, the President instructed USTR“to
                             begin investigations of unfair trading practices on the part of our trad-
                             ing partners.” The President announced trade initiatives against several
                             countries, including an investigation of restrictive tobacco product
                             import practices of Japan. An assistant U.S. Trade Representative told
                             us that in late 1985, the administration was under a lot of pressure from
                             Congress, due in part to the growing trade deficit, to demonstrate that it
                             was taking more aggressive action throughout the world to market U.S.
                             commodities. Thus, the government began an aggressive campaign to
                             solve longstanding trade problems. The Trade Policy Review Group
                             identified obvious unfair trade practices where the U.S. government
                             could self-initiate and aggressively pursue section 301 actions.


Section 301 Actions Were a   The U.S. cigarette companies had been trying through various means to
Last Resort                  gain access to the restricted cigarette markets for several years in many
                             Asian countries. They had limited success in establishing commercial
                             arrangements in some of these countries, but had been substantially
                             frustrated in their efforts to gain any significant market access in
                             Japan, Taiwan, Korea, and Thailand. According to USTRofficials, the cig-
                             arette section 301 actions were taken as a last resort and have been sub-
                             stantially successful in removing the government-imposed import
                             restrictions.


                             In the three targeted Asian countries, there were only a few reported
Few Reported                 incidents of US. cigarette companies not complying with the section 301
Instances of U.S.            trade agreements, marketing restrictions, or applicable industry codes.
Cigarette Companies          Health advocacy groups and government authorities in Taiwan and
                             Korea provided us with some examples of alleged violations in those
Violating Cigarette          countries. Moreover, we observed some possible violations by U.S. ciga-
Trade Agreements and         rette companies of the industry’s own self-regulatory code of standards
Applicable Industry          in Japan. (See app. IV for a more detailed description of cigarette mar-
                             ket restrictions in Japan, Taiwan, and South Korea.)
Code Provisions
                             In Japan, we observed that both US. cigarette companies and the Japa-
                             nese tobacco monopoly engage in advertising and promotional practices
                             that possibly violate certain industry code provisions. For example, a
                             U.S. cigarette company placed a billboard containing a picture of a
                             young woman, who appears to be smoking, near the entrance to a
                             women’s college near Tokyo. The Japan Tobacco Institute Code prohib-
                             its the targeting of women and children in cigarette advertisements.



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                          Alleged violations of the section 301 agreement in Taiwan appear to
                          result from conflicting interpretations of certain provisions of the agree-
                          ment. For example, a U.S. cigarette company planned to promote a
                          brand of cigarettes by holding a drawing for a luxury car. Although the
                          agreement allows the use of certain sales promotions, Taiwan authori-
                          ties objected primarily because they believed the prize was too costly to
                          qualify as a promotional item. The conflict stemmed from nuances in the
                          interpretation of the Chinese language version of the agreement. In
                          another instance, the Taiwan tobacco monopoly alleged that U.S. ciga-
                          rette companies violated the agreement’s point-of-sale provisions by dis-
                          tributing free cigarettes at unlicensed establishments, such as
                          discotheques and nightclubs frequented by young people. American gov-
                          ernment officials in Taiwan claimed that this practice only occurred
                          immediately after the agreement and has since been discontinued.

                          Alleged violations of the section 301 agreement in South Korea include
                          an accusation by Korean government officials that a U.S. cigarette com-
                          pany held a series of promotional beach concerts that targeted young
                          people. The agreement with South Korea prohibits advertisements
                          targeting women and children. U.S. embassy officials claimed that these
                          concerts did not violate the agreement because people of all ages go to
                          the beach. The U.S. cigarette company cancelled many of the concerts.
                          On the other hand, U.S. cigarette companies claimed that the tobacco
                          monopoly interferes with their marketing activities by harassing their
                          local retailers, tearing down point-of-sale signboards, and disrupting
                          their promotional activities.


Regulatory Environme nt   The governments of Japan, Taiwan, and South Korea attempt to control
Differs in the Three      cigarette marketing activities, including the advertising and promotion
                          of cigarettes, through various laws and regulations and through self-reg-
Targeted Countries        ulatory mechanisms, such as voluntary codes of standards, that the cig-
                          arette companies institute. The Japan agreement contains no restrictions
                          on cigarette advertising and promotional activities. Japan relies to a
                          great extent on industry self-regulation to assure compliance with ciga-
                          rette marketing guidelines, codes, and regulations. The cigarette trade
                          agreement with Taiwan contains many provisions relating to advertising
                          and promotional activities; the Taiwan authorities rely to a much lesser
                          extent than Japan on self-regulation by the cigarette industry.

                          South Korea regulates the advertising and promotional practices of ciga-
                          rette companies more heavily than either Japan or Taiwan. The ciga-
                          rette trade agreement with Korea, the most recent section 301 based


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                             Chapter 2
                             Aa!eaa for U.S. Tobacco   Producta   in Certain
                             ltedrictedhlanMsrketB




                             cigarette trade agreement, contains the most specific and comprehensive
                             provisions on cigarette advertising and promotional activities, including
                             prohibitions against targeting women and children in cigarette adver-
                             tisements and promotions.


USTR Official Maintains      A USTRofficial maintains that section 301 based trade agreements are
                             government-to-government agreements, whereby the foreign govem-
That U.S. Government Is      ment agrees to remove certain unfair trade barriers and the U.S. govem-
Not Responsible for          ment in return terminates the section 301 action. The official further
Assuring Compliance With     states that the USTR does not consider the government to be responsible
Foreign Cigarette            for monitoring or enforcing compliance by U.S. companies with terms of
Marketing Restrictions       the agreements, which may restrict activities of the U.S. companies, or
                             with any applicable foreign laws, rules, or regulations. According to the
                             official, compliance, oversight, and enforcement are the responsibilities
                             of the foreign government or its instrumentalities. The only monitoring
                             responsibility that USTRhas is to track foreign government compliance
                             with its obligations under an agreement.


U.S. Government and          In response to growing antismoking movements, health ministry offi-
Cigarette Exporting          cials in Japan, Taiwan, and South Korea have proposed expanding their
                             restrictions on cigarette advertising and promotional activities;
Companies Resist Furthe lr   strengthening requirements for health caution.labels; and, where appli-
Restrictions on Cigarette    cable, reflecting these new restrictions in amendments to the section 301
Marketing                    based cigarette trade agreements. In certain cases, U.S. cigarette compa-
                             nies, with the assistance of U.S. government officials, have opposed
                             these efforts because they believe that the proposed changes would
                             unfairly discriminate against U.S. cigarette manufacturers. Some of
                             these efforts are discussed below.


Japan                        In mid-1989, based on recommendations from an advisory committee,
                             the Japanese Ministry of Finance was considering whether to further
                             restrict cigarette TV advertising, require more stringent health caution
                             labels on cigarette packs, and restrict the use of outdoor cigarette vend-
                             ing machines. A USTR official, acting at the request of US. cigarette com-
                             panies, asked the Ministry of Finance to delay the implementation of the
                             new regulations. The United States viewed the proposed regulations as
                             discriminatory because they worked to the disadvantage of new
                             entrants into the market. According to a U.S. embassy memorandum, a
                             meeting between a USTRofficial and the Ministry of Finance probably
                             resulted in the ministry’s decision to phase in the television advertising


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                restrictions over 2 years, rather than implementing the regulation imme
                diately as the advisory group had recommended.


Taiwan          During 1988 consultations with American Institute in Taiwan officials,
                the Taiwan authorities stated their intent to amend the section 301
                agreement in order to ban cigarette promotional activities and magazine
                advertisements. According to records of the consultations, this ban was
                sought because the Taiwanese were concerned about the negative effect
                of cigarette advertising on young people and women. They cited the
                results of a study noting an increase in the number of young smokers
                and women smokers since implementation of the agreement in 1987.

                Based on the belief that any changes to the agreement would limit the
                competitiveness of U.S. cigarettes, American Institute in Taiwan offi-
                cials argued against such a ban and also against changes to the agree-
                ment’s provisions on advertising and promotions. The officials believed
                that Taiwan authorities were using the cigarette advertising and promo-
                tion issue to avoid discussions of other market issues, such as excise
                taxes. To addreesthe concernsof Taiwan officials, the US, cigarette
                industry proposed the establishment of a self-regulatory industry asso-
                ciation and advertising code similar to those operating in Japan.


South Korea     Through a change in regulations, the Korean government strengthened
                health warning labels for domestic and imported cigarettes in late 1989.
                Both the U.S. government and U.S. cigarette companies have accepted
                this change without raising any market access issues.


Thailand        With certain minor exceptions, such as airport duty free shops, the sale
                of foreign cigarettes in Thailand is prohibited. In April 1988, the Thai
                government ordered the tobacco monopoly to discontinue cigarette
                advertising. The Thai government claims that foreign cigarette compa-
                nies continued to advertise, and so, in February 1989, the government
                totally banned cigarette advertising. Despite the exclusion of foreign cig-
                arettes from the market and the total ban on cigarette advertising, the
                Thai government alleges that foreign cigarette companies continue to
                advertise. Thai officials provided us with the following examples:

              . A billboard that reads “WINSTON - American Country Life Style” was
                placed in a well-known night life section of Bangkok;



                Page 28                                          GAO/NSIAJMO-190   Trade and Healtl~ huea
    chapter 2
    Accem for U.S. Tobacco Producta   ln Ceti
    He&&ted   Adan Marketa




. A billboard that reads “WINSTDN” was erected at a motor speedway in
  Pattaya;
l Tickets to attend “Winston Cup” racing are given to customers at gas
  stations;
l A “Salem” billboard was erected at the Pro-Am Golf Championship held
  on February 28,199O; and
l A “Benson & Hedges” billboard was erected at a cricket game in Chieng
  Mai.

    During our visit to Thailand, we observed some of these advertisements.
    A high level Public Health Ministry official told us that all of these
    infractions have been submitted to the Thai Consumer Protection Board
    for legal action.




    Page 28                                     GAO/lWIABWl9O   Trade and Health   Iema
Chapter 3

Health Considerations of Cigarette
Market Access

                                According to the Surgeon General’s 1989 report, the prevalence of smok-
                                ing among adults in the United States decreased from 40 percent in 1966
                                to 29 percent in 1987. It appears that to help offset this decrease in U.S.
                                cigarette consumption, the major US. cigarette companies have sought
                                market opportunities abroad. In recent years they have focused their
                                attention on certain Asian countries, such as Japan, Taiwan, and South
                                Korea.

                                At the same time, these countries are becoming increasingly aware of
                                the health consequences of smoking. As cigarette consumption increases
                                in these countries, there has been an increased prevalence of smoking-
                                related illnesses such as lung cancer and heart disease. To the extent
                                that the introduction of U.S. cigarettes to these markets and any associ-
                                ated increase in advertising have contributed to an increased incidence
                                of smoking, U.S. trade actions contribute to these adverse health
                                impacts.

                                Overall smoking rates for Japan, Taiwan, and South Korea are higher
                                than those in the United States. While the smoking rates in Japan have
                                gradually declined, the overall consumption rates in Taiwan and South
                                Korea continue to rise. Smoking rates for women in these countries are
                                substantially lower than for men.

                                The increased incidence of smoking in Taiwan and South Korea is gener-
                                ally attributed to a number of variables, including changes in social val-
                                ues, consumer tastes and preferences, rising incomes, and increased
                                advertising since the introduction of U.S. cigarettes.

                                The role advertising plays in affecting demand for cigarettes in these
                                three countries is controversial. On the one hand, cigarette industry rep-
                                resentatives told us that advertising plays no role in attracting new
                                smokers; it only affects switching between brands. On the other hand,
                                health advocates argue that advertising plays a key role in attracting
                                new smokers, especially those from young and female population
                                groups.


                        The current smoking trends in Japan, Taiwan, and South Korea can be
Current Smoking
Trends in the Targeted summarized    asfollows’
Asian Countries       . The smoking  population of Japan has declined significantly. In 1975,
                        76.2 percent of the adult male population were smokers. By 1988, the
                                percentage had dropped to 61.2 percent, according to Japan Tobacco



                                Page 30                                 GAO/NSIADfJO-130   Trade and Health   Issuee
                           chpter3
                           Health CQ~tloIul   of cigarette
                           MuketAccaa




                           Incorporated. During the period between 1982 and 1987, the total num-
                           ber of smokers in Japan fell 7.3 percent. While smoking rates have
                           declined substantially for men, the overall rate for women has remained
                           relatively constant at between 12 and 16 percent. Because smoking is
                           illegal for minors, the government does not collect data on smoking rates
                           for people under age 20.
                       l   For Taiwan, good data are not available on the percentage of the popu-
                           lation that smokes. Estimates of the prevalence of smoking for men
                           range from 60 to 66 percent, and for women from 2 to 7 percent. Better
                           statistics exist for actual consumption, which shows an increase of 20
                           percent from 1982 to 1988. Furthermore, consumption statistics are mis-
                           leading because estimates of the large quantities of contraband ciga-
                           rettes smuggled into Taiwan are not included.
                       l   The South Korean cigarette market was characterized by growth
                           between 1982 and 1986, although the rate of growth decreased. Indus-
                           try experts had predicted that the market would plateau. However,
                           after cigarette import restrictions were removed in 1988, South Korean
                           consumption rose 6 percent over the 1987 level. According to a Gallup
                           poll, 74 percent of Korean men smoked in 1987, up from 68 percent in
                            1982. Another private survey found that 71 percent of men and 19 per-
                           cent of women smoked, and smoking rates for male teenagers rose from
                            18.4 percent in 1988 to 29.8 percent in 1989. For female teenagers, the
                           rates rose from 1.6 percent to 8.7 percent during that same time period.

                           These changes in the incidence of smoking are attributed to a number of
                           socioeconomic factors as well as to the altered marketing environment
                           following the removal of import barriers.


                           The sharp rise in disposable income associated with rapid economic
SocioeconomicFactors       growth in Japan, Taiwan, and South Korea has made an increase in
                           smoking economically feasible.

                           In addition, as a result of industrialization, the traditional role of women
                           is changing in those countries. Changes can be seen in relationships at
                           home, in school, and in the workplace. More women are entering the
                           work force, thereby providing them with the independence and disposa-
                           ble income with which to buy luxury items such as cigarettes. For exam-
                           ple, according to a health advocacy group in South Korea, women who
                           have moved to Seoul from rural areas have an increased incidence of
                           smoking.




                           Page 31                                 GAO/NSIADtWl9o   Trade and Health   Ismww
                       Chqter  3
                       Health Considerationa   of Cigarette
                       Market Aecese




New Cigarette          ber of sophisticated marketing techniques appear to have been adopted.
Marketing Strategies   Prior to the market openings, cigarette monopolies had control of the
                       cigarette industry, including production and distribution. Most of these
                       monopolies advertised little, if at all, because competition was minimal.
                       Moreover, there is little evidence that cigarette advertising targeted at
                       specific population groups, such as women, existed prior to the market
                       Openings.
                       Since the markets we studied have opened to foreign cigarettes, market-
                       ing has changed significantly. For example, in Japan, U.S. cigarette
                       firms introduced sophisticated advertising. Japan Tobacco Incorporated
                       responded by upgrading and increasing its own advertising. Japanese
                       television advertising of cigarettes rose significantly in both frequency
                       and length within 1 year after the trade agreement was signed. For
                       example, sources we identified indicated that cigarette commercials, in a
                       large Japanese district which includes Tokyo, went from 138th in total
                       air time in 1983, to 16th in 1987, to 11th in 1989.

                       In Taiwan, as a result of the terms of the section 301 agreement, the
                       Ministry of Economic Affairs has proposed a set of regulations to enact
                       specific restrictions on cigarette advertising. These regulations, which
                       have not yet been enacted, include a ban on special promotions and on
                       television, radio, and newspaper advertising. According to the section
                       301 agreement, only magazine and point-of-sale advertisements can be
                       used. Disputes have occurred between U.S. cigarette companies and the
                       Taiwan tobacco monopoly concerning the interpretation of the new
                       advertising restrictions, Taiwan tobacco monopoly officials claim that
                       the U.S. cigarette companies target women in their advertising cam-
                       paigns and use promotional activities such as sponsoring athletic and
                       cultural activities to encourage smoking. One measure of the impact of
                       imported cigarettes is that a 1987 survey of teenage smokers conducted
                       by the John Tung Foundation, a local antismoking organization, found
                       that 80 percent of those polled prefer imported cigarettes.

                       In 1987, according to the CEAsection 301 petition to the USTR,South
                       Korea banned all cigarette advertising and promotional activities, with
                       the exception of certain point-of-sale advertisements. However, the 1988
                       section 301 cigarette market-opening agreement with South Korea
                       allows restricted cigarette advertising and promotional activities. Since
                       the market opening, the Korean tobacco monopoly has developed and
                       marketed cigarette brands intended for women, such as “Lilac,” “Jade,”
                       and “Rose.” U.S. cigarette companies have also introduced brands into



                        Page 32
                     wt.-3
                     Health conddemtloM   of tlgarette
                     lbfarketAcan




                     the Korean market targeted to women, such as “Finesse” and “Virginia
                     Slims.”

                     A combination of factors-industrialization,    more women entering the
                     work force, new marketing techniques-are      generally viewed as con-
                     tributing to the changing cigarette consumption patterns in Japan, Tai-
                     wan, and South Korea. It will be some time before the full impact of the
                     opening of these markets can be determined. However, increased smok-
                     ing in segments of the population in which smoking incidence had his-
                     torically been low has been identified by antismoking groups as an area
                     of concern.


                     Concurrent with the success of U.S. market access efforts, there has
Antismoking          been an increased awareness in Asia of the health consequences of
Awareness Has        smoking. The governments in the targeted Asian countries are aware
Intensified in the   that smoking has decreased in the United States over the past 26 years,
                     that use of cigarettes in the United States is lowcompared to rates in
Targeted Asian       their countries, but that U.S. cigarette exports have increased to their
Countries            countries. More and more, cigarette smoking is being identified as a sig-
                     nificant factor in the incidence of lung cancer and heart disease.

                     Grassroots health groups formed in the late 197Os-1980s in Japan, Tai-
                     wan, and South Korea and gained greater support after the markets
                     opened to foreign cigarettes. However, U.S. cigarette exporters have
                     alleged that the health issue has been used by the governments of these
                     countries as a pretext for protecting their national cigarette monopolies.
                     These monopolies have been an important source of government reve-
                     nue and employment. USTRofficials also believe that these governments
                     are using the health issue as a pretext for protecting national
                     monopolies.

                     The Japan Action on Smoking and Health (JASH) was formed in 1978 to
                     increase the public awareness of nonsmokers’ rights. JASH has had some
                     limited success in getting smoking restricted in public places. It has
                     developed antismoking educational programs and actively pursues the
                     abolition of cigarette advertising on television and cigarette sales
                     through vending machines,

                     The antismoking movement was strengthened in 1987 when Japan
                     hosted the Sixth World Conference on Smoking and Health in Tokyo, a
                     meeting of international antismoking groups, including WHO and various
                     U.S. health organizations. The conference agreed to a public resolution



                     Page 33                                 GAO/NBIAD90-130   Trade and Health   Immes
chapters
Health Ckmsiderationa   of Cigarette
Market Acceae




stating that tobacco should be treated differently from other products in
international trade because of its adverse health effects.

In Taiwan, the John Tung Foundation was formed in 1984. Its primary
objective is to teach young people about the dangers of smoking. For
example, the Foundation hosts no-smoking clubs and parties for high
school and university students. The Chairman of the John Tung Founda-
tion established and provided initial funding in early 1989 for an Asian
antismoking group called the Asian Pacific Association for the Control
of Tobacco. This pan-Asian group is currently active in trying to prevent
USTRfrom opening Thailand’s cigarette market to U.S. exports.

In South Korea, the Korean Association on Smoking and Health (KASH)
was formed in 1988, the same year the market opened to foreign ciga-
rettes. KASH publishes articles, brochures, and newsletters and sponsors
conferences concerning the dangers of smoking. This association submit-
ted a proposal to the Ministry of Health that would require that all pub-
lic places maintain separate smoking and nonsmoking areas. The
Ministry of Health announced the proposal to Parliament in 1989.

The Seventh World Conference on Tobacco and Health was held in
Perth, Australia, in April 1990. Participants from 70 countries attended.
According to some of the participants, it is apparent that the interna-
tional antismoking movement is growing and uniting in its efforts to
decrease worldwide cigarette consumption. The conference participants
agreed to two resolutions dealing with tobacco product trade. The first
resolution urges nations “not to use trade leverage to compel other
nations to repeal .., restrictions on the ... manufacture, import, distribu-
tion, sale or advertisement of tobacco products, and specifically the U.S.
government is called upon to cease pro-tobacco trade actions against
Thailand and other countries.” The second resolution “urges GATT to
acknowledge that tobacco products are uniquely hazardous and that
nations have the right to tax, prohibit or restrict the manufacture,
import, distribution, sale or advertisement of tobacco products.”

According to a presentation at the Perth Conference by a U.S. govern-
ment official, premature deaths from smoking are currently 2.6 million
per year. A WHOepidemiologist projected an increase in mortality due to
increases in smoking. He predicted that during the 1990s there would be
about 3 million deaths a year from smoking. But, by the time the young
people of today reach middle age, increased smoking would lead to
about 10 million deaths per year.




Page 34                                 GAo/‘NsuDm1eo    Trade 8nd Health   ImolIea
                   Ckapter 3
                   He&k conlJldemtloM   of cigarette
                   Market A-




                   The American Cancer Society presented GWBALINK at the conference.
                   GI0BALINK is a plan for a computer-based system tracking worldwide
                   smoking, mortality and morbidity rates, smoking control activities, and
                   tobacco industry activities. The Cancer Society will be providing techni-
                   cal assistance to developing countries on how to participate in the
                   GIGBALINK plan.

                   Because of the growth of antismoking sentiment in Asia, the ongoing
                   section 301 cigarette case directed at Thailand is receiving a lot of media
                   attention in both the American and Thai press. Much of the activity at
                   the conference in Perth included reference to the ongoing Thai section
                   301 case.


                   Responding to growing health concerns over smoking, Congress has
U.S. Antismoking   passed a number of laws that have restricted the marketing and use of
Efforts            tobacco products. In addition, the U.S. government has supported
                   increased education, both domestically and internationally, about the
                   health implications of tobacco use.

                   In 1966, Congress enacted the Cigarette Act requiring all cigarette pack-
                   ages (not including cigarette advertisements) to include the statement:
                   “Caution: Cigarette Smoking May Be Hazardous To Your Health.” This
                   caution was strengthened in the 1970 Cigarette Labeling Act to read:
                   “Warning: The Surgeon General Has Determined That Cigarette Smoking
                   Is Dangerous To Your Health.” Congress also enacted a ban on all ciga-
                   rette advertising on television and radio, effective January 1971.

                   In 1982, Congress increased the excise tax on cigarette products for the
                   first time since 1961, raising the per-pack tax charged from 8 cents to 16
                   cents. Two years later, Congress enacted the Comprehensive Smoking
                   Education Act, which required (1) replacing the existing health caution
                   warning with four stronger, more specific health warnings on cigarette
                   packages, cigarette advertisements, and cigarette billboards; (2) creating
                   a statutory mandate for a federal office on smoking and health; and (3)
                   disclosing to the Department of Health and Human Services all chemi-
                   cals and other ingredients added to cigarettes during the manufacturing
                   process. In 1987, Congress banned all smoking aboard commercial air-
                   craft on all flights of 2 hours or less. And, in 1989, Congress extended
                   the ban on smoking aboard commercial aircraft to include all domestic
                   flights, except those to Alaska and Hawaii, regardless of the length of
                   the flight.




                   Page 36                                 GAO/NsuDso-130   Tmde and Eiealth hmm
HITShas the lead role in the U.S. government’s efforts in the area of
smoking and health. It chairs the statutorily established Interagency
Committee on Smoking and Health, which advises the Secretary of HHS
on a wide range of these issues, including the international health impli-
cations of tobacco use. The 1989 Surgeon General’s Report reported that
HHSexpenditures on smoking and health prevention activities amounted
to $39.6 million for fiscal year 1986.

The Office of Smoking and Health, under the Assistant Secretary for
Health, is the focal point for all HHSactivities related to smoking and
health. That office, with a 1990 budget of $3.4 million, coordinates HHS
smoking prevention education and research efforts both nationally and
internationally.

At a recent World Conference on Tobacco and Health, the Assistant Sec-
retary for Health made the keynote address, which strongly criticized
the marketing activities of transnational cigarette companies in develop
ing countries. Also, the Secretary of HITShas recently publicly addressed
the health consequences of smoking and criticized the marketing tech-
niques and strategies of cigarette companies.

The United States also supports the efforts of international organiza-
tions to curb tobacco use through its membership in and financial sup-
port of WHO.As a member of WHO,the United States contributes 26
percent of the total WHO budget. WHOhas established a global program to
discourage tobacco use and bring greater awareness of the health conse-
quences of smoking. WHO’Sbudget for 1990-91 for antismoking programs
is about $1.2 million.

Furthermore, a U.S. government agency with international programs,
the Overseas Private Investment Corporation (OPIC), has established a
policy that recognizes the dangers of smoking. OPIC encourages and facil-
itates private U.S. investment in developing countries by providing
loans and political risk loan guaranty insurance. In 1984, OPIC estab-
lished a policy that requires consideration of the health consequences of
smoking cigarettes in evaluating requests for 0PIc support. As a result,
OPIC has denied assistance to U.S. cigarette companies wishing to pro-
mote their enterprises overseas. This policy decision was made because
of the Surgeon General’s concerns about the health and economic conse-
quences of smoking.

Concerns have been expressed that U.S. policy and programs for assist-
ing the export of tobacco and tobacco products work at cross purposes



Page 36                                GAO/‘NSIAIMMb130   lhde   and Health   Istmee
                ckapter 3
                Health (.hudderationa   of C@rette
                Market A-




                to U.S. health policy, both domestically and internationally. In Septem-
                ber 1989, the former Surgeon General, C. Everett Koop, testified at a
                WTR hearing on the Thailand cigarette case, and was critical of U.S.
                tobacco trade policy because it does not include consideration of the
                health impact of that policy. He stated that he believes the inconsistency
                between U.S. tobacco trade policy and U.S. health policy is obvious and
                works against U.S. interests in the international health community. He
                added that the United States is in the process of reversing its positive
                influence in the cause of public health through its aggressive tobacco
                trade policy, and that this trade policy is “all the more questionable”
                because the United States is taking a firm public health stand domesti-
                cally against tobacco use.


                The U.S. government’s role in helping the export of cigarettes and other
Matters for     tobacco products raises important policy issues. On the one hand, the
Congressional   government is committed to help U.S. exporters overcome foreign mar-
Consideration   ket barriers to the export of legal products. On the other hand, the US.
                government has determined that smoking is hazardous to health and is
                actively working to reduce smoking and the use of other tobacco
                products.

                If Congress believes that trade concerns should predominate, then it
                may choose to do nothing to alter the current trade policy process. The
                U.S. government can simultaneously continue to actively help U.S. ciga-
                rette exporters overcome foreign trade barriers while promoting aware-
                ness of the dangers of smoking and further restricting the circumstances
                in which smoking may take place.

                If Congress believes that health considerations should have primacy,
                Congress may choose to grant HHSthe responsibility to decide whether
                to pursue trade initiatives involving products with substantial adverse
                health consequences.

                Alternatively, rather than having one policy dominate, Congress may
                specifically require that health matters be included in the interagency
                trade policy process so that health issues receive some consideration on
                a case-by-case basis. Such a change would necessitate that HHSpartici-
                pate in the interagency trade policy decision-making process.




                Page 37                                 GAO/NMAD@@l80   Trade and Health   Imaws
Appendix I

Impact of Increased U.S. Cigarette Ekports on
U.S. Tobacco Farmers

                        Tobacco and tobacco products are produced and traded throughout the
Global Tobacco          world. About 30 percent of the world’s tobacco production is traded
Situation               internationally. World production of tobacco was about 6.3 million met-
                        ric tons in 1989. While China was the largest producer of tobacco in
                        1989, with about a 40 percent share, the United States was the world’s
                        leading exporter of tobacco, accounting for about 15 percent of world
                        tobacco exports. Other major producers of tobacco and their shares in
                        1989 were the United States (9 percent), India (7 percent), Brazil (6 per-
                        cent) and the Soviet Union and Turkey (3 percent each). Other major
                        exporters of tobacco and their shares in 1989 were Brazil (14 percent),
                        Greece (9 percent), and Zimbabwe, Italy, and Turkey (8 percent each).

                        Cigarette production accounts for about 85 percent of the products man-
                        ufactured from tobacco. World cigarette production was about 5.3 tril-
                        lion in 1988. About 8 percent of world cigarette production is exported.
                        China was the largest producer of cigarettes in 1988, with about a 29
                        percent share, but the United States was the largest exporter of ciga-
                        rettes, accounting for about 26 percent of world cigarette exports. Other
                        major producers of cigarettes and their shares in 1988 were the United
                        States (13 percent), the Soviet Union (7 percent), and Japan (5 percent).
                        Other major exporters of cigarettes and their shares in 1988 were Bulga-
                        ria (16 percent), the Netherlands (13 percent), West Germany (10 per-
                        cent), Hong Kong (9 percent), and the United Kingdom (8 percent).


                        In 1987, tobacco was grown on about 137,000 farms in the United
U.S. Domestic Tobacco   States, with an average of about 5 acres per farm. This was a decrease
Situation               in the number of farms from about 179,000 in 1982 and about 500,000
                        in the 1950s. There are several kinds of tobacco grown on U.S. farms,
                        with flue-cured and burley-both      cigarette tobaccos-accounting for
                        over 90 percent of total production.

                        Tobacco is the sixth largest U.S. cash crop, after corn, soybeans, wheat,
                        hay, and cotton. In 1988, farmers received about $2.25 billion at auc-
                        tions for their tobacco. However, consumer spending for tobacco prod-
                        ucts was about $38 billion in 1988. (only about 6 percent of the price of
                        a pack of cigarettes reflects the price of the tobacco leaf in the ciga-
                        rettes.) From these sales, an estimated $9.3 billion in taxes was collected
                        in 1988-$4.4 billion by the federal government and $4.9 billion by state
                        and local governments.

                        The Agricultural Adjustment Act of 1933 established price supports
                        that guarantee established prices to the growers if they adhere to strict
                        marketing quotas or acreage allotments that restrict production. The


                        Page 33                                 GAO/TWADW190    Trade and Health   Imms
                       Impact of Immmaed U.S. Cigarette   Exportd   on
                       U.S. Tobacco Famma




                       price support activities are administered by producer-owned coopera-
                       tive associations through loan agreements with the Commodity Credit
                       Corporation (ccc). Under these agreements, the association uses the ccc
                       loans to pay the growers the support price and the costs to process and
                       store the tobacco until it is sold. According to the U.S. Department of
                       Agriculture (USDA),the growers have benefited from the higher prices
                       they receive because of the marketing quotas and price supports, and
                       the cigarette manufacturers have been assured adequate supplies of the
                       types and qualities of leaf needed for their product. Since 1982, the pro-
                       gram has been operated on a “no net cost” to the government basis.
                       Farmers and cigarette manufacturers now pay a special assessment into
                       a cxx account to cover the cost of the price support program. USDAesti-
                       mates that the federal government spent $56 million in fiscal year 1988
                       for administering the price support program and providing a variety of
                       research, marketing, and information services to tobacco growers.


                       Despite reduced domestic cigarette consumption, U.S. production of
U.S. Tobacco Farmers   tobacco has risen in the last 4 years: 29 percent for flue-cured tobacco
Benefiting From        and 38 percent for burley tobacco, the primary tobaccos used in U.S.
Increased Cigarette    cigarettes. These tobacco production increases were partly caused by
                       the large rise in U.S. cigarette exports, which grew from about 64 billion
Exports                cigarettes in 1986 to about 142 billion cigarettes in 1989. About 55 per-
                       cent of this increase is attributable to imports of U.S. cigarettes by
                       Japan, Taiwan, and South Korea. Therefore, it would appear that not
                       only have the cigarette manufacturers benefited from the increased U.S.
                       exports, but also the U.S. tobacco growers have gained from the greater
                       U.S. cigarette exports. In addition, since US. tobacco is considered to be
                       the finest quality in the world, exports of U.S. tobacco leaf to these
                       countries have also increased since 1986; Japan, Taiwan, and South
                       Korea are now using more US. tobacco to improve the quality of their
                       domestically produced cigarettes to compete with foreign imports.

                       We have reviewed a number of studies performed by the USDA’SEco-
                       nomic Research Service and Foreign Agricultural Service, the cigarette
                       industry, and academia, and have interviewed a number of tobacco
                       industry officials to determine whether the U.S. tobacco grower has ben-
                       efited from the increased cigarette exports. Some tobacco industry offi-
                       cials had expressed concern that these increased cigarette exports could
                       have an adverse impact on U.S. shipments of tobacco leaf. However,
                       these studies conclude that, thus far, the U.S. growers have benefited.




                       Page 39                                           GAO/NSIAD-9&199   Trade and Health   Ismws
Appendix I
lmpct   of In-       US. Cigarette   Fhporta   on
U.S. Tobacco Farmera




For example, a Foreign Agricultural Service study of the tobacco trade
with Japan, South Korea, and Taiwan following trade liberalization con-
cluded that

“...tobacco exports in the form of cigarettes do have a positive impact on the net
tobacco trade balance. However, it cannot be concluded that exports of tobacco in
cigarettes are displacing or substituting for leaf shipments.”

[Text omitted.]

“Still it appears that U.S. leaf tobacco exports have benefited incidentally from
expanded cigarette exports to these markets. Cigarette manufacturers in these
countries have shown greater interest in U.S. leaf tobacco as new cigarette brands
using more US. leaf are being developed to compete with the US. cigarette brands,
Indeed, this has led to increased purchases of U.S. tobacco in Taiwan and South
Korea.”

A September 1989 study by the Tobacco Merchants Association con-
cluded that the liberalization of the Japanese, Taiwan, and South
Korean markets has resulted in multimillion dollar and multimillion
pound net gains in leaf sales to the U.S. producers. The study stated that

“Specifically, over the period 1986-88 the study shows that U.S. leaf producers sold
over 108 million pounds more tobacco leaf than would have been sold had there
been no US. cigarette market entry in Japan, Taiwan, and Korea. Valued at more
than 8 176 million on the auction floor, such net additional U.S. tobacco leaf exports
include both a negative total leaf impact in Taiwan for flue-cured as well as a nega-
tive direct leaf impact for Japan....”

“As U.S. cigarette exports gain an even greater foothold in Asia, one would expect
that the foreign monopoly demand for direct burley shipments, along with high
quality U.S. flue-cured, will grow as the monopolies compete head-to-head against
U.S. cigarette blends.”

Also, in an August 1989 study of the effects of the U.S. cigarette export
market on U.S. burley tobacco demand, the University of Kentucky, Col-
lege of Agriculture, Cooperative Extension Service, concluded that

“With U.S. cigarette consumption projected to decline another 20-26%by the year
2000, the importance of the international market for the U.S. burley tobacco indus-
try is obvious. Unmanufactured U.S. burley leaf exports have exhibited some
growth during the 198Os,but the major area of growth has been in manufactured
form through the U.S. cigarette export market. U.S. cigarette exports increased 66%
in 1987, 18% in 1988, and 23% during the first quarter of 1989 as U.S. cigarette
manufacturers benefited from the removal of various trade restricting barriers in
several Asian markets. As a result, U.S. burley quotas increased 2% in 1988, 24% in
1989, and are projected to increase again in 1990.”



Page 40                                             GAO/NSIADWlsO   Trade and Hedth   Inws
      Impactof IncreaMAU.S.clgarelzeExport8on
      U.S. Tobacco Farmem




      [Text omitted.]

      “Therefore, it appears that the international consumption of U.S. burley will con-
      tinue its increasing trend leading into the 21st century, combating the expected
      decline in domestic U.S. burley consumption and putting upward pressure on the
      U.S. burley quota.”

      An executive of the Tobacco Growers Association of North Carolina told
%.    us in December 1989 that the flue-cured tobacco growers are currently
 -E   in the most stable situation they have been in over the past 20 years and
      that increased cigarette exports have a lot to do with it. He stated that
      the flue-cured tobacco quotas have risen over the past 3 years, and the
      projected 1990 effective quota is also higher. Total tobacco sales for
      1989 rose 3 percent over 1988 sales, and the “average over support
      price” rose from $17.17 to $20.72 per 100 pounds, and only 3 percent of
      total tobacco available for sale went into stabilization stocks.

      He believes there will be fewer fluctuations for the tobacco growers
      than in the past during the next 10 years because (1) there is a commit-
      ment from cigarette manufacturers to buy more US. tobacco, (2) there
      are new markets for U.S. tobacco and cigarettes, for example, in the
      Pacific Rim, where there is a potential for growth, and (3) tobacco grow-
      ers have committed themselves to making heavy investments in equip-
      ment, fertilizers, and pesticides.

      On this same subject, a tobacco specialist from Agriculture’s Economic
      Research Service told us in April 1990 that between 1986 and 1990,
      tobacco production will likely have increased about 360 million pounds.
      Grower incomes rose, and the grower’s expense of no-net-cost assess-
      ments were smaller. According to the tobacco specialist, more tobacco is
      being used largely because of higher U.S. cigarette production resulting
      from growth in U.S. cigarette exports. A rough estimate is that about
      one-quarter of the increase, or about 86 million pounds of tobacco, may
      be attributed to rising cigarette exports. The specialist also stated that
      because U.S. consumption is declining, any future production increase
      beyond 1990 will likely result from increased exports of cigarettes and
      leaf.




      Page 41                                     GAO/NSIAD&I-1fJ0   Trade and Health   Issues
Appendix II

Tobacco and Tobacco Product Balance of Trade


                                      As set forth in Table Xl, the United States has exported more tobacco
                                      and tobacco products than it has imported. During the period 1986-89,
                                      the net trade surplus of the U.S. tobacco industry grew over 100 per-
                                      cent, from $2 billion to $4.3 billion. This growth was due to several fac-
                                      tors, such as the gains in disposable income in importing countries, the
                                      weakening of the U.S. dollar, the growing popularity of U.S.-blended cig-
                                      arettes, and the removal of trade barriers, especially in certain Asian
                                      countries.

                                      Specifics on the trade surplus of U.S. tobacco and tobacco products dur-
                                      ing the period follow.
Tabh 11.1:U.S. Tobacco and Tobacco
Product Trade Balance                 Dollars in Thousands
                                      All Countrier                                 1986            1987            1988              1989
                                      Ex~otts
                                        Unmanufactured       tobacco         $1209,600         $1,089,900     $1,252,800      $1,340,600
                                        Manufactured                          1,522,200        2,309,600        2,900,900      3,632,OOO
                                        Total                               $2,731,890        S3,399,500      $4,153,700     $4,972,600
                                      Imports
                                        Unmanufactured       tobacco           3609,300         3620,ooo        $557,200            550,400
                                        Manufactured                             79,500           90,500          86,100             87,700
                                       Total                                  w8a,eoo          $710,500         $643,300       $638,100
                                      Net Trade Salonce                     $2,043,W0         S2,6es,ooo      $3,510,400     $4,334,500
                                      Source: United States Department of Agriculture

Table 11.2:U.S. Tobacco and Tobacco
Product Trade Balance With Japan      Dollars in Thousands
                                                                                    1986            1987            1988              1989
                                      Exports
                                        Unmanufactured       tobacco           $232,000         3300,600        $212,ooo        $299,100
                                        Manufactured                             130,700         491,900         606,3ocJ        871,200
                                        Total                                  3362,700         $792,700       3318,300      $1,170,3W
                                      Imports
                                        Unmanufactured       tobacco                               $3,100         $6900
                                        Manufactured                                    600           600          1,100                600
                                       Total                                     $1,200           $3,700          $woo           31,100
                                      Net Trade Balance                        $361,5W          $789,ooo       $810,300      $1,169,2W
                                      Source: United States Department of Agriculture




                                      Page 42                                                 GAO/NgUD@@lQO      Trade and Health    hea
                                          AppendixH
                                          Tobaca~ and Tobacco     Product   Balance
                                          of Trade




Table 11.3:U.S. Tobacco and Tobacco
Product   Trade BalOnW With south Korea   Dollars in Thousands
                                                                                         1888           1987           1988              1989
                                          Exports
                                            Unmanufactured       tobacco                8,800                       $lO,ooo            $10,900
                                            Manufactured                                 5,700          6,100        5woo              106,400
                                            Total                                     $11,300          moo          888,400       $117,300
                                          Imports
                                            Unmanufactured       tobacco               $25,ooo        $16,700       $18,900            $5,400
                                            Manufactured                                   ooo            loo           ooo                ooo
                                           Total                                       8%~           $18,800        Sl8,900            $5,400
                                          Net Trade Balance                           t(13.7001      5(8.@00)       547.500       $111.900
                                          Source: United States Department of Agriculture.

Table 11.4:U.S. Tobacco and Tobacco
Product Trade Balance With Taiwan         Dollars in Thousands
                                                                                         1888           1987           1988              1988
                                          Exports
                                            Unmanufactured       tobacco               $41.400        $18.000        $55.4ocl      $1 lO.ooo
                                            Manufactured                                 4,400        118,600        119,200         98,ooo
                                            Total                                     $48,800       $138,800       $174,8W        $208,000
                                          Imports
                                            Unmanufactured       tobacco                                                $100           $700
                                            Manufactured                                    ioo                         ioo            i#o
                                           TotaJ                                                                       $100           $700
                                          Net Trade Balance                           S48,SW        $138,800       $174,500       $207,300
                                          Source: United States Department of Agriculture




                                          Page 48                                                 GiAO/NI3UDWlBO    Trade and Health    IMUW
U.S. Foreign Market Development Programs
for Tobacco

              The export of U.S. tobacco is assisted by three federally funded market
              development programs. They are the Department of Agriculture’s Coop-
              erator Market Development Program, the Targeted Export Assistance
              Program, and the Export Credit Guarantee-GSM 102103-programs.

              In the Cooperator Market Development Program, which was initially
              authorized by the Agriculture Trade Development and Assistance Act of
              1964, Agriculture’s Foreign Agricultural Service authorizes about 50
              private, nonprofit agricultural organizations to conduct market develop
              ment activities overseas to increase both consumer and commercial uses
              of U.S. agricultural commodities and their derivatives by overcoming
              constraints to exports. These market development activities involve
              technical assistance, trade servicing, and consumer protection. In fiscal
              year 1990, total funding for the Cooperator Program is about $35 mil-
              lion, of which about $160,000 is allocated to Tobacco Associates, the
              tobacco cooperator.

              The Targeted Export Assistance Program, which was authorized by the
              Food Security Act of 1986, is modeled after the Cooperator Program and
              was established to counter or offset the adverse effects of subsidies,
              import quotas, or other unfair trade practices of foreign competitors on
              U.S. agricultural exports. In fiscal year 1990, the program has an appro-
              priated funding level of $200 million, of which $6 million is allocated to
              Tobacco Associates.

               Through the program, Tobacco Associates provides certain countries
               with the technology, equipment, and training necessary to manufacture
               a U.S.-blended cigarette that uses significant amounts of U.S. flue-cured
               and burley tobaccos. The specific objective of these activities is to bene-
               fit the U.S. tobacco growers through (1) regular sales of U.S. tobacco to
               these countries, (2) favorable economic activity from increased exports
               of U.S. tobaccos, and (3) the establishment of new foreign markets.
               Countries where these activities are underway or planned are Turkey,
               South Korea, Taiwan, and Thailand. Agreements were entered into with
               Turkey and South Korea to develop U.S. blended cigarettes that would
               include significant amounts of U.S. tobacco.

               Agriculture’s Export Credit Guarantee Programs-GSM 102 and 103-
               were established to expand the export sale of U.S. agricultural commodi-
               ties by stimulating U.S. bank financing of foreign purchases on credit
               terms. The GSM-102 Program guarantees the repayment of credit
               extended on credit terms of up to 3 years; GSM-103 guarantees up to 10
               years. A total of 66 companies received GSMguarantee credits on 127
               million pounds of tobacco valued at $2 14 million and loan guarantees of


               Page 44                                 GAO/NF3IAD~lBO   Trade and He&h   IIWJII~S
U.S. PoAgn   Market   Development   Pmgrama
for Tobacm




about $210 million, shipped during the period October 1986 through
September 1988. Shipments of tobacco under these programs were
stopped in 1989 after $27.2 million of tobacco was shipped to Iraq fol-
lowing allegations against some tobacco exporters of mixing foreign
tobacco with U.S. tobacco and exporting it as completely U.S. tobacco.
Such activity is not authorized under the program and is the subject of a
current U.S. attorney’s investigation.




Page 46                                       GAO/NSLiIM@lfJO   Trade and Health   Imuea
Appendix IV

Cigarette Marketing Restrictions in Targeted
Asian Nations

                The first cigarette section 301 agreement was concluded in October 1986
Japan           with Japan. The terms of the agreement only relate to marketing issues
                such as tariff rates, cigarette pricing, and distribution. The agreement
                does not refer to cigarette promotional activities or to any health warn-
                ing label requirements. In fact, the section 301 agreement does not even
                contain provisions requiring the U.S. cigarette companies to comply with
                its terms.

                Shortly after the section 301 agreement was signed, the Japan tobacco
                monopoly and the foreign cigarette companies doing business in Japan
                established the Tobacco Institute of Japan. This voluntary self-regula-
                tory association attempts to oversee cigarette marketing activities by
                promoting compliance by members with established cigarette marketing
                guidelines, codes, and regulations. According to Japanese government
                officials, Japanese law requires health warning labels on cigarette packs
                and prohibits smoking by minors. These officials add, however, that the
                Japanese government has no law or regulation that governs cigarette
                advertisements or promotions. Instead, the government issues informal
                guidelines to the Tobacco Institute and relies on it to self-regulate ciga-
                rette advertisements and promotional activities.

                According to a Tobacco Institute official, the institute operates as “a
                social club” because it has no legal authority to enforce the advertising
                code. It relies on the Japanese government to enforce legal requirements
                and on its members’ own sense of professionalism to assure compliance
                with those provisions that go beyond existing laws and regulations.


                The section 301 agreement with Taiwan contains many provisions relat-
Taiwan          ing to advertising and promotional activities. Moreover, the Taiwan
                authorities rely to a much lesser extent than Japan on self-regulation by
                the cigarette industry. The section 301 agreement places restrictions on
                cigarette advertising and requires health warning labels on cigarette
                packs, but allows for special cigarette promotions and certain promo-
                tional displays.

                Soon after the agreement, the Taiwan monopoly issued regulations to
                implement the terms of the agreement. According to American Institute
                in Taiwan officials, a recent law prohibits the sale of cigarettes to
                minors and proposed legislation would prohibit cigarette companies
                from targeting minors in cigarette advertisements. U.S. cigarette compa-
                nies are currently working with USTRto establish an industry association
                and a self-regulatory advertising code for Taiwan. The Taiwan monop-
                oly officials claim that the monopoly supports the U.S.’ efforts, but it


                Page 46                                 GAO/NSIADBO-190   Trade and Healtb   Imum
              has not participated in developing the code nor agreed to join an indus-
              try self-regulatory association.


              South Korea regulates the advertising and promotional practices of ciga-
South Korea   rette companies more heavily than either Japan or Taiwan and, thus,
              relies less on self-regulation or voluntary compliance. The section 301
              agreement with South Korea contains the most specific and comprehen-
              sive provisions on cigarette advertising and promotional activities,
              including prohibitions against targeting women and children in cigarette
              advertisements and promotions. The agreement also requires health
              warnings on cigarette packs and in magazine advertisements. Cigarette
              advertising, with the exception of minor point-of-sale activity, had been
              prohibited through a March 1987 law.

              According to industry documents, the South Korean law that imple-
              ments the section 301 agreement places a few restrictions on advertising
              that go somewhat beyond the terms of the agreement. For example, cig-
              arette advertising can only inform smokers of the brand names, kinds,
              and characteristics of cigarettes. It cannot attempt to attract new smok-
              ers or violate the intentions of the health warning labels.

              A cigarette industry group consisting of the three major U.S. cigarette
              exporting companies and the South Korean tobacco monopoly has not
              developed an industry code of conduct nor become a self-regulatory
              body.




              Page 47                                GAO/NSItiIb~lSO   Trade and Health   Iameo
Appendix V                                                                                        .

Major Contributor to This &port


                        Phillip Thomas, Assistant Director
National Security and   John Bachkosky, Project Manager
International Affairs   Michael Kassack, Evaluator-in-Charge




                        Peter Koqjevich, Assignment Manager
Far East Office         Elizabeth Guran, Evaluator
                        Judith McCloskey, Evaluator
                        Raymond Ridgeway, Evaluator




(488518)                P8ge 48                                GAO/NSUD-WlSO   Trade and Health   Imm~ee
        t
    Y

.




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