Political Hurdles for International Trade Deals Promote Transparency; Proliferation of Plain Packaging Laws and Associated Disputes

In the last few months there have been several key developments in international economic law:

• The passage of both the Trans-Pacific Partnership (TTP) and Transatlantic Trade and Investment Partnership (TTIP) has been delayed due to political hurdles between the EU and the US. Local debate in the EU and US as to the benefits and costs of investor-state dispute settlement procedures (ISDS) has also arisen. While the US Congress has passed legislation to assist their adoption of the TPP, the current European political climate has made the future direction of ISDS in the EU unclear; and
• Norway has announced it will implement standardised cigarette packaging while major tobacco companies have challenged UK plain packaging laws.

Political hurdles for the TTP lifted

After hitting repeated stumbling blocks in US Congress, the Trade Promotion Authority legislation (TPA legislation) eventually made headway. On 25 June 2015, the US Senate approved the TPA legislation and on 29 June the US President signed it into law.

The TPA legislation grants President Obama the power to submit completed trade agreements to Congress for a straight up-or-down vote without the possibility of amendment. The legislation was approved in the Senate late last month, following a debate as to the merits of ISDS.

On the international front, there have been ongoing negotiations in areas of trade and investment, particularly with respect to market access and intellectual property.

The previous ministerial level meetings of TPP member countries were postponed, reportedly due to the TPA legislation not being in place. However, negotiators did meet in Guam to discuss issues of intellectual property, textiles, investment and labour. It is anticipated that the passage of the TPA legislation will facilitate the resolution of the remaining contentious issues in the TPP negotiations, which include tariffs and quota removal on agriculture, with non-tariff barrier reductions on other goods.

While major US labour unions have lobbied against both the TPA legislation and the TPP on the basis that American workers would be detrimentally affected (by, for example, displacing local manufacturing and service sector jobs), business organisations have identified the trade deal as important in ‘levelling the playing field‘ for American businesses.

Political hurdles for the TTIP and ISDS

The European Parliament’s international trade committee (INTA) has outlined a series of recommendations in support of the TTIP’s trade and investment agenda, but the EU’s preferred format of the ISDS mechanism that it will formally propose to the US is far from clear. This follows the EU’s suspension of TTIP trade talks in early 2014 for the purpose of holding public consultations that were prompted by the ‘unprecedented public interest‘ in the negotiations.

INTA has proposed an independent arbitration court with publicly appointed judges and an appellate mechanism. This model is based on proposals from the EU Commission that were released in early May 2015.

The Commission’s proposals addressed the relationship between ISDS and domestic courts, including:

• the right to regulate in the public interest; and
• improving the function of arbitral tribunals through, for example, a permanent multilateral court and appellate mechanism to arbitrate investment disputes.

These proposals were based on the ISDS mechanism contained in a trade agreement negotiated between the EU and Canada (CETA) last year. The EU Commission has stated that the CETA ISDS is both innovative in its substance and procedure.

INTA made further recommendations on investment protection provisions, which were reportedly the result of a compromise between the European Parliament’s two largest groups, the Socialists & Democrats and the European People’s Party.  INTA’s recommendations are not binding, but are indicative of whether any agreement would be approved before a full session of the European Parliament.

Tobacco plain packaging

Developments have arisen in the sphere of tobacco plain packaging disputes. In its WTO claim against Australia, Ukraine made a request to suspend proceedings. Australia has supported this request. Ukraine based its decision to suspend its action on limited resources as well as absent ‘economic logic’. Whilst it is not clear how long the suspension will last, under the Dispute Settlement Understanding, Ukraine is allowed up to 12 months before the WTO Panel’s authority will lapse.

Meanwhile, Norway issued a notification under the WTO Technical Barriers on Trade Agreement, that it is proposing a requirement for all tobacco products to be sold in standardised packaging. Norway explained that the proposal will involve ‘uniform layout and design on all tobacco packaging, as well as a ban on manufacturers’ logos, trademarks, images, colours or other forms of advertising’. It is not clear when the new requirements will enter into force.

In the UK, tobacco companies British American Tobacco and Philip Morris have challenged the legality, under both English and EU law, of the UK’s plain packaging laws before the High Court. It is argued that the laws deprive the tobacco companies of trademark rights without fair compensation as well as preventing the free movement of goods.

In a press release, British American noted that it ‘did not ultimately prevail’ in its challenge against Australia’s plain packaging laws in the High Court owing to a ‘unique requirement in the Australian constitution that meant it would only win the case if it could prove the Australian Government had received a benefit by removing its brands’. British American stated that no such requirement exists in the UK.

Kyle Dickson-Smith, FCIArb. is an international lawyer and arbitration counsel at Appleton & Associates International Lawyers, who specialises in trade law and investment treaty disputes, such as the NAFTA. The views expressed in this article are those of Kyle Dickson-Smith and are not attributable to Appleton & Associates.

This article is the second in a series that investigates and reports on the disputes over Australia’s tobacco plain packaging measure in the World Trade Organization (WTO).  Plain packaging for tobacco products has been debated intensively in the WTO for over three years and the panel is expected to continue until at least the first half of 2016 (see Australia – Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging (WT/DS 435, WT/DS 434, WT/DS 441, WT/DS 458, WT/DS 467)) (28 April 2014).

The last article examined the introduction of plain packaging legislation in Australia, the efficacy of the measure and the challenges being brought against it at the WTO.  This article examines the relationship between trade liberalisation and tobacco usage.  In doing so, it highlights the important role of international courts and tribunals, including the WTO Panel and Appellate Body, in maintaining a  coherent international legal system.

Does trade liberalisation contribute to increased tobacco usage?

During the 1980s, the US threatened sanctions and retaliation under the General Agreement on Trade and Tariffs (GATT) against Japan, South Korea and Taiwan unless they opened their markets which were closed to foreign tobacco companies.  In response to this pressure, those countries opened their markets to foreign tobacco companies, increasing their populaces’ tobacco usage.  In 1989, the US challenged Thailand’s 1966 Tobacco Act for placing limitations on American tobacco companies.  A GATT panel found against Thailand in 1990, forcing it to open its market to tobacco multinationals.

These cases illustrate how international trade agreements and state pressure have indirectly facilitated the proliferation of western tobacco in developing countries, which increases rates of smoking.  A report by the World Health Organisation (WHO Report) has found that the link between trade liberalisation and increased tobacco consumption is strongest in low and middle-income countries. The WHO Report also found that foreign direct investment (FDI) leads to higher rates of tobacco consumption.  This is because FDI is an alternative pathway to accessing a foreign market with high barriers to trade.  The finding is in line with basic trade theory, which suggests that liberalising a market will increase competition and efficiency in the supply of a product to that market.  Other factors, including marketing, tobacco advertising, promotion and sponsorship, and the international movement of contraband and counterfeit cigarettes, have also contributed to the explosive increase in tobacco usage.

In order to combat the rise of tobacco consumption and disease globally, governments have employed increasingly strict tobacco control measures.  Australia was in fact not the first country to consider plain packaging for tobacco products.  New Zealand first recommended that cigarettes be sold only in white packs with black text and no colours or logos as early as 1989.  In 1995, the Canadian parliament passed a plain packaging law which was ultimately struck down by its Supreme Court.  Presaging the negative reaction of the tobacco industry to global plain packaging reform, Phillip Morris threatened to reduce future investment in Canada in response to its plain packaging laws.  Upon the release of Australia’s draft legislation, Imperial Tobacco stated it would ‘make every effort to protect its brands and associated intellectual property and … take legal action’.  The approaches of Phillip Morris and Imperial Tobacco reflect the tobacco industry’s general position, which is to pursue every avenue to challenge implementation of plain packaging.

Regional and bilateral free trade agreements provide one such avenue for tobacco control laws to be challenged.  For example, Philip Morris Norway made a challenge under the European Economic Area Agreement against Norwegian bans on the display of tobacco products at the point of sale.

The tobacco industry is also using its rights under international investment agreements to challenge tobacco control and regulation.  In addition to the challenges made under the Australia–Hong Kong bilateral investment treaty, Philip Morris Switzerland recently brought a similar claim against Uruguay, arguing that its tobacco packaging measures violate the Switzerland–Uruguay bilateral investment treaty.

The increase in bilateral and multilateral free trade and investment agreements provides tobacco companies with a resource with which to disrupt reform.

Supporting and internationally coherent legal system

Tobacco companies are seeking redress in domestic courts, international arbitral tribunals and the WTO. The use of multiple fora is contributing to the wider dilemma of ‘conflicting rules and clashing courts’.  This poses the threat of undermining international law generally because its diversification and expansion is leading to ‘the fragmentation of international law’.

Fragmentation is characterised by Pieter Jan Kuijper as a ‘deplorable development’ which is brought about by a decrease in the application of general principles of international law in specialised jurisdictions, including WTO proceedings.  The International Law Commission (ILC), on the other hand, characterised it as a natural consequence of the expansion and specialisation of different areas of international law. Either way, WTO panels and the Appellate Body should be ensure that they interpret opposing norms harmoniously given the dangers of further fragmentation.

The ILC identifies several approaches to establish an internationally coherent legal system.  These include:

• relationships of interpretation, where one norm assists in the interpretation of another using the Vienna Convention on the Law of Treaties;
• relationships of conflict, which refers to the case where two norms that are both valid and applicable point to incompatible decisions so that a choice must be made between them; and
• the principle of harmonisation, which is a generally accepted principle that when several norms bear on a single issue they should, to the extent possible, be interpreted so as to give rise to a single set of compatible obligations.

As providing security and predictability to the multilateral trading system is an overarching goal of WTO dispute settlement, it is important that this forum is able to harmonise the conflict between international trade and domestic and global health policy.

The Framework Convention on Tobacco Control (FCTC) is important to the harmonisation process as it clarifies existing standards and key protections in relation to public health and tobacco control.

The entry into force of the FCTC in 2005 was a decisive moment for global tobacco control. It is an evidence-based treaty developed in response to the globalisation of tobacco consumption and related harm. Ratifying the FCTC places all parties under an obligation of good faith (pacta sunt servanda) to abide by the minimum legal standards outlined in the treaty and to not to undermine the objectives set out in it. In addition to minimum commitments, parties are ‘encouraged to implement measures beyond those required by this Convention and its protocols’. This is further supported by the object and purpose of the FCTC, which states that the parties are ‘determined to give priority to their right to protect public health’. As of 2015, there are 180 parties to the FCTC in contrast to the WTO with 161 members. In fact, there are just eight WTO members not party to the FCTC, two of which are challenging Australia’s measure.

Another solution may lie in mechanisms found in non-WTO treaties with trade related aspects, including multilateral environmental agreements (MEA). The Cartagena Biosafety Protocol to the Biodiversity Convention — which has seven more signatories than the WTO — not only has a provision relating directly to trade and environmental agreements, but also advances the principle of mutual supportiveness. This is a principle by which international legal rules are to be understood and applied as reinforcing each other with a view to fostering harmonisation and complementarity, as opposed to conflicting relationships.

So far, no action affecting trade and taken under an MEA has been challenged in the WTO system.  However, the WTO Trade and Environment Committee recognises that MEAs provide internationally agreed solutions for trade problems, which it says better than one country trying to change another countries’ environmental policies on its own.  It is possible that the principle of mutual supportiveness, and other trade facilitative measures, can assist the WTO Panel and Appellate Body to interpret WTO provisions in a fashion which supports international legal coherence.

The next article in the series will look at how the FCTC should be used to interpret Australia’s obligations under WTO law in a manner which is consistent with general international law.

Pauline Wilson recently graduated from an LLM at the University of Amsterdam with a focus on international trade and investment law. Prior to that she graduated from the ANU with a combined Bachelor’s of Arts and Law.

Australia was the first — and until very recently the only — country to introduce mandatory plain packaging for all cigarettes and tobacco products.  Australia’s Tobacco Plain Packaging Act 2011 (Cth) (Act) prohibits the use of brands, logos and colours on all cigarette and tobacco products and on packaging imported, manufactured or sold in Australia.  On 9 March 2015, Ireland followed Australia’s example and enacted similar plain packaging laws.

Since the introduction of the Australian measure, five members of the World Trade Organization (WTO) have requested dispute settlement with Australia (WT/DS 435, WT/DS 434, WT/DS 441, WT/DS 458, WT/DS 467).  Indeed, there is widespread interest in the outcome of the disputes pending at the WTO.  This is the first of a series of articles that will investigate and report on the proceedings against Australia in the WTO.

Whilst the Australian market for cigarettes is relatively small, and although the majority of tobacco products sold here are manufactured domestically and are not imported, the primary concern of the tobacco industry (and hence tobacco producing countries) is the precedential effect of Australia’s introduction of plain packaging – this has potential for global significance.  If Australia’s policy is not thwarted at the WTO (or in another dispute forum, including the Investor State Arbitration with Phillip Morris Asia), the policy may encourage a global ‘olive revolution’, with the international dissemination of drab olive coloured plain packaging with large health warnings for tobacco products.  Such a movement would deprive the tobacco industry of its last semblance of control over the advertising and marketing power upon which its profitability depends.

Why did the Australian Government introduce plain packaging?

On 1 December 2011, the Act became law in Australia.  Its purpose is to improve public health, give effect to Australia’s obligations as a party under the Framework Convention on Tobacco Control (FCTC), and to contribute to FCTC objectives by regulating the retail packaging and appearance of tobacco products (see ss 3(1)(a), (b) and 3(2) of the Act).  The Act forms part of a comprehensive strategy to reduce the rate of smoking in Australia (see National Tobacco Strategy 2012-2018).

Tobacco is the only legally available consumer product that, when used in the manner intended by the manufacturer, will kill a third to a half of all people who use it.  As such, the goal of the strategy is ‘[t]o improve the health of all Australians by reducing the prevalence of smoking and its associated health, social and economic costs, and the inequalities it causes’.  In combination with other discouraging tactics — including health warnings, taxation and prohibiting point-of-sale visibility — the Act aims to reduce smoking in Australia to ten percent of the population by 2018.  A key objective behind plain packaging is to reduce the uptake of smoking by young people, because evidence suggests their demographic is most influenced by packaging aesthetics (discussed further below).  The issue remains however, whether plain packaging is successful in contributing to the broader regime of reducing Australia’s rate of smoking, compared to other measures like increased taxes and health warnings.

Is plain packaging effective?

The Australian Government frames the public health policy quandary regarding cigarettes by stating that:

it is impractical to ban the purchase of a product that so many people find so difficult to quit, [and] governments the world over have accepted that it is unethical to encourage use of tobacco and appropriate to legislate to prevent all forms of its promotion (see National Tobacco Strategy 2012-2018).

Australia’s previous regime (including taxation and large graphic warnings) did not achieve the desired level of reduction in tobacco consumption.  The Australian Government also prohibited all forms of tobacco advertising in 1992.  Thus, plain packaging is the final avenue available to the government, other than prohibition, to achieve the required level of protection.  At the same time, the cigarette and its packaging is the last marketing tool of the tobacco industry to attract and retain customers.

Packaging differentiates brands, which is particularly important in homogenous consumer products such as cigarettes.  Tobacco companies promote their products through branding and package design, creating preferences, differentiation and identification.  Indeed, advertising and promotional activities by tobacco companies are shown to cause the onset and continuation of smoking among youth.  Hence, advertising on cigarette packets can influence one’s choice to smoke.

Research prior to the introduction of Australia’s policy shows that plain packaging, by removing most brand design elements, is successful in decreasing cigarette brand image associations.  Moreover, plain packaging can render a smoker’s image ‘less cool’ and ‘less attractive’.  Researchers also note that colouring affects sensory and hedonic ratings, signals product attributes and determines the consumer’s final perception of the product, thus influencing price and quality perceptions.  For example, white, blue and green tones of menthol cigarettes denote a refreshing and soothing product.  On the other hand, the white and red packaging of Marlboro’s chevron strengthens the consumer’s psychological association with brand identity.  Ultimately, plain packaging laws covering all aspects of cigarette design – from sticks to packaging inserts, cardboard and wrapping – standardises the appearance of all tobacco brands, greatly reducing the status-signalling role and appeal of cigarettes.

The tobacco industry presents a number of strong arguments against plain packaging.  These include that:

• there is insufficient evidence the measure will reduce smoking;
• the legislation will not be effective;
• retailers’ businesses will be damaged;
• competition will be diminished; illicit trade will be increased; and
• international agreements concerning intellectual property will be breached.

These arguments, combined with the threat of litigation, have led all countries (except Australia and now Ireland) that had previously considered implementing plain packaging in their jurisdictions to abandon it.  Nonetheless, evidence exists to refute these arguments.

On 24 May 2011, Cancer Council Australia published a review of the evidence that finds that plain packaging reduces the uptake of smoking by young people.  Some important findings include how colouring and imagery contribute to consumers’ misperceptions that certain brands are safer than others.  Removing colours and misleading terms such as ‘smooth’, ‘gold’ and ‘silver’ reduces false beliefs about the harmfulness of cigarettes.  In addition, young people and adults perceive cigarettes in plain packs as less appealing, less palatable, less satisfying and of lower quality compared to cigarettes with branded packaging.  The study reinforces previous research that plain packaging alters perceptions about the characteristics and status of people who smoke brands.  It is also shows that the intensity of opposition by the tobacco industry against plain packaging suggests they believe such measures will reduce sales and company profits.

In addition to the growing evidence supporting plain packaging, WTO jurisprudence allows members a degree of deference in determining their own levels of protection or regulatory outcomes (see Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled And Frozen Beef, WT/DS161/AB/R WT/DS169/AB/R (11 December 2000)).  This may, in part, be in recognition of the fact that every effective public health measure started as an experiment at some stage.  WTO jurisprudence recognises that there will inevitably be gaps in scientific knowledge.  This means that health policy that is based on limited emerging evidence may still justify a departure from trade commitments to the WTO.  Jurisprudence also accepts that there may be a degree of uncertainty regarding scientific evidence (see Appellate Body Report, Canada – Continued Suspension of Obligations in the EC – Hormones Disputes, T/DS321/AB/R (14 November 2008)).  Thus, given that there is a growing evidence base supporting the efficacy of plain packaging, Australia is in a strong position to argue that there is sufficient evidence to establish that the measure contributes to its overall tobacco reduction strategy.

Pauline Wilson recently graduated from an LLM at the University of Amsterdam with a focus on international trade and investment law. Prior to that she graduated from the ANU with a combined Bachelor’s of Arts and Law.