6.1. The protection of domestic tobacco growers and the import duties policy – international experience and its use for Ukraine

Although there are exceptions and provisions for phases over periods of time, the domestic content requirements for products (i.e. various requirements that products incorporate some amount of domestic ingredients) are generally prohibited under the WTO agreements. These rules apply to tobacco products as well as other goods. The relevant agreements would be the GATT (1994) Articles III:5 and XI:1, and the TRIMS agreement (Trade-Related Investment Measures). Ukraine is not a WTO Member, but has been in the preliminary stages of the accession process with an established Working Party since 1994.

From a free trade perspective, these local content requirements are seen as a trade restriction, which are to protect local agricultural producers. They are naturally opposed by foreign-based tobacco product manufacturers, because they limit their ability to utilize their own tobacco sources which may be lower in cost or higher in quality. From a health perspective, these kinds of protectionist measures may be favorable to the extent that they lead to higher overall prices (or lower quality) for tobacco products, and in turn to lower rates of consumption. Relatively speaking, higher tariffs are seen as preferable to lower tariffs for similar reasons—to the extent that the higher import duties may lead to increased production and sales costs (and hence increased prices) for tobacco products.

According to the FAS US Dept. of Agriculture (www.fas.usda.gov/scriptsw/attacherep/default.asp and www.fas.usda.gov/scriptsw/wtopdf/wtopdf_frm.asp) and APEC (www.apectariff.org), different countries have different policies in regard to imported and domestic raw tobacco:

1) Some countries strongly discourage import with high duties and quotas. For example, the Polish import duty is 113 euro per 100 kg (113 times higher than in Ukraine). Tobacco was eliminated from the list of commodities upon which developing and impoverished countries receive preferential tariff treatment. There are no preferential tariffs for the European Union or Visigard countries. Thus, all exporting countries face the same tariff treatment for the entry of tobacco into Poland. Tariff-rate-quotas are in effect for tobacco and tobacco products. Above quota tariffs are approximately 2.5 times higher than within quota levels. The preferential tariff quota is 700 tons of unmanufactured tobacco from Hungary. Some tobacco producing countries have rather high tariffs: Hungary (51-80%), China (40%), Turkey (25-31%).

2) Some countries have different policies regarding the various types of tobacco. In the USA, there is a tariff-rate-quota (TRQ) for imports of flue-cured, burley, and other light air-cured tobacco that are imported for manufacture of cigarettes. Under the TRQ, a tariff rate equal to the concession rate is applied to tobacco imports until the in-quota quantity (a total of 151,200 metric tons with a domestic production of about 750,000 tons) is filled, after which a tariff rate of 350% ad valorem is applied. Other tobaccos, including oriental and cigar-type tobaccos are not subject to the quantitative limitations of the TRQ. However, the tariff for Oriental or Turkish types of tobacco is 11.4-25.4ў/ kg. This policy aims to protect local growers, who produce the light types of tobacco. In Bulgaria, where oriental tobacco is mainly produced, the situation is opposite: the tariff is 10% for light tobacco and 60% for oriental tobacco.

3) The countries that have to import most of their raw tobacco have low tariffs. The EU extends varying preferential tariff treatment to imports from the developing counties of Africa, the Caribbean, and in the Pacific under the Lome Convention. Tariff preferences are also extended to over 100 developing countries under the Generalized System of Preferences (GSP). Reductions are limited to a quota and a certificate of authenticity delivered by a state recognized organization. In the EU, raw tobacco from non-preferential suppliers is subject to an ad valorem duty of 21.5 percent for flue-cured Virginia type, light air-cured burley type, light air-cured Maryland type, and fire-cured Kentucky type tobaccos. Other types of raw tobacco from non-preferential suppliers are subject to a duty of 13.1 percent. Cigarettes are charged an ad valorem duty of 79.2 percent, making non-preferential imports expensive. The EU is unlikely to change this tariff discrimination between the raw product, which it needs, and the finished product, which it does not want from developed countries. Some other countries also have low tariffs: South Korea (20%), Slovakia (6-9.8%), Russia, Belarus and Kazakhstan (5%). Tobacco factories in Russia prefer imported raw tobacco due to low tariffs.

4) Some countries (where a tobacco monopoly actually exists) have no tariffs on imported tobacco. In Japan, the Ministry of Finance holds 67-percent of the stock of Japan Tobacco Inc., JTI. JTI is a monopoly manufacturer of tobacco. It is the only authorized buyer of imported leaf. Also, it is the only authorized cigarette manufacturer in Japan. In Uzbekistan, British American Tobacco (BAT) and the Government of Uzbekistan signed a joint venture in 1994. Under this agreement, BAT is not required to pay import duties.

While Ukraine proclaims to protect domestic tobacco growers, it is actually situated between groups 3 and 4 because its tariff (1 euro per 100 kg or actually 0,4%) is very low. It is very favorable to transnational tobacco companies, which control most of tobacco market in Ukraine, but does not protect local tobacco growers, state revenue, nor public health.