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Why bilateral investment treaties are the last refuge of Big Tobacco

The tobacco industry has no recourse other than to pursue its challenge to the Australian government’s plain cigarette pack legislation via international trade agreements in the wake of yesterday’s High…

Uruguayan chancellor Luis Almagro, whose his country will join efforts with Australia to face Phillip Morris. EPA/SASHENKA GUTIERREZ

The tobacco industry has no recourse other than to pursue its challenge to the Australian government’s plain cigarette pack legislation via international trade agreements in the wake of yesterday’s High Court ruling.

Legal opinion suggests the legislation doesn’t violate the World Trade Organization’s (WTO) multilateral trade agreements pertaining to protection of intellectual property or technical barriers to trade. But it’s far more difficult to predict the outcome the investment protection claim under the terms of the Hong Kong-Australia bilateral investment treaty.

What are bilateral investment treaties?

Bilateral investment treaties differ from the WTO – there’s no public health exemption and investors, as opposed to countries, initiate complaints. The dispute resolution mechanism is overseen by arbitration bodies dominated by private-sector adjudicators utilising contract law to rule on market access issues. This process has been described as making the WTO dispute settlement mechanism seem “evenly balanced by comparison."

The events leading up to Philip Morris Asia’s announcement that it would claim compensation for loss of income related to plain packaging seem to do little to support its case. Most significantly, Philip Morris Asia acquired Philip Morris Australia nearly a year after the government’s announcement that plain packaging was about to be introduced. Nonetheless, the threat posed by the bilateral treaty should not be underestimated.

The power of bilateral trade agreements

The tobacco industry has been aware of the potential of bilateral trade and investment agreements, and of regional treaties that contain similar investment protection mechanisms for some time. Following the mixed outcome of its campaign to force Thailand to drop restrictions on imported cigarettes in the late 1980s, industry officials reassessed their reliance on the General Agreement on Tariffs and Trade (GATT), the forerunner and a key component of the WTO, as a means to expand their operations beyond their traditional markets in North America, Western Europe and Australia.

The United States Trade Representative (USTR) had previously used GATT to force open the domestic cigarettes markets of Japan, South Korea and Taiwan on behalf of the leading US tobacco corporations. Thai opposition to USTR demands eventually led to GATT arbitration that ruled against import restrictions, but in favour of enactment of comprehensive tobacco control legislation.

Dismayed at the outcome, industry officials argued that they had been dragged into the arbitration process “kicking and screaming” and took note of “the ineffectiveness of the GATT process, as compared to bilateral trade negotiations” to overcome obstacles to investment and operations in other restricted markets.

Philip Morris v Uruguay

In February 2010, Philip Morris International announced it had filed an arbitration claim against Uruguay for alleged breaches of the Swiss-Uruguay bilateral investment treaty. The alleged breach was domestic legislation requiring that 80% of cigarette packs display graphic health warnings.

As well as providing an explicit example of industry use of bilateral treaties that has been described as an “early test-case of the little-used intellectual property protections contained in BITs”, the case also serves as an explicit reminder of the potential implications of trade agreements for global tobacco control.

Efforts to include language that prioritised “health over trade” in the WHO’s Framework Convention on Tobacco Control, although supported by a majority of participating member states, were successfully opposed by a small group of high-income countries, including the United States, the United Kingdom, Germany and Japan, all of which are home to leading transnational tobacco corporations.

The effective silence of the FCTC on its relationship with trade agreements has created uncertainty regarding its potential effectiveness. And further work is needed to contend with the challenges to tobacco control created by agreements such as the Hong Kong-Australia bilateral investment treaty.

Read other articles on plain packaging published since the High Court decision: