August 20, 2012 1:35PM

Free Trade and Tobacco

Down in Australia, a law requiring "plain packaging" of cigarettes is causing a lot of controversy.  In a nutshell, under the law, cigarette packaging must be drab in color, with no branding of any sort, in order to reduce the attractiveness of tobacco products.

Whether this law will discourage smoking is certainly open to question.  Does Joe Camel cause kids (or anyone) to smoke?  I've always had my doubts.

But regardless of the law's effectiveness, there are some interesting trade and investment disputes that have arisen because of the law, and these disputes help illustrate how, in recent years, trade agreements have gone beyond traditional notions of fighting protectionism, and now can be said to act as a limited form of global governance.

Before we get into the trade and investment disputes, though, let me mention briefly a related case under Australia's "takings" law.   Some tobacco companies challenged the plain packaging law in Australian court, arguing, in essence, that their trademarks had been acquired without just compensation.  Last week, the Australian High Court rejected this argument.  Now that the domestic challenge is over, attention has turned to the international disputes.

At the international level, there are two categories of complaints.  First, an Australian subsidiary of Philip Morris International has brought a complaint against Australia under the Hong Kong-Australia Bilateral Investment Treaty (investors can sue governments directly under these treaties).  And second, several countries (presumably with legal advice from the tobacco companies themselves) have filed complaints against Australia at the World Trade Organization.

Two of the main arguments against the plain packaging law are: (1) the tobacco companies' intellectual property rights are being infringed by the law because their trademarks cannot be used on the packaging, and (2) the value of the tobacco companies' investment in Australia has been undermined by the law (kind of like a "takings" case).  (The issues are more complex than this, but I don't want to get bogged down too much in legal arguments, so I'll leave it at that).

With regard to intellectual property, one of the key issues is whether trademark holders have a right to use their trademarks, or, instead, whether they simply have a right to prevent others from using them.  Here, the Australian law clearly prevents the tobacco companies from using their trademarks, but is that enough to violate the relevant international agreements?  IP experts (and I'm not one) seem divided on the issue.

As for investment, the international legal obligations at issue are extremely vague, and different arbitrators have taken different approaches to the issue.  There's a lot of uncertainty as to what the scope should be for international "takings" law.

At this point, you may be wondering, what does all this have to do with free trade?  That's a good question.  The answer is in two parts.  First, trade agreements have expanded considerably over the years.  They are not just about protectionism anymore.  For better or worse, trade agreements have detailed obligations on intellectual property, and the investment rules mentioned above are now included in many of these agreements.

Second, the WTO complaints do include more traditional "trade" claims.  The complainants argue that the law discriminates against foreign products and is too trade restrictive.  It's not clear to me at this stage what the basis for these claims is.  On its face, the law seems to treat products from all countries the same.  Perhaps the lawyers have something up their sleeve, although they may just be trying to make this issue seem like a more typical trade dispute.

As you can see, there is a lot going on with these cases.  They raise general trade policy questions, like "what is free trade" and "what issues should trade agreements cover."  They get into the proper scope of trademark protection.  And they address the international counterpart to "regulatory takings" rules.

And if that's not complicated enough, this is just one of several "free trade and tobacco" issues going on right now, which I discuss in a new Free Trade Bulletin.  In this piece, I argue that protectionism is no better in the tobacco industry than in any other industry, so we shouldn't carve tobacco out of trade agremeents, as some have suggested.  At the same time, the extent to which trade agreements are becoming a source of "global governance" is a legitimate source of concern, and cases such as the plain packaging one may be useful to help highlight the importance of sorting out what policies trade agreements should pursue.