Source: INSIDE TRADE, 10/7/14

Text of StoryU.S. trade officials have reached out to some other Trans-Pacific Partnership (TPP) countries to informally float the idea of excluding tobacco-related challenges from being brought under the deal's investor-state dispute settlement (ISDS) mechanism, according to informed sources. This move signals the United States may be ready to bring its position on this issue closer to that of public health groups, which have demanded tobacco be completely carved out from the agreement.

Sources said the Office of the U.S. Trade Representative has indicated to these TPP countries that it may propose language carving out tobacco-related disputes from ISDS at the upcoming TPP meetings in Australia.

But a USTR spokesman said the U.S. does not expect to table a new tobacco proposal in Australia. "TPP countries continue to debate how to address tobacco public health issues in the agreement," the spokesman said. "The United States has not tabled any new U.S. proposal on tobacco products and is still engaged on congressional and stakeholder consultation on an appropriate approach. We do not expect to table a new proposal in Australia."

One informed source said it is unclear whether -- in the event the U.S. does opt to table a tobacco proposal -- it would be at the Oct. 25-27 ministerial meeting in Sydney or the informal round that is slated to immediately precede it in Canberra. Proposals on tobacco-specific language in TPP have previously been tabled in the chief negotiators' group.

This source said the language informally floated by USTR would exclude tobacco-related challenges from being brought under ISDS but would not impact other TPP chapters. For instance, it would not exclude tobacco-related challenges from being brought under state-to-state dispute settlement, and it would not preclude countries from cutting tariffs on tobacco products, according to this source.

One open question is whether the ISDS carveout being informally floated by the U.S. would replace its earlier August 2013 tobacco proposal, or complement it. That U.S. proposal would reaffirm that tobacco control measures fall within the scope of an already existing general exception for measures necessary to protect human life or health, and establish a consultation requirement for health ministers to discuss a potential state-to-state legal challenge of tobacco control measures.

Any move by the U.S. to prevent tobacco-related challenges under ISDS would tackle a major criticism by public health groups, which is that tobacco companies have been increasingly using ISDS as a tool to challenge tobacco control policies around the world. These groups often cite the pending case brought by Phillip Morris International against Australia's plain-packaging law under an Australia-Hong Kong bilateral investment treaty.

One public health advocate said if the U.S. were to propose excluding tobacco-related challenges under ISDS, that would represent "tremendous movement" by USTR in the right direction in dealing with the tobacco issue relative to public health. This source added that, while a complete carveout from trade agreements would be the ideal result for public health groups, cutting off tobacco industry-initiated challenges of public-health-related regulation of tobacco would be a "huge change for the better."
At the same time, this source stressed that the ultimate test for public health groups will be to see where the negotiations on the tobacco-specific language in TPP end up.

The ISDS carveout being informally floated by the U.S. would still fall short of a Malaysian proposal to completely exclude tobacco control measures from TPP obligations, which is being supported by U.S. and Malaysian public health groups. The Malaysian proposal would prevent tobacco control measures from being challenged under state-to-state dispute settlement as well as ISDS.

Malaysia had also initially pressed for a ban on tariff cuts for tobacco products in TPP, but the country dropped that element of its proposal last December. One informed source signaled that Malaysian public health groups are likely to urge their government to oppose any ISDS tobacco carveout because they view it as not going far enough.

On the other side of the spectrum, USTR's move to informally float an ISDS carveout for tobacco regulations is already generating opposition from the U.S. private sector and Capitol Hill.

"This proposal would unfairly discriminate against a single sector by denying access to due process and other basic and fundamental legal principles," one industry source said. "It leaves businesses powerless to pursue any opportunity to seek fair compensation from governments. Worse, it sets a terrible precedent opening the door for other trade partners to begin targeting other business sectors for exclusion."

U.S. business associations such as the U.S. Chamber of Commerce and National Association of Manufacturers have generally opposed tobacco-specific language in TPP on the grounds that it would undermine the longstanding U.S. assertion that provisions in past trade agreements offer governments sufficient leeway to issue regulations to protect public health objectives.

These business groups also fear that the special treatment of tobacco could open the door to trade-limiting provisions for alcoholic beverages, genetically modified organisms, processed food products, or other goods. A Senate aide echoed that argument, saying that creating exceptions to trade rules based on a product's characteristics would open up a door that could never be closed again.

This aide also contended that investment rules in trade agreements merely enshrine fundamental principles of U.S. law like non-discrimination and protection against arbitrary and capricious treatment. Such rules do not prohibit countries from regulating on issues like tobacco, but merely ensure that any such regulations are non-discriminatory, this aide argued.

A complete carveout of tobacco controls measures from ISDS would also go beyond an initial draft tobacco proposal that USTR floated in May 2012.

That draft proposal would have created a "safe harbor" for tobacco regulations issued by the Food and Drug Administration (FDA) pursuant to the Tobacco Control Act, a 2009 law that conferred new tobacco regulatory powers to FDA. By explicitly allowing governments to put in place certain regulations, the draft proposal would have shielded those regulations from state-to-state legal challenges alleging they violate TPP rules.

But the draft proposal, which USTR never formally tabled in TPP talks, was still criticized by public health advocates. They charged that it did not go far enough because the safe harbor would only apply to federal regulations, not to federal or state laws or to non-health regulators at the federal level, and would have only excluded these from being challenged under state-to-state dispute settlement and not ISDS.