U.S. tobacco companies have a long history of deceit, deception and duplicity in their relentless pursuit of profit. These companies have hooked generations of American smokers using the tools of manipulative advertising, disinformation campaigns refuting the health consequences of smoking, and political lobbying. In the process, they have grown into enormous multinational conglomerates. In recent years, as smoking has declined in the United States, they have begun to look elsewhere for growth.
Drawing on their experiences in the United States, these companies are having great success abroad. The United States is now home to two of the world's three largest multinational cigarette companies and is the world's largest exporter of cigarettes. 1 Overseas, these companies use advertising and marketing techniques that have long been banned or restricted in the United States. They also apply political and economic pressure to circumvent other countries' public health laws, often under the guise of "free trade." And, in countries where market access is difficult due to government regulations, the multinational tobacco companies are allegedly complicit in cigarette smuggling in an attempt to gain market share.
While cigarette sales fell by 4.5 percent in North America between 1990 and 1995, they increased by 5.6 percent in Eastern Europe and 8 percent in the Asia-Pacific region.2 By the turn of the century, per capita consumption in developing countries will be greater than that of developed countries, says the World Health Organization (WHO).3 "There is no time to lose," says Barbara Zolty of the WHO. "Multinational [cigarette companies] are flooding [developing countries] with ads that say smoking is exciting, glamorous and Western. The situation is only going to get worse as more women and children start smoking."4
If current trends continue, the United States' success in reducing domestic tobacco use will be more than offset by the overseas activities of the tobacco companies, with dire global public health consequences. Since U.S. tobacco companies are not bound by any borders in their insatiable drive for new customers, the United States must think globally and act locally in its efforts to control these companies if it hopes to stem the tide of death and disability in the rest of the world.
Approximately 1.1 billion people 15 and older now smoke. Seventy-two percent of those smokers live in developing countries, a rate expected to rise to 85 percent by the year 2025.1
By 2025, the number of people worldwide who die each year from tobacco-related disease will rise from the current 3.5 million to 10 million, according to the WHO. At the same time, death and disability due to tobacco use will increase from 3 percent to 9 percent of the global total. A majority of these deaths will occur in the Third World and Eastern Europe. Given these projections, more than 100 million people will die from tobacco-related illness over the next 30 years, exceeding the toll from AIDS, tuberculosis, automobile accidents, maternal mortality, homicide and suicide combined.2
The economic costs of tobacco use are equally mind-boggling. The cost to the international community in terms of death and disability is massively greater than the economic gain from the production and sale of tobacco products, according to the World Bank.3 In India, for example, the Voluntary Health Association estimates that tobacco-related illnesses cost the government $11 billion a year.4 In the small country of Costa Rica, smoking-related illnesses cost the social security system an estimated $534 million per year, and approximately 11 percent of deaths in the country are tobacco-related.5
The Big 3 global tobacco players bear substantial responsibility for rising smoking rates and projected future increases. "With growers and manufacturers being threatened by stiff U.S. regulations on tobacco, it is logical to expect them to strengthen their overseas markets. And they will," says Diana Temple of Salomon Brothers Inc.1 Former Vice-President Dan Quayle summed up the industry view in 1990 when he remarked to a group in North Carolina, "Tobacco exports should be expanded aggressively, because Americans are smoking less."2
For two decades, the tobacco companies have invested heavily in overseas advertising. They have acquired newly privatized cigarette companies, set up joint ventures and built distribution and sales networks. As a result, Philip Morris, RJ Reynolds and BAT have registered double-digit growth in international cigarette sales in recent years. Philip Morris and RJ Reynolds now sell more cigarettes abroad than they do in the United States.3 In 1997, Philip Morris made more profit selling cigarettes abroad than in the United States, and analysts expect in the next 10 years that RJ Reynolds and Brown & Williamson (BAT's U.S. subsidiary) will do the same.4 Between 1986 and 1996, U.S. cigarette exports grew by 260 percent and now account for nearly 30 percent of all domestic cigarette production, with 40 percent of these exports now destined for Asia.5 "Most of their capital expenditure and infrastructure is in place and the profit comes from growing [international] volumes," says Salomon Smith Barney analyst Martin Feldman, who expects the companies' international tobacco profits to rise by around 20 percent over the next few years.6
An increasing proportion of these companies' overseas sales are being manufactured abroad, rather than being exported from the United States. U.S. cigarette exports fell 11 percent in 1997, "due to greater offshore production by U.S. manufacturers," says the U.S. Department of Agriculture (USDA).7 In 1996 the big three U.S. cigarette companies shipped 244 billion U.S. made cigarettes to foreign countries. This amount was less than half of what Philip Morris alone sold abroad that year,8 while in 1997 only 18 percent of the cigarettes RJ Reynolds sold overseas were made in the United States.9 "U.S. companies are likely to look harder at their operations abroad and produce fewer cigarettes here," says Peter Burr, an agricultural economist at USDA who specializes in tobacco.10
A number of factors have driven this overseas expansion, including:
The Big 3's increasing reliance on overseas production has transformed the tobacco industry around the globe. In country after country, they have purchased previously state-owned factories, set up joint ventures with existing state enterprises and built new factories. Currently, Philip Morris, RJ Reynolds and BAT each own or lease plants in at least 50 different countries spanning all corners of the globe.11 The following is a summary of their overseas operations:
Philip Morris is the world's largest multinational cigarette company. It controls around 16 percent of the global cigarette market and hawks the world's most popular brand, Marlboro, which accounts for 8.4 percent of global consumption.12 The company has subsidiaries, affiliates and licensing agreements in 54 countries around the world,13 and has at least a 15 percent market share in over 40 countries. Philip Morris' international tobacco unit is the company's fastest growing in terms of profit and sales. Since 1990, the company's cigarette sales have risen by only 4.7 percent in the United States, but 80 percent overseas,14 while profits from international sales have risen by 71 percent since 1993.15 In 1997, the company sold 235 billion cigarettes in the United States for a profit of $3.3 billion, while selling over 711 billion cigarettes abroad for a profit of $4.6 billion, marking the first time that the company's international sales made more profit than domestic ones.16 By the year 2000, predicts CEO Geoffrey Bible, the company will be selling a trillion cigarettes worldwide.17 "They've got a good buffer. No matter how badly things go in the United States, international sales will carry them along," says Allan Kaplan, a tobacco analyst at Merrill Lynch & Co.18
In 1996, Philip Morris bought a controlling interest in the Polish government's largest cigarette factory for $372 million.19 A year later, the company paid $400 million to take a controlling interest in Mexico's second largest cigarette maker, Cigatam (see Mexico case study). The acquisition strengthens the company's already formidable presence in Mexico (Marlboros currently have 30 percent market share)20 which it had gained through a previous license agreement with Cigatam to produce, market and distribute its Marlboro, Merit, Parliament, and Virginia Slims brands. The acquisition will also help the company's efforts to produce low-cost cigarettes for export to North America and Asia -- Cigatam has over the past few years been exploring strategies to increase its presence in overseas markets, especially in China.21 In December 1997, Philip Morris announced that it would build a cigarette plant near Bucharest, Romania, to begin production of its Marlboro, L&M and Bond Street cigarettes.22 As Chairman Bible puts it, "We are still in the foothills when it comes to exploring the full opportunities of many of our new markets."23
Brown & Williamson's parent company, British American Tobacco (BAT), is the world's second largest multinational cigarette company. With subsidiaries in 65 countries, 24 BAT controls around 15 percent of the global cigarette market.25 The company and its subsidiaries and affiliates manufacture more than half their cigarettes in Asia, Australia and Latin America. In 1997, the company's international tobacco operations made a profit of $2 billion on sales of $23.7 billion.26 In 1996, the company underwent a reorganization in which British American Tobacco Company, British-American Tobacco Germany, Souza Cruz (Brazil) and Brown & Williamson all merged to become a single entity -- British American Tobacco (Holdings) Ltd. The purpose of the merger was to improve the company's marketing efforts, "especially exports and the development of international brands."27 All of the company's operations are run out of the company's United Kingdom office, except for those of Japan, Mexico, South Korea and the United States, which are handled at Brown & Williamson's Kentucky headquarters. In the course of the merger, BAT also established the Consumer and Regulatory Affairs Office to "counter the anti-smoking lobby and vigorously advocate the company's views around the world."28
BAT, which has long been the most international in outlook of all the tobacco multinationals, is also intensifying its strategy of acquiring and building production capacity around the world. In 1996, BAT spent $25 million to upgrade its "Liberation Factory" in Cambodia in order to boost production for both the domestic and export markets.29 In January 1998, BAT purchased a controlling interest in Tekel, the Turkish state cigarette monopoly. The purchase gives the company a quarter of the world's ninth largest cigarette market -- Turks consume nearly 100 billion cigarettes a year. BAT will invest $145.6 million in return for a 52 percent share of Tekel, which will eventually have the capacity to produce 25 billion cigarettes a year. BAT also acquired a 49-year exclusive license to sell Tekel's popular Samsun and Yeni Harman cigarette brands.30
In 1997, BAT purchased Cigarrera La Moderna (CLM), Mexico's biggest cigarette maker, for
$1.7 billion (see Mexico case study). This was one of the largest foreign investments ever made in
Mexico31 and BAT's most expensive purchase ever.32 CLM produces both Mexican cigarettes
and international brands -- sold under licensing agreements with BAT competitors -- such as
Camel, Winston, Dunhill and Salem.33 "This acquisition offers us the rare opportunity to buy a
sizeable and very profitable player in a growth market," says Martin Broughton, chair of BAT.34
The purchase will consolidate the company's dominance of the Latin American market, where it
currently holds a 60 percent share (almost double that of Philip Morris) and significantly increase
its ability to boost exports to the United States and Asia. BAT also sees "considerable
opportunities" to export tobacco leaf from Mexico, "particularly because the country is outside
the U.S. import quota," says a Reuters report.35
RJ Reynolds, the world's third largest multinational cigarette company, has recently fallen further behind Philip Morris and BAT. Saddled with a huge debt load (the result of a failed takeover bid in the late 1980's made famous in the book Barbarians at the Gate), RJR saw its international tobacco profits decline 5 percent in 1997 to $759 million on sales of $3.57 billion. This drop, however, masked a 43 percent increase in sales in Central Europe and a 13 percent increase in the Baltic Republics and Commonwealth of Independent States.36 The company's recent troubles have sparked speculation among Wall Street analysts that the company may enter into an international alliance with BAT that would involve a merger of the two companies' international tobacco divisions.37
Although smaller than its two rivals, RJ Reynolds is still a huge multinational company, with subsidiaries, affiliates and licensing agreements in 57 countries.38 The company, which controls around 4 percent of the global cigarette market, has seen a 75 percent increase in its international sales since 1990, reaching $3.4 billion in 1997.39 International sales now account for 41 percent of RJR's total tobacco sales.40
In 1995, RJ Reynolds significantly boosted its overseas operations, adding facilities in Finland, Vietnam, Poland and Tanzania, where it paid $55 million for a controlling share of the Tanzanian Cigarette Company. The purchase was the largest single foreign investment in Tanzania since the country achieved independence in 1961.41 RJ Reynolds has ambitious plans to rehabilitate the formerly state-owned company's Dar Es Salaam plant, which will soon produce 4 billion cigarettes annually, making it one of the biggest plants in Africa. The company hopes to use its new base in Tanzania to challenge BAT's virtual monopoly in the East and Southern African region.42 In November 1997, RJ Reynolds opened a new $9 million plant in Tunisia to manufacture Winstons and Monte Carlos for Tunisia's voracious smokers -- 62 percent of Tunisian men and 8 percent of women smoke. "Tunisia ranks sixth in the cigarette market in Africa," says Reynolds Executive Vice President Klaus Langner. "This new alliance will allow Reynolds to be the leader of foreign tobacco firms in Tunisia, and to reinforce its position in North Africa," he says.43 The company is also a huge player in Turkey, where its factories account for half of the country's cigarette exports.44
Geoffrey C. Bible:
The Ultimate Marlboro Man
Chairman and CEO of Philip Morris since 1995, Geoffrey Bible has spent many years working in the company's international division. Beginning in 1968 with the company's Europe/Middle East/Africa office, he rose to become vice-president of Philip Morris International in 1978. In 1981, he was assigned responsibility for his native Australia, where Philip Morris was locked in a battle for market share with Rothmans. Bible quickly turned the company's operations around, catching the eye of senior management which then promoted him to executive vice-president and then president of Philip Morris International. Bible "proved a shrewd and tireless strategist, selecting the most promising emerging markets and working with foreign ministers to secure favorable long-term conditions for Philip Morris," according to Fortune magazine. "After communism collapsed in 1989, Bible moved faster than his rivals to acquire local cigarette companies and factories in...Eastern Europe and the former Soviet Union. Led by Bible's international charge, Philip Morris passed Britain's BAT Industries to become the No. 1 cigarette seller worldwide." International tobacco is "our star business," says Bible.1
Bible has called the United States an "island of extremism" in terms of tobacco control.2 Referred to as "the Crocodile Dundee of the tobacco industry" because of his heritage and his combative style, Bible has vowed that the company will not be "anybody's punching bag." He has likened the company's battles against anti-tobacco forces to the plight of the allies during the Second World War. "We shall fight, fight, fight," he pledged, because "when you are right and you fight, you win." 3
In a 1996 speech to employees at a factory in Virginia, Bible said that it would take the company time "to overcome these people who are trying to make a quick buck," referring to suits against the company for smoking-related illnesses. But he is no slouch in the "quick buck" department. In 1997, Bible made $30 million in salary, bonuses, incentives and stock options.4 In addition, he either owns or has options to buy 3.9 million shares in the company. At the recent price of $45 a share, those holdings are worth around $170 million. No wonder then that Bible is so concerned about the performance of the company's stock -- "Next to my wife and family, it is the most important thing in my life," he has been quoted as saying.5
Martin Broughton:Going to Bat for BAT
According to a company bulletin, the "theme" of BAT's 1996 reorganization was "one prize, one goal, one vision." That vision certainly includes expansion. As the company puts it: "One in ten of all cigarettes sold today is made by BAT, which leaves almost 90% still to fight for."1 Leading BAT into the fight is Martin Broughton, who became the CEO of the company in 1993. Broughton is no stranger to the global cigarette business, having spent the majority of his 25 years with the company overseas. His postings have included South Africa, Argentina, Hong Kong, Bangladesh and Brazil, where he ran BAT's subsidiary (Souza Cruz) for four years in the early 1980s. Although not a smoker himself, he feels that BAT offers a useful product. In a 1997 interview he said, "I think we give pleasure to a huge number of people around the world."2 Broughton has been the most vocal of the cigarette CEOs in opposing restrictions on the overseas practices of the multinationals.. "America should look after America and keep its nose out of anywhere else," he says.3
Broughton is dismissive of the overwhelming evidence that smoking causes cancer, insisting in 1996 that BAT had "no internal research which proves that smoking causes lung cancer or other diseases or, indeed, that smoking is addictive." He also denies that the company has ever been dishonest in its dealings with the public. "We have not concealed, we do not conceal and we will never conceal" information from the public, he said.4 Broughton thinks that BAT has a good future, especially now that the former Soviet Union has disintegrated: "The outlook for the company is better than at any time for 40 years. We have never faced such opportunities before."5 Broughton's base salary for 1997 was around $1.3 million.6
Chairman and CEO of RJ Reynolds since 1995, Steven Goldstone has spent most of his adult life as a lawyer rather than a tobacco industry operative. Before formally joining the company, Goldstone was a senior partner at the law firm of Davis, Polk & Wardwell. Starting in 1978, he served as a "close advisor" to the Reynolds management and Board.1 In 1996 Goldstone made $7.1 million in salary, bonuses and stock options.2
In a 1996 letter to the companyUs shareholders, Goldstone said the companyUs international tobacco division is taking a number of steps to "focus on core brands in the highest priority markets, improve product quality and development, invest more aggressively in effective marketing initiatives, and cut costs." Since the company only commands 4 percent of the market outside the United States, "thereUs plenty of room for growth."3
Wherever U.S. cigarettes go, smoking rates rise. Smoking rates in Japan, South Korea, Thailand and Taiwan rose 10 percent higher than they would have following the massive inflow of American cigarettes after the U.S. Trade Representative forced these countries to open their markets to tobacco imports, according to a study by the National Bureau of Economic Research. Price competition and advertising were largely responsible for this increase.1 "The presence of the US companies changes the picture," says Frank Chaloupka, an economics professor at the University of Illinois at Chicago and the author of the study. "They bring competition with the domestic cigarette monopolies. Real aggressive marketing starts and prices go down, making smoking more attractive to groups that typically hadn't smoked, like women and children."2
"When the multinational companies penetrate a new country, they...transform the entire market," says Greg Connolly, head of the Massachusetts Tobacco Control Program. "They transform how tobacco is presented, how it's advertised, how it's promoted. And the result is the creation of new demand, especially among women and young people."3 In South Korea, for example, the government-owned monopoly increased its advertising and promotion expenditures by 641 percent in the three years following the entrance of U.S. companies into the Korean market.4 More than half a million women die each year from smoking, a figure that will double by the year 2020 if current trends continue. While approximately 25 percent of women in industrialized countries smoke, only 7 percent of women in the rest of the world smoke, making these women a prime target for the cigarette companies. "As smoking decreases in the West, the tobacco industry in search of new markets is making huge investments in targeting women and girls with aggressive and seductive advertising that exploits ideas of independence, emancipation, sex appeal and slimness," says a 1997 WHO report. "In an increasing number of less developed countries, smoking is linked with a cosmopolitan and affluent lifestyle. With increasing urbanization, educational and career achievement, and increasing spending power, many young women have taken up smoking."5
In Japan, where the cigarette companies have agreed to a voluntary ban on advertising which
encourages women to smoke, the companies allegedly continue to violate the agreement. Health
activists allege that Philip Morris has repeatedly run ads for its Virginia Slims brand showing
cosmopolitan women with the slogan "Be You," while ads for Brown & Williamson's Capri brand
show a western woman skateboarding. Philip Morris insists that the prohibition is "sexist."6 The
tobacco companies regularly deny that their advertising and marketing activities increase smoking
rates. Promotional activities are designed only to switch smokers' brand loyalty, they say.
Speaking of the Ukrainian market, Kalyna Hrushetsky, the Kiev-based director of the Leo Burnett
advertising agency, which has been retained by Philip Morris to help manage its public relations
worldwide, says "Ukrainians smoked heavily before we got here -- and those were non-filters.
We're moving them to a better product," she says.7
By spending billions of dollars on direct advertising and the sponsorship of sporting and entertainment events -- and, in an effort to circumvent national ad bans, by relying increasingly on transglobal satellite, cable and internet advertising, as well as on cigarette product placements in movies -- Big Tobacco hopes to entice new generations of smokers by developing positive associations with their brands. Cigarette companies are among the world's largest advertisers. In 1996, Philip Morris alone spent $813 million on overseas advertising and is the world's ninth-largest advertiser.1 Just as in the United States, the cigarette companies deny that their advertising is targeted at young people. "We try to take steps to ensure that our cigarettes are marketed only to adults, such as making sure our ads don't appear in magazines aimed at youth," says Philip Morris International spokeswoman Elizabeth Cho.2
In recognition of the connection between cigarette advertising and increased youth smoking rates, many countries have moved to restrict or outright ban cigarette advertising. As more and more countries adopt such restrictions, the cigarette companies have used their sophisticated advertising and marketing skills to devise new and creative ways to skirt these bans, including the use of indirect advertising. By increasing their sponsorship of sporting events and teams, rock concerts, discos, and the arts, the companies get free exposure without violating the bans against direct advertisement.
Ironically, as Americans increasingly reject smoking, the cigarette companies use the lure of
America to promote their brands. In 1997, RJ Reynolds began testing ads in Eastern Europe and
the former Soviet Union that link its Winston and Magna cigarette brands with "American"
themes. One ad features an eagle flying over a city skyline, with the text: "A Taste of Freedom."
Other ads feature a young couple driving a convertible along beaches or the Grand Canyon,
accompanied by the text: "New Horizons In Taste."3 Tobacco companies even sponsor traffic
lights. In the Hungarian capital of Bucharest, RJ Reynolds paid for a year's supply of light bulbs
for the city's traffic lights in exchange for adding the Camel logo to the yellow lights. 4 But
the multinational cigarette companies do not limit themselves to piggybacking on worldwide
fascination with U.S. culture. They are also ready, for example, to appeal to Russian nationalist
sentiment to sell their cigarettes. Peter the Great cigarettes, produced by RJ Reynolds, are
designed for those who "believe in the revival of the traditions and grandeur of the Russian lands"
says the inscription on the back. BAT takes it a step further. One of its ads for the Yava Gold
brand depict a missile-shaped pack of cigarettes soaring over Manhattan and, in large print, the
words, "Strike Back."5 Another shows a Russian cosmonaut, tethered to the Mir space station,
painting "Yava Gold" on the American space station above the words "retaliatory strike."6
By practicing the tactic of "brand-stretching," or "trademark diversification" as the companies like to call it, cigarette firms have put their logos on clothing lines, racing boats, backpacks, coffee and even travel agencies.7 Although they deny it, brand-stretching allows the companies to advertise their cigarette brand names without violating laws prohibiting the advertisement of cigarettes. In Malaysia, for example, four of the top ten advertisers have cigarette brand names in their title, including Peter Stuyvesant Travel and Benson & Hedges Bistro.
Internal RJ Reynolds International documents state that 'Salem Attitude', a chain of clothing stores in Hong Kong, was established to "extend the trademark beyond tobacco category restrictions....The Salem Attitude image campaign will survive marketing restrictions." In Malaysia, a RJ Reynolds subsidiary licenses the Camel name to makers of "adventure gear" clothing, now one of the country's best-selling lines of clothing.8 Recently in Beijing, Philip Morris began offering sportswear emblazoned with the Marlboro logo -- including hats, jackets and watches -- in exchange for empty Marlboro cigarette packs. The company reportedly mailed promotional materials for the giveaways to junior high-school students.9 The company also operates Marlboro Classics stores across Europe and Asia, selling everything from lizard-skin cowboy boots to wool blankets.10
In January of 1998, the Times of London reported that cigarette companies were testing ways to skirt the recently passed European Union-wide cigarette advertising ban that will take effect in 2006 by pushing their cigarette brand names through a line of coffee products. Starting with a trial run in Malaysia, BAT is hoping to open up a string of "Benson & Hedges" coffee shops. Testing in Malaysia is being carried out by World Investment Company, a private company reportedly created by BAT expressly for the purpose of developing consumer products which use its cigarette brand names. At the coffee shops, customers are waited on by staff adorned with logos of the Benson & Hedges gold colored cigarette package and are served Benson & Hedges Quality Blend Coffee. Says Danny Sta. Maria, the manager of one of the shops in Kuala Lumpur, "The idea is to be smoker-friendly. Smokers associate a coffee with a cigarette. They are both drugs of a type." A source close to the project called the promotion a "logical step" for the company. "They are running out of markets in which they can openly advertise. So the thinking is, well, 'Okay, if we can't advertise cigarettes we will advertise another product which will have a halo effect on the cigarette brand." Although the EU ban is supposed to ban all forms of "indirect advertising," the tobacco companies believe that enterprises which are profitable in their own right cannot be stopped from using the trademark names. The coffee shops are just one of a number of spin-off brands developed by BAT. Others include the Kent travel agency, John Player whiskey and Lucky Strike Clothing.11
The multinational cigarette companies spend millions of dollars sponsoring sporting events and teams. Sponsorships publicize their brand names and, according to the WHO, create "subconscious positive images" of the relationship between smoking and athletics.12 Among recent sports sponsorship examples:
The cigarette companies also spend millions of dollars sponsoring and promoting entertainment events that appeal to young people. Cigarettes and promotional items are often given away at these events in order to hook new smokers and promote the companies' brand names:
The cigarette companies deny that these activities encourage young people to smoke. What they are simply doing, they say, is competing for the loyalty of current smokers. According to the Tobacco Manufacturers' Association, "One characteristic which tobacco advertising and tobacco sponsorship both share...is that neither activity encourages non-smokers to start smoking or existing smokers to smoke more."
There is certainly evidence to the contrary. A 1996 study published in the British Medical Journal, for example, concluded that cigarette company sponsorship of the India-New Zealand cricket series in 1995 did have a significant impact on kids who watched it on television. The study concluded that the advertising created the impression among the 1,948 children aged 13-16 years who participated in the survey that "smoking gives more strength, improves batting and fielding and ultimately increases the chance of winning." According to a survey by the Australian Medical Association, 87 percent of young people in Western Australia said that cricket players promote cigarettes. Benson & Hedges has sponsored Australian cricket for 20 years.33
When indirect methods of sports and entertainment sponsorship do not seem to be enough, the companies can always use more direct appeals. In Kandy, Sri Lanka's second largest city, BAT has paid to paint the logo of one of its most popular brands on the front wall of a prestigious girls high school and the scoreboard of an exclusive boys high school. BAT also hires young women (at five times the average salary of a university graduate) to drive around the country in bright red "Gold Leaf" cars and jeeps, giving out free cigarettes and promotional items on college campuses, shopping malls and other places where young people gather.34
Overseas, the cigarette companies have used their significant economic and political clout to influence regulatory legislation, fight advertising restrictions and try to downplay the health effects of smoking. They have spent millions of dollars on lobbying activities to avoid incurring the legal, political, regulatory and cultural problems they face in the United States.
One prominent theme in Big Tobacco's political campaigns is that tobacco regulations will interfere with individual rights. Philip Morris "has been worried that anti-smoker sentiment in the US is being transferred to Europe," says a report prepared by the State Affairs Company, a Virginia-based public relations firm working with the cigarette industry. The report describes efforts by Philip Morris to spend millions of dollars in advertising in Europe to defend smoking and stem tobacco control measures being prepared in the European Union. The company hopes "to quash these feelings with a Pan-European national newspaper campaign calling for common sense and respect for personal liberty."1 This particular effort backfired, when Philip Morris suggested in a Western European ad campaign that inhaling second-hand smoke is a less dangerous activity than eating a cookie or drinking a glass of milk. This outraged health advocates, not to mention cookie manufacturers, who sued the company.2 A French court subsequently put an injunction on the ad campaign.3
Big Tobacco has not hesitated to flex its significant political muscle in countries where it operates. Philip Morris has hired former British prime minister Margaret Thatcher on a three-year, $2 million part-time contract to help them promote their product overseas. One of her first tasks for the company was a visit to Kazakhstan where she successfully convinced the government to sell a controlling stake in the state cigarette company to Philip Morris.4
In the Czech Republic, Philip Morris was recently involved in a major campaign finance scandal involving the Civic Democratic Alliance, the country's most powerful political party. Philip Morris and two Czech companies allegedly funneled donations to the Alliance through a fictitious company. When the scandal broke in February 1998, the environment minister was forced to resign in disgrace. Philip Morris claims that it knows nothing of these matters.5
In the Ukraine, Philip Morris and RJ Reynolds now control over half of the country's cigarette manufacturing capacity. Since entering the country in the early 1990s, these companies had seen their advertising campaigns curbed by increasingly strict government regulations. Hoping to avert even tougher restrictions being proposed by health and veterans' groups, the companies signed a voluntary code of conduct that allowed cigarette commercials on television after 10 p.m. and prohibited cigarette billboards within 100 yards of schools. Defeated in their attempt to get the voluntary code signed into law, the tobacco companies regrouped. Philip Morris hired the Leo Burnett advertising agency to pull together a coalition of cigarette companies and advertisers to fight the new proposals. These firms donated billboard space, as well as radio and TV time and encouraged newspaper editorialists to criticize the proposed restrictions. The coalition lobbied parliament heavily, using slick information packets produced clandestinely by Philip Morris. On the cover of the packets was an image of crushed tobacco leaves forming the figure of $400 million -- "That's the amount that Ukraine's economy will lose in the next five years as the result of a ban on tobacco advertising," it said. Parliament rescinded most of the meaningful advertising restrictions, making way for the Marlboro man to roam the streets of Kiev once more.6
Although known as ardent free-traders, the cigarette companies are willing to play the role of protectionists when it suits their interests. In Russia, BAT has opposed a government effort to institute a uniform tax rate on cigarettes that would replace the current system whereby domestically produced cigarettes are subjected to a lower excise tax.7 In Romania, where RJ Reynolds is the largest foreign cigarette company, Reynolds executives have actively opposed recent reductions in the 98 percent duty on imported cigarettes. The tariff reduction "is a bad law and it needs to be changed in a way to stimulate local producers," said Adam Bryan-Brown, a spokesman for RJ Reynolds Central Europe. "We remain committed to Romania, but we may have to consider transferring production of some of our brands offshore," he threatened. 8
The tobacco companies have always understood that politics is about more than lining up votes in national legislatures. They undertake a wide array of activities to shape the political context in which legislation and regulations may be considered. "We must attack the anti-smoking groups and zealots more confidently than we have in the past," suggests a 1985 internal Philip Morris International memo. "[P]erhaps we could commission a book on the 'anti-industry industry' and show that our attackers actually make money out of their activities, a situation quite at variance with their image today. Possibly, too, we can discredit our critics....If we dig around, we will certainly find anomalies which we can exploit. Internationally, we will start looking in countries where we are under severe pressure."9
According to recently disclosed Philip Morris memos, the company secretly orchestrated a campaign to promote the industry's contention that secondhand smoke is not dangerous. Coordinated by the law firm Covington and Burling, the operation, dubbed "Project Whitecoat," secretly recruited scientists to "keep the ETS [environmental tobacco smoke] controversy alive." Among the company's hires were an editor of the prestigious British medical journal, The Lancet, as well as a consultant who advised a Parliamentary committee on the issue.10 Philip Morris also established Indoor Air International, a "learned society" based in Geneva created to publish studies suggesting that tobacco smoke is not necessarily the cause of lung disease. Dr. Helmut Gaish, former Director of Science at Philip Morris Europe wrote in 1988, "No other resource gives the industry any similar access to the scientific community, government, and those who make decisions about indoor air quality issues and standards." Clive Bates, the director of Action on Smoking and Health, says "Philip Morris's claimed infiltration of science is a scandal. The documents clearly show the industry inventing and orchestrating controversies, buying up scientists and creating influential outlets for tainted science."11
The cigarette companies have also been trying to sow doubt among overseas journalists over the hazards of tobacco use. According to the New York Times, BAT has sponsored seminars at luxury resorts around the world showcasing company scientists refuting the health risks associated with smoking. At one seminar for African journalists, a communications consultant gave a presentation from a wheelchair. The woman, who is not disabled, "used the wheelchair to dramatize her belief that many countries are becoming paralyzed by the fear of such 'infinitesimal, if not hypothetical, risks' as the 'whiff' of someone else's cigarette." In the Philippines, the Leo Burnett advertising agency (creator of the Marlboro Man) has worked with Philip Morris to defeat government anti-smoking programs and cast doubt over the link between smoking and cancer. The agency takes credit for helping to "neutralize" a government ad campaign to reduce cigarette consumption by children which used a cartoon character named "Yosi Kadiri" (slang for 'cigarettes are disgusting') with bloodshot eyes and yellow teeth. More than half of Filipino children between the ages of 7 and 17 now smoke, a 150 percent increase since 1987.12 The agency helped orchestrate a campaign to get the ads pulled by mounting a letter writing campaign and encouraging cigarette companies to threaten to withhold advertising if the anti-smoking campaign continued.13
This sort of threat is not uncommon. According to the World Health Organization, "tobacco
advertising revenues discourage the media from reporting the risks of smoking. This is of
particular concern in developing countries, where public awareness of the harmfulness of smoking
is low or sometimes nonexistent."14 The same Philip Morris memo mentioned above suggests
using the company's "considerable clout with the media" to dampen anti-smoking sentiment. "The
media like the money they make from our advertisements," says the memo, "and they are an ally
that we can and should exploit."15
Along with their considerable economic and political clout, until recently the cigarette companies have been able to rely on the full support of the U.S. government to help them peddle their deadly products in the rest of the world. Official U.S. promotion of tobacco exports to the developing world started in earnest after the Second World War. Under the guise of providing assistance to needy countries, the federal government's "Food for Peace" program shipped hundreds of millions of dollars worth of tobacco to Asia, Africa and Latin America. By encouraging tobacco addiction, this program helped lay the groundwork for the later penetration of these countries by the tobacco multinationals.1 However this pales in comparison with the assistance given U.S. cigarette companies in Asia in the 1980s.
In 1985, under pressure from the U.S. Cigarette Export Association (a trade group comprised of Philip Morris, RJ Reynolds and Brown & Williamson)2, the Office of the U.S. Trade Representative (USTR) began to use Section 301 of the 1974 Trade Act to open up foreign markets to U.S. cigarettes. Under Section 301, the USTR can invoke retaliatory sanctions against countries that discriminate against U.S. imports.. The cigarette companies saw this as the golden key to opening up lucrative markets in Asia. Japan had high tariffs which kept U.S. brands out. South Korea had a law that made it a crime to buy or sell foreign cigarettes. Taiwan and Thailand remained tightly shut. Each of the governments justified its ban on imported cigarettes on public health grounds while at the same time their state-owned cigarette monopolies manufactured and sold cigarettes. The USTR declared that the governments were using public health protection as a phony justification to protect their inefficient monopolies from foreign competition. What the USTR did not take into account was that the cigarettes produced by the state-controlled monopolies were expensive, of poor quality, and rarely advertised. As a result, per capita cigarette consumption was relatively low (with the exception of Japan) and smoking in these countries was generally limited to older men with disposable income.
In 1986, the U.S. government threatened trade sanctions against Japan if it did not open up its market to cigarettes. Senator Jesse Helms, the powerful North Carolina Republican and then chair of the Senate Agriculture Committee, wrote to Japanese Prime Minister Nakasone in July 1986 urging him to comply with U.S. demands: "Your friends in Congress will have a better chance to stem the tide of anti-Japanese trade sentiment if and when they can cite tangible examples of your doors being opened to American products," Helms wrote. "I urge that you make a commitment to establish a timetable for allowing US cigarettes a specific share of your market. May I suggest a goal of 20 percent within the next 18 months?"3 Months later, Japan complied.
Since Japan was forced to open its market, foreign cigarette brands have increased their market share from 2 percent to 22 percent and now account for approximately half of all cigarette advertising on television.4 In 1986, the smoking rate for Japanese women in their twenties was 15.5 percent. By 1996, it had risen to 20.3 percent.5 Yumiko Mochizuki, head of the Japan Ministry of Health's tobacco control program, says that between 1990 and 1996, the smoking rate among 17-year-old boys shot up from 26 to 40 percent, and among girls went from 5 to 15 percent, an all-time high. She attributes this to the influx of U.S. cigarettes. "Their marketing techniques are very excellent and teenagers are vulnerable to their power," she says.6
South Korea was the U.S. cigarette companies' and USTR's next target. The country had passed legislation banning cigarette ads a few months before the USTR commenced Section 301 action in which it defined "fair access" as including the right to advertise. "I want to emphasize," said a commercial counselor at the U.S. embassy in Seoul in a letter to a Philip Morris public affairs manager in 1986, "that the embassy and the various US government agencies in Washington will keep the interests of Philip Morris and other American cigarette manufacturers in the forefront of our daily concerns."7 In 1988, the Korean government agreed to open its doors to U.S. brands and allow cigarette signs and promotions at shops, ads in magazines, and company sponsorship of sporting events. Within a year, U.S. companies had 6 percent of the market. According to a Gallup Poll, the smoking rate among teenage boys in Korea was 18.4 percent in 1988 -- a year later, after U.S. cigarette imports were allowed, it had risen to 30 percent. Smoking rates for teenage girls rose during the same period from 1.6 to 8.7 percent.8
In Taiwan, where the government also caved in to U.S. pressure, consumption of foreign
cigarettes increased from 1 percent of annual cigarette sales to more than 20 percent in less than
two years, while smoking rates among high school students increased by 50 percent. 9 The
cigarette companies were less successful in Thailand. Thai health officials refused to buckle to
unilateral pressure, leading the United States to challenge Thailand's ban on cigarette imports and
ad prohibition at the General Agreement on Tariffs and Trade (GATT). In 1990, a GATT dispute
resolution panel concluded that Thailand's ban on imported cigarettes was a clear violation of the
international trade rules. However, the panel found that Thailand could maintain cigarette
advertising restrictions that applied equally to domestic and foreign brands. Thailand now has
some of the strongest anti-smoking legislation in the world and imported cigarettes account for
only 3 percent of the market.
Although the U.S. Congress has taken some positive steps to end these sorts of abuses by American trade officials, the cigarette companies are finding new ways to pry open foreign markets, again under the guise of "free-trade". Following the signing of the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States in 1994, there has been a sharp rise in the activities of the cigarette multinationals in Mexico, culminating in the purchase last July of Mexico's two cigarette companies by BAT and Philip Morris (see the Mexico case study). Although Mexico currently exports few cigarettes to the United States, that is expected to change as U.S. tariffs on Mexican exports are reduced under the NAFTA. Those reductions will apply to raw leaf as well, which helps explain recent interest by multinationals. "NAFTA is very important," says Hector Garcia, manager of tobacco processing and exportation for BAT's Mexican subsidiary. A few years back, "no American cigarette companies came here. [In 1996] they all came," he explains, due to the lower duties. 10
The cigarette companies are also taking advantage of international trade rules to break open new markets, particularly in China, where taxes on foreign tobacco and cigarette imports effectively double their retail price.11 Unhappy with these and other restrictions, foreign tobacco companies have sought to condition China's entry into the World Trade Organization (WTO) on the opening up of its market. Following U.S. threats to invoke retaliatory sanctions under Section 301, China signed a Memorandum of Understanding with the United States in 1992 that required it to lift all import licensing requirements for cigarettes, cigars, tobacco and cigarette filters within two years and to remove "scientifically unjustified health standards related to tobacco."12 China has yet to honor this agreement, and the U.S. government has so far not pressed the matter.
The cigarette companies, however, have been actively courting the Chinese leadership. Philip Morris is a member of the Business Coalition for U.S.-China Trade, a trade association which has lobbied the U.S. Congress heavily to ease trade restrictions with China.13 Last October, at a meeting with Philip Morris CEO Geoffrey Bible, Chinese President Jiang Zemin praised the company's efforts in the United States to secure Most Favored Nation trading status for his country.14 Martin Broughton, BAT's Chief Executive Officer, is the Chairman of the Chatham House Task Force, a foreign policy group which "aims to facilitate free trade in China." The company makes no bones about its desire to capture the Chinese market. "For BAT, China is an important challenge for the future. It is the world's largest market for tobacco products, representing 30% of world volume."15
This tactic represents their "greatest hope for making it big time into China," says the Independent of London. "China wishes to join the WTO, but membership will involve opening up its cigarette market to foreign competition. China's WTO membership would give BAT and other companies the leverage to pry open the market, giving them access and ability to set up factories or joint ventures, thus allowing them to widen their product range."16 The pressure may be working. In August 1997 the Financial Times reported that China would cut tariffs on tobacco imports "as part of its bid to join the World Trade Organization."17 Another threat to the ability of countries to regulate tobacco is the proposed Multilateral Agreement on Investments (MAI), currently being negotiated behind closed doors at the Organization for Economic Cooperation and Development (OECD). Negotiations for this "stealth treaty", which has attracted little attention in the media, are ongoing. A draft copy of the Agreement which was leaked in 1997 paints a chilling picture. If adopted, the MAI could have extremely negative implications for international tobacco control efforts. Domestic regulations regarding cigarette imports, advertising and ingredient disclosure, for example, could again come under attack as unfair barriers to trade, as they did in the 1980s. At that time, however, Thailand was able to argue for exceptions on public health grounds. The MAI makes no such allowance. In addition, the MAI would require governments to treat huge multinational corporations like Philip Morris or RJ Reynolds no more or no less favorably than their domestic cigarette companies.
The MAI would also give private investors the same legal standing as governments to seek to enforce the terms of the Agreement. This is a radical departure from previous international trade agreements where the right to "sue" governments over perceived trade violations has been the sole province of sovereign governments. Thus, even though the U.S. Congress has for the most part barred the federal government from challenging foreign tobacco regulations, large tobacco companies could sue governments in their domestic courts.
Health and Human Services (HHS) Secretary Donna Shalala did tell the House Commerce Committee in November 1997 that the Clinton administration would support strong overseas measures to curb tobacco, saying that it was the policy of the Administration "not to interfere with a foreign country's non-discriminatory health-based efforts to control the use of tobacco." She said that HHS would work with the U.S. Trade Representative, "to ensure that US tobacco trade policy incorporates the health policy perspective." She also promised that U.S. embassies and trade missions overseas would not promote tobacco use, and said that U.S. negotiators will do nothing more than seek "equal access to a shrinking global tobacco market".18 Whether that last pledge is being honored is subject to interpretation. Just two months later, the USTR delivered a demarche to the Thai government challenging a proposed regulation that would require cigarette manufacturers to disclose the ingredients in their brands. The USTR demanded extremely detailed proof that the Thai law was intended to promote public health, not benefit the state tobacco company.
Each year around 300 billion cigarettes, or a third of all cigarettes entering into international commerce, are illegally smuggled, escaping taxes and import restrictions. This figure has increased from 100 billion in 1989. Cigarette smuggling costs governments some $16 billion a year in lost tax and customs revenue.1
There is widespread belief among analysts, and some substantial evidence, that the tobacco companies facilitate and benefit from smuggling, although the companies uniformly deny they are complicit in it. Smuggling encourages people to smoke, especially youth, by making cheap cigarettes available. Smuggled cigarettes often sell at one-third the cost of those which have been subjected to taxes and customs duties. It also helps develop brand loyalty among customers in countries where it is expected that trade barriers will soon be lifted, such as in China. Smuggled products do not need to comply with the labeling requirements now present in many countries. As the industry publication World Tobacco puts it, smuggling has "helped to promote some of the world's leading brands in markets which had remained closed to foreign imports and where demand for Western cigarettes has continued to grow."2
Smuggling benefits Big Tobacco in other ways as well. Smuggling helps break high tariffs and other trade barriers. Smuggling encourages governments to reduce these barriers and allow more cigarettes to be imported legally, on the theory that the governments might as well at least take in tax revenues on imports. Smuggling also "seems to work to the benefit of multinational tobacco companies and results in the weakening of state and local companies," says Neil Collishaw of the WHO, since domestic companies' "taxed product has to compete with untaxed product from the multinationals."3
Smuggling played an important role in helping the multinational tobacco companies establish their Latin American presence. A 1992 U.S. Surgeon General's Report looking at the conquest of Latin America by the multinational tobacco companies identified smuggling as the key to the demise of national tobacco companies. Philip Shepherd, a professor of marketing at Florida International University who has advised state cigarette companies in Colombia and Peru, says that during the 1960s and 1970s, the multinational companies set up smuggling networks to evade high tariffs. "The smuggling networks were incredibly effective, and [in many parts of Latin America] local companies withered quickly and were bought up."4
In Canada, following passage of a hefty increase in cigarette taxes in 1989, there was a huge jump in Canadian cigarette exports to the United States -- from 3 billion in 1990 to 9 billion one year later -- with the bulk of those exports going to Buffalo and other destinations on the U.S.-Canada border. Most of these cigarettes ended up smuggled back into Canada. "It wasn't because a bunch of people in Buffalo all of a sudden decided they like Players cigarettes," says Heather Selin with the Nonsmokers Rights Association in Ottawa. "Tobacco companies were flooding the export market knowing full well that those cigarettes would end up in Canada illegally," she says.5 Michel Descoteaux, a spokesman for Imperial Tobacco Ltd., which is partly owned by BAT, told the New York Times that the companies "absolutely" knew that the cigarettes were destined to come back into Canada. "We had warned the government for years that when the taxes were increased, there would be smuggling," he said. Canada's top three cigarette companies, each of which is affiliated with either Philip Morris, Reynolds or BAT, lobbied heavily to repeal the new taxes. In 1994 Prime Minister Jean Chretien was forced to start reducing the taxes because the government was losing so much revenue to the smugglers. "The fact is," he said at the time, "that the Canadian tobacco manufacturers have benefitted directly from this illegal trade," and had known "perfectly well" what was happening.6
In 1997, a senior executive with RJR McDonald, the Canadian subsidiary of RJ Reynolds, was charged with conspiring with the leaders of a multi-million dollar smuggling ring to bring the company's cigarettes into Canada illegally. According to federal court records, Les Thompson, a marketing executive with RJ Reynolds based in Winston-Salem NC, met often with leaders of a massive cigarette smuggling ring7 and that Reynolds paid for trips by these smugglers to a fancy Canadian fishing resort.8 Thompson was in charge of marketing cigarettes to the Akwesasne Indian Reservation (which sits on the U.S.-Canada border), long known as a major source of smuggled cigarettes into Canada. A former truck driver for the smuggling ring stated in an affidavit that Thompson was present at a meeting of the smugglers and "definitely put it together that the cigarettes were being smuggled into Canada."9 The ring stands accused of smuggling $687 million worth of cigarettes and alcohol into Canada over a four-year period through the Reservation. Authorities say that the cigarettes were exported from Canada into the U.S. to avoid high domestic cigarette taxes and then smuggled back into Canada and sold for a hefty profit.
Now smuggling appears to be having similar effects in China. In the past few years, billions of cheap cigarettes have been smuggled into China, often transhipped by violent criminal gangs based in Hong Kong. Estimates of the number smuggled each year go as high as 50 billion, many times more than the 700 million which are allowed in legally each year under the country's import quota. The Chinese government says this smuggling is costing it $1.8 billion a year in lost revenues. Legal foreign cigarette imports in China face a 65 percent excise tax.10
Many observers find the companies' denial of involvement in smuggling less than convincing. As U.S. Senators Richard Durbin and Ron Wyden put it, "What other legal industry allows up to one-third of its product to be diverted to illegal sales?"11 A large percentage of the cigarettes that are smuggled are produced in the Big 3 companies' overseas factories. In the past few years, several cigarette company executives have been indicted and/or pled guilty on charges of aiding smugglers.
Jerry Lui, a former executive with Brown & Williamson, was recently convicted of accepting over $33 million in kickbacks from a Hong Kong-based smuggling ring. Before cigarette dealer Tommy Chui had a chance to testify as the government's star witness in the case, his battered body was found floating in a laundry bag in Singapore Bay, his mouth taped shut.12 Chui had alleged to Hong Kong officials that his firm had bribed a series of BAT marketing managers in Hong Kong, including Lui. In return, BAT officials allegedly arranged the sale of millions of dollars of cigarettes to Chui's firm, complete with phony manifests and shipping papers, which Chui's company then resold to smugglers bringing them into China. The Wall Street Journal reports that BAT executives held "weekly meetings at which smuggling activities were discussed, down to specific boats, inlets and villages involved" and that "such information was kept from the most senior BAT officials who visited Asia from London to allow them deniability."13 Although BAT officials claim that the whole affair was the work of rogue elements, the judge in the trial stated that the evidence suggested that "at all material times BAT was in fact aware that this large quantity of cigarettes, worth billions and billions of dollars, would ultimately end up, through smuggling, in the China market."14 In any case, "there is no question that the smuggling has given BAT a foothold in China, the most prized cigarette market," says the New York Times.15 According to Tony Silverman, a tobacco analyst with NatWest Securities, 80 percent of BAT cigarettes sold in China are contraband.16
In 1997, the New York Times reported that a Swiss tobacco dealer served as the middleman between RJ Reynolds and black marketeers in Spain. Michael Haenggi, one of Europe's biggest cigarette dealers, told the Times in an interview in August 1997 that he resells many of the Winstons he buys from Reynolds to smugglers in Spain. Haenggi would purchase the cigarettes, indicate on the shipping documents that they were bound for Senegal, and then arrange to have them secretly offloaded onto speedboats outside Spanish territorial waters. At Haenggi's Belgian warehouse, investigators found a series of faxes from Reynolds officials in Geneva indicating that they were closely tracking the volume of cigarettes that Haenggi was supposedly shipping to Senegal. The numbers could not have possibly squared with Reynolds own sales figures in Senegal -- Senegal imports no more than 500 million cigarettes a year, less than one-fourth the amount that Haenggi said were being exported there. As Carlos Castresana Fernandez, a prosecutor in a case against the Spanish smugglers, said, "The amount is so high, they [Reynolds officials] can't say they don't know." Winstons are the most popular foreign brand in Spain -- approximately 60 percent of those sold are contraband, purchased at about one-third less the price of legally imported ones. "It's astonishing that these big producers are not more concerned that such a large quantity of their product is arriving on the illegal market," says Per Brix Knudsen, director of an anti-fraud unit for the European Union. "How is it that such a trade can take place?"17
Despite Haenggi's admission that he resells Reynolds products to known smugglers, a spokesman for RJ Reynolds International told the Times in May 1998 that the company is continuing to sell cigarettes to him. European Union officials now intend to ask for U.S. government assistance in the case. Says Knudsen, since "Reynolds has previously refused any cooperation whatsoever we intend to take up this issue with the U.S. authorities."18
The smuggling issue is further complicated, says analyst Doug Cogan, by the fact that the international tobacco divisions of both RJ Reynolds and Philip Morris are based in Switzerland. "Swiss law basically does not view selling cigarettes to people who smuggle them into other countries as a crime," Cogan writes. "Therefore, it is perfectly legal under Swiss law for Philip Morris and RJ Reynolds to sell cigarettes to Swiss dealers who in turn sell them on the black market in other countries."19
The Minnesota Star-Tribune summed up the broad health ramifications of smuggling in a 1997 editorial explaining: "In many countries, tobacco taxes are not just a revenue source but a key instrument of public health -- a way of discouraging cigarette consumption, especially among youth. Smuggling undercuts these worthy efforts. In Canada, the process has now come full circle -- the government has been forced to lower taxes as a way of undercutting smugglers.....Some observers are reading the tobacco deal as evidence that tobacco companies have written off the U.S. market as a hostile environment of declining opportunities, and are banking on a brighter future overseas. Such a prospect has some obvious appeal from a health standpoint, but it would be shortsighted to think that Americans pay no practical or moral price for tobacco companies' misconduct elsewhere."20
Wacky Tabacky
For over a decade, farmers in Southern Brazil have been growing large quantities of a genetically-altered, fast-growing tobacco plant containing twice the normal amount of nicotine. Brown & Williamson developed the seeds in conjunction with DNA Plant Technology, an Oakland-based biotech company which is owned by the Mexican conglomerate Empresas La Moderna, which in 1997 sold Mexico's biggest cigarette firm to BAT for $1.7 billion. The seeds were then provided to the farmers by BAT's Brazilian subsidiary, Souza Cruz. DNA first contracted in 1983 with Brown & Williamson to develop the high-nicotine strains (hundreds were developed) and ship them to Brazil to be grown under the secret project code "Y-1." By 1990, approximately 4.5 million pounds of the enhanced tobacco was being grown in the region -- enough to produce 180 billion cigarettes a year.1
Between 1990 and 1994, Souza Cruz shipped nearly 8 million pounds of the genetically altered tobacco to the United States for use in Brown & Williamson brands, including Pall Malls and Lucky Strikes. Roger Black, director of leaf-blending for BAT, said in a January 1998 court deposition that since 1992 Brown & Williamson had been secretly adding 2 million pounds a year of genetically altered tobacco to its cigarettes destined for export to Asia, the Middle East and Western Europe. This was twice the amount it added to its domestic brands, according to Black. Brown & Williamson spokesman Mark Smith says that while the company has stopped growing and importing Y-1 tobacco, it will continue to put Y-1 in cigarettes until the existing stockpile of 3.5 million pounds is used up some time in 1999. He claims that the company had decided to stop using the tobacco because consumer test panels didn't like the taste. But Black's own sworn testimony says that cigarettes with Y-1 "tested better in the consumer product test. The consumers seemed to like that product better."2
The tobacco, dubbed "fumo louco" ("crazy tobacco" in Portugese), was reported to cause dizziness among the farm workers who handled it, so powerful was its narcotic effect. "Even out in the field, I had a hard time approaching the stuff without getting dizzy...that smell was heavy, felt cold in my lungs. It made the back of my neck crawl," said Juca Schneider, a tobacco field instructor.3
The Associated Press quotes Mitch Zeller, a deputy associate commissioner at the U.S. Food and Drug Administration (FDA), as saying that while the agency was aware that a high-nicotine tobacco seed had been developed it did not know that it was being cultivated in such large commercial quantities. Brown & Williamson executives assured the FDA in 1994 that the project had been stopped and that they were no longer using the super-tobacco in their brands. However the Associated Press reports that Brazilian farmers are still growing the tobacco and selling the leaf to Souza Cruz. Enoir Mueller, a former Souza Cruz field instructor, says: "The company line is that what we're planting today is different tobacco, but anyone who works with the stuff knows that's just a story." In 1997, DNA was indicted for violating the U.S. Tobacco Seed Export law, which requires a permit to export tobacco seeds. The U.S. Justice Department, which filed criminal charges against B&W and DNA, charged that on numerous occasions, employees of Brown & Williamson and DNA smuggled Y-1 and other tobacco seeds to Brazil and other countries -- Nicaragua, Honduras, Chile, Nigeria, Costa Rica, Argentina, Zimbabwe and Canada -- in violation of the law.4 Under questioning, Black repeatedly invoked his Fifth Amendment right against self-incrimination when he was asked whether he knew if Y-1 seeds were sent to these countries. In January 1998, DNA pled guilty to a misdemeanor charge and agreed to cooperate with the government's investigation into Brown & Williamson's role in the scandal, in particular its efforts to "control and manipulate the nicotine levels in its cigarettes."5
During the recent U.S. Congressional debate on tobacco legislation, the cigarette companies often invoked the plight of the American tobacco farmer to argue against increased taxes and other tobacco control measures. However this concern has always taken a back seat to higher profits. Over the past decade, Philip Morris, RJ Reynolds and BAT have been using use more and more foreign-grown tobacco in both their U.S. and foreign factories. By 1993, these companies were importing more than 1 billion pounds of tobacco into the United States, up from 413 million pounds three years earlier -- between 1995 and 1996, these imports rose an additional 21 percent.1 According to the USDA, "The main reason for this surge was the rising popularity in the United States and abroad for low and mid-priced cigarette brands (discounts). To meet this demand, manufacturers imported an increasing amount of lower cost foreign tobacco."2 In 1994, U.S. Senator Wendell Ford from Kentucky managed to get a bill passed requiring U.S. companies to use at least 75 percent U.S. tobacco in their cigarettes, but this law was later declared illegal under GATT rules. 3
Overseas, the cigarette companies have also been using more and more foreign leaf rather than importing American-grown tobacco. Most of what they purchase overseas comes from three large U.S.-based corporations that dominate the global trade in tobacco leaf -- Universal Corporation, Dimon Incorporated and Standard Commercial Corporation -- which had combined revenues of $7.9 billion in 1997. These companies buy, process, pack and ship leaf tobacco for sale to the cigarette companies in countries ranging from Brazil to Zimbabwe. As the cigarette companies have expanded their global reach, so too have the tobacco leaf companies. Yet the costs associated with this global expansion have led to a rapid consolidation in the leaf processing industry, with the number of major companies going from eight to three in the past few years. As world demand grows for American cigarettes and the mild tobacco mixture known as "American blend," these companies have begun to play a major role in financing overseas tobacco production. According to a report in the Washington Post, in many countries the leaf companies get down payments from American cigarette companies to deliver a set amount of leaf. "They then use that down payment to provide cash advances to growers in countries such as Brazil, helping to finance farmers there without putting their own funds at risk," says the Post report.
"The world market is where the bulk of the growth is," says Universal Vice President James Starkey III.4 With operations in 30 countries around the globe, Universal realized a profit of $237 million on sales of $4.1 billion in 1997.5 The company first went into China in the 1920s, was kicked out during the revolution, but returned in the 1970s when the Nixon administration restored relations with China. "The one thing we've been good at is managing through instability. We stick to our knitting. We don't get involved in politics," Starkey says. In China, the company manages a new leaf processing plant with the understanding that a minimum of 70 percent of the tobacco will be exported. "It's the only export operation in China managed by a foreign company," Starkey says proudly. In the early 1990s, Universal and Philip Morris jointly purchased a newly privatized tobacco processing company from the Kazakhstan government.6 The company's latest joint venture is with RJ Reynolds in Azerbaijan, where it will develop and boost production of Azerbaijani leaf.7
Dimon Inc. made a profit of $177 million in 1997 on sales of almost $2.5 billion.8 With operations in 36 countries, Dimon recently acquired UK-based Intabex Holdings Worldwide, which was the fourth largest leaf tobacco dealer in the world. With leaf buying, processing and exporting operations in the United States, Brazil, Argentina, Malawi, Italy, Zimbabwe and Thailand, the acquisition has helped Dimon become Universal's main competitor.9
Standard Commercial Corporation is the smallest of the three big leaf companies, making a relatively modest profit of $38 million on sales of $1.3 billion in 1997.10 Yet it is has been extremely active lately in expanding its foreign holdings. In August 1997, the company announced plans for a joint venture with the Chinese government to construct a factory for processing tobacco for both domestic use and for export. The company is to supply and oversee the installation of the processing machinery, and provide "expertise in the growing, grading and selection of export quality leaf tobacco." According to Standard CEO Robert Harrison, the company sees "great potential to increase exports from China."11 Two months later, the company announced the construction of similar factories in India and Tanzania. The Indian plant will process and market tobacco, primarily for export.12 In Tanzania, Standard will build a new factory to add to its holdings in the country, where it has purchased a minority interest in the sole leaf processing factory in the country (which had been operated by the state-owned Tanzania Tobacco Board) from Universal Corporation, which had acquired it earlier in 1997. Tanzania is increasingly viewed as an important source for filler-style tobacco, particularly for the European market.13