CML5619F - The Law of International Trade

Assignment Task

Background Facts

South Africa wants to adopt measures to combat the high incidence of smoking in the country in light of the associated health impacts – to the affected individuals, the public health care system and the economy as a whole.

Approximately 12 million adult South Africans smoke. The figure for non-adult smokers is less certain, but the health department believes that an increasing number of youth (those under 18) are starting to smoke, even though it is unlawful to sell cigarettes to youth. The cigarettes sold on the South African market include regular (unflavoured) cigarettes, cigarettes flavoured with menthol and cigarettes flavoured with other flavourants (such as cherry, strawberry, vanilla etc).

The tobacco industry in South Africa is a R30 billion industry. The industry includes tobacco farmers and manufactures of tobacco-products. The tobacco product manufactured in South Africa is exclusively cigarettes.1 The proportion of smokers smoking flavoured cigarettes is increasing. The percentage of regular tobacco smokers in SA has decreased from 85% (in 2015) to 70% at present, and the decline appears likely to continue.

The tobacco industry attributes much of the decline to smokers increasing preference for flavoured cigarettes (rather than the fact that they are simply stopping smoking). Flavoured cigarettes are particularly popular amongst women and youth. Approximately 70% of the cigarettes manufactured in South Africa are regular (unflavoured) cigarettes, and about 30% are menthol cigarettes. South Africa does not produce other varieties of flavoured cigarettes The South African cigarette-manufacturing-industry is dominated by a single company (British American Tobacco), which holds approximately 75% of the market share in legal cigarette sales. The cigarette manufacturing industry pays approximately R10 billion in excise taxes to the South African Revenue Service (SARS) annually.

South Africa both imports and exports cigarettes. It exports about R3 billion worth of cigarettes and imports about R1.5 billion worth of cigarettes. Of the imported cigarettes, approximately 40% are regular cigarettes, 30% are menthol cigarettes and 30% are other flavoured cigarettes.

Country

A. is a developed country.

It is one of South Africa’s main trading partners. There is extensive bilateral trade between South Africa and country A in both agricultural and manufactured goods across a wide array of tariff lines.

B. is an upper income developing country with a very large economy. It is also one of South Africa’s main trading partners. There is extensive bilateral trade between South Africa and country B in both agricultural and manufactured goods across a wide array of product lines.

C. is a lower income developing country. South Africa exports mainly precious metals to Country C, and those exports account for 4% of South Africa’s total exports of precious metals. Other than cigarettes, South Africa imports mainly palm oil from Country C. Fifty percent of its palm-oil imports come from Country C. South Africa also imports other vegetable oils from other countries, and those oils include olive oil, sunflower oil, coconut oil and canola oil. South Africa levies an import tariff of 10% on all vegetable oils, including palm oil.

D. is a least developed country. South Africa imports very little from Country D, apart from cigarettes. It exports considerably more to Country D than it imports. Its primary exports are petroleum and machinery used in the manufacturing and transportation sectors. Country D imports 30% of its petroleum and machinery from South Africa, but Country D is a relatively small market from South Africa’s perspective – its imports account for only 2% of South Africa’s exports in these products.

South Africa’s Proposed Measures

With all these issues in mind, South Africa is considering adopting one or more of the following measures with the objective of discouraging smoking, particularly smoking of flavoured cigarettes.

1. A direct import ban on menthol and all other flavoured cigarettes.

2. Increasing the customs duty payable on all imported cigarettes (regular, menthol and flavoured) to 100%.

3. The introduction of new tariff lines and different tariff rates in South Africa’s tariff book. The new tariff lines will distinguish between regular cigarettes, menthol cigarettes and other flavoured cigarettes, with different duties applied to each of these product categories. The existing MFN applied duty across all cigarette types is 45%.

The proposed new tariff lines and MFN applied duties are reflected in the table below.

4. The introduction of higher excise duties on cigarettes. The current excise duty does not distinguish between different types of cigarettes. It is currently 30? Valorem on the ex-factory-sales-price. The proposed new excise duty will distinguish between the three types of cigarettes.

The excise duty on regular cigarettes will remain at roughly 30%, while it will be raised to 50% for menthol cigarettes and 60% for other flavoured cigarettes.

5. The adoption of a regulation specifying that menthol is the only permissible flavourant in cigarettes sold in South Africa and expressly prohibiting the use of all other flavours.

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