China takes on tobacco

In a move hugely symbolic for a nation that pulls in 9% of its tax revenue from cigarette sales, China ratified a World Health Organization anti-tobacco treaty aimed at mitigating the health crisis related the use of tobacco products. By signing the accord which bans cigarette vending machines and tobacco sales to minors and limits cigarette advertising, Beijing is signaling to the world that it cares about more than economic indicators and GDP growth.

Of course, cigarette vending machines have been banned in China since 2000 and advertising has been heavily regulated since the early 1990s. The immediate economic effects of the treaty won't do much to disrupt big tobacco's gravy train, nor does it seem that millions of health care dollars and young lives will be saved. Still, more than PR coup, the ratification serves as a statement of principles – principles to which one day Beijing may have to adhere.

"The ratification is not likely to have an immediate effect on the whole industry, in the sense that the industry does know that this has been going on," said Sheau Jing Heng, China researcher at Euromonitor, a global consumer market consultant. "It is more a reminder to industry that the government is going to adhere to more international standards."

Immediate effects
China's legislature ratified WHO's Framework Convention on Tobacco Control on July 28, joining some 75 governments worldwide, many of which are developed EU nations, in committing to reduce the number of deaths caused by smoking.

"Many lives will be saved, health will be strengthened and the economy will benefit as well," said Dr Henk Bekedam, the WHO representative in China.

Tobacco kills 1.2 million each year in China, and in the next few decades, one third of all China's men will be affected by tobacco-related illnesses. Studies have suggested that at least five million of China's minors are currently consistent smokers. The economic payoff from the potentially declining tobacco sales, however, is hardly obvious. True, in the 1990s, China's smoking cost Beijing US$6.5 billion dollars in annual healthcare alone. And with 5 million new smokers each year added to the hundreds of millions already inhaling tar-heavy China-made smokes, the economic price is sure to keep rising.

But in terms of raw numbers, healthcare costs are just a fraction of the almost US$20 billion in annual revenue the government pulls in from taxes collected on tobacco sales. The 350 million smokers in China generated US$58.64 billion in tobacco revenue last year, up 6% from 2003, and the main beneficiary was the largest tobacco company in the world: state-owned China National Tobacco Corporation, which owns 95% of the China market.

The ratification might also disquiet foreign tobacco companies which, in light of recent regulations reducing tariffs on tobacco imports from 65% to 25%, were just gearing up for a full-on assault on the China market.

The value of rhetoric
So is Beijing weighing more than just the economic trade off? Are issues of morality – a respect for the sanctity of human life – helping to drive China's policy?

In truth, the new ban will probably do little to limit actual cigarette sales. The agreement hardly changes the legal status quo – and the regulations existing in the past have rarely been enforced. Selling cigarettes to minors has been illegal for some time, but there is no codified recourse to penalize those who break the law; for example, the framework for punishing shopkeepers caught selling tobacco to children has yet to be established. While the treaty seeks to work towards the banning of smoking in public places, no timeline has been set for implementation.

At this point, Beijing's priority seems not so much improving health as shifting its public image. "The Chinese government ratifying the act sends a message that the government will put public health on their agenda and will be concerned with public health, not just economic development," said Yan-Wei Wu of WHO.

The Chinese ratification, like abstract commitments to environmental regulation and IPR protection, suggests China is working toward – or at least committed to – a more robust legal system with a new regulatory capacity. Beyond protecting domestic industry, the new China will protect rivers and ideas and people.

And as toothless as current commitments may appear right now, they set precedents. "The convention signals the central government's commitment to it and should kick start a series of more committed actions to enforce the bans,"said Heng.

Industry fallout
Beyond the WHO treaty, China's tobacco industry faces more tough battles ahead. In preparation for increased foreign competition, the government has been closing down and merging small tobacco companies in an effort to build a handful of globally competitive players. Tobacco companies are trying to up profit margins through increased efficiency and higher quality brands, said Euromonitor's Heng.

What's the bottom line? In 2004, US-based Philip Morris saw its operating income jump 13.3% to US$4.4 billion following widespread anti-tobacco legislation. If these figures are any guide, big tobacco will do just fine.