Clove Cigarettes May Prompt U.S., Indonesia Dispute (Update1)

By Mark Drajem and Lorraine Woellert

May 19 (Bloomberg) — A U.S. effort to discourage teenagers from smoking is running into opposition from Indonesia, whose 4 million clove farmers may lose a market.

Cloves would be banned as a cigarette flavoring, along with cherry and chocolate, under tobacco legislation a Senate panel is to consider today. Altria Group Inc., the largest U.S. tobacco company, backs the measure, which would exempt mint- flavored menthol cigarettes such as its Marlboro Smooth.

Congress would be “blatantly favoring a domestically produced product over an imported one” if it bans cloves and not menthol, Sudjadnan Parnohadiningrat, Indonesia’s ambassador to the U.S., wrote last month to Senate Majority Leader Harry Reid, a Nevada Democrat. Indonesia vows to take the matter to the World Trade Organization if the proposed ban becomes law.

The dispute may force lawmakers to choose between jeopardizing a $22 billion-a-year trade relationship with Indonesia or rewriting legislation that took years to negotiate among lawmakers, anti-smoking advocates such as the Campaign for Tobacco-Free Kids, and Richmond, Virginia-based Altria.

The Senate Health, Education, Labor and Pensions Committee plans to vote as soon as today on the Family Smoking Prevention and Tobacco Control Act, which would give the Food and Drug Administration authority to regulate tobacco ingredients and advertising. The House passed the measure April 2, including the ban on most flavored cigarettes, which is meant to reduce temptations for children to smoke.

‘Trainer Cigarettes’

Clove-flavored products are known as “trainer cigarettes,” and may lead to more tobacco use, a study by the National Institute of Drug Abuse found in 2006.

Cloves, native to Indonesia, are a spice taken from the dried flower buds of a tropical tree. Indonesia is the world’s largest producer of clove cigarettes, known as kreteks, exporting about $500 million worth of the product a year, according to the Indonesian ambassador.

“Tobacco in Indonesia is more about politics than business,” said Widyastuti Soerojo, head of tobacco control at Indonesia Public Health Association. Increasing taxes or banning sales in the U.S. won’t affect demand or employment in the industry, she said.

About a fifth of the exports go to the U.S., and Indonesia says its cigarettes make up 99 percent of the U.S. market for the product. A ban would hurt Indonesian clove farmers and violate WTO rules, said Trade Minister Mari Pangestu.

U.S. Trade Disputes

“It’s the principle of it,” she said in an interview the day before she met U.S. Trade Representative Ron Kirk in Washington on May 15.

A clove ban would add to a list of congressional actions that have sparked trade disputes. Lawmakers included rules requiring that certain funds in the $787 billion stimulus package passed in February be spent mainly on American-made products, prompting protests from Canada, the European Union and companies such as Peoria, Illinois-based Caterpillar Inc.

In a spending bill passed in March, Congress banned Mexican trucks from U.S. roads, leading Mexico to levy $2.4 billion in retaliatory tariffs. That measure also prohibited imports of chicken from China, which responded with a complaint at the WTO days later.

PT HM Sampoerna, the Indonesian unit of Philip Morris International Inc., which was spun off from Altria last year, doesn’t export cigarettes to the U.S., said spokeswoman Niken Rachmad. Sampoerna is Indonesia’s biggest cigarette maker.

Gudang Garam

PT Gudang Garam, Indonesia’s second-largest cigarette maker, sold 11.3 percent of its cigarettes overseas in 2008, up from 9.7 percent a year earlier, according to the company’s annual report.

Gudang Garam rose as much as 18 percent to 10,250 rupiah today, the most in five months, after Deutsche Bank AG raised its stock rating to “buy” from “hold,” citing “signs of a turnaround” at the company. The stock traded at 9,800 rupiah at 11:23 a.m. in Jakarta.

The tobacco bill specifies that the Food and Drug Administration could ban menthol cigarettes later if it finds them harmful.

Menthol-flavored products account for about 28 percent of all cigarettes sold in the U.S., compared with 0.09 percent for clove cigarettes, according to the Specialty Tobacco Council Inc., a trade group in Winston-Salem, North Carolina. Among its members is PT Djarum, Indonesia’s leading clove-cigarette manufacturer.

Health Reasons

“Our industry is not seeking to escape reasonable regulation,” the group’s executive director, Henry C. Roemer III, said in a statement. An outright ban is “unjustified,” he said.

A trade complaint by Indonesia would hinge on whether the U.S. can prove to the WTO that it’s banning clove cigarettes for health reasons and not to protect domestic producers.

Kreteks, made from a mixture of cloves, tobacco and other additives, deliver more nicotine, carbon monoxide and tar than conventional cigarettes, according to the Centers for Disease Control and Prevention in Atlanta.

“The WTO would get involved if there is a question of discrimination,” said Claude Barfield, an analyst at the American Enterprise Institute, a public-policy research group in Washington.

The case will depend on “whether there is anything about cloves that allows you to say this is a health and safety issue,” Barfield said. The complaint “is certainly not something you could dismiss out of hand.”