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12th Jul 2020

Interview

EU: Tobacco giant PMI won't start smuggling after deal ends

  • Anti-smuggling effort in Finland in 2000. Back then, there were few legal tools on EU level (Photo: European Commission)

It almost looked like the anti-smuggling agreement between the European Union and tobacco giant Philip Morris International (PMI) would expire without any public acknowledgement.

After 12 years of cooperation, the increasingly controversial agreement expired on 9 July without any press release or public announcement.

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  • 'We cannot establish a direct causal consequence ... but the fact is that 85 percent less tobacco products are smuggled' (Photo: European Commission)

On Monday (18 July), the EU commissioner responsible for the file, Kristalina Georgieva spoke to EUobserver to explain her decision not to renew it.

In her office in the commission's Berlaymont building in Brussels, decorated with purple furniture, Georgieva said that it was the right decision in 2004 to sign the agreement, and it was the right decision in 2016 to let it expire.

“When we signed the agreement there was a lot of support for it in the European Parliament, among the public, and rightly so. Because it was a legal victory for the EU at the time when there was nothing else to fight illegal smuggling with. But today this is no longer the case," she said.

The EU-PMI deal was agreed as part of an out-of-court settlement after PMI was accused of smuggling its own goods to avoid paying taxes.

More than a year ago, Georgieva promised MEPs an assessment report into the cost and benefits of the agreement, which made the EU, its member states and PMI partners in the fight against illegal tobacco smuggling.

It included reporting obligations for PMI, and payments into EU and member state coffers of around €1 billion during the 12-year period.

No Eureka moment

In February, the commission published the long-awaited assessment report that contained few strong arguments for renewing.

In March, the EU parliament adopted a text in which it urged Georgieva, one of the commission's vice-presidents, not to renew the agreement.

“I wouldn't say that was a moment when the light bulb came,” she said, adding that the picture became gradually more clear when laying out the pros and cons of continuing with the agreement, and talking to “numerous people”.

One argument in favour was that the new legal tools that are supposed to bring tobacco companies in check will not come into force until a few years.

“What determined that it is best to let it expire, was when we took a very careful look into what it has delivered so far and what is the risk of the regulatory gap,” said Georgieva.

She said she believed the risk of PMI smuggling its own cigarettes to avoid taxes “is very minimal, if not none”.

“Why? Because Philip Morris says so, they have committed very publicly that with or without the agreement they will continue the same practices," she said.

She said the tobacco sector is also something of an oligopoly, with only four major companies selling most cigarettes in Europe, and the other three companies have similar agreements that run until 2022 and 2030.

Georgieva called it “the peer pressure factor”.

“In that peer group, in this particular sector, it is unlikely that the company would behave worse than its peers,” she said.

Track-and-trace

But the “most important” element of the agreement was that it convinced tobacco companies to introduce some kind of track-and-trace system. That way, if a smuggled product is found, its origins can be traced back to the factory.

Track-and-trace is part of the new tobacco products directive, and also part of an international treaty backed by the World Health Organisation (WHO).

The directive went into force in 2014, although the commission is still due to present detailed track-and-trace rules, which are expected next year.

The WHO's Protocol to Eliminate Illicit Trade in Tobacco Products will enter into force once 40 countries have ratified it – so far 18 have done so.

“We are very much on the view that 2022 is realistically the target year for the protocol to be into force,” said Georgieva.

The EU is a signatory and ratified the text last month. Because the EU is not a country, its ratification does not count as one of the 40. But were all EU member states to ratify, the treaty would enter into force globally.

Belarus

However, Georgieva said she wanted to focus her efforts on convincing countries where tobacco smuggling is “most pervasive”.

“I'm thinking of Belarus,” the Bulgarian politician said.

“Cigarettes are being bought legally in Belarus and they are smuggled into the European Union. In Belarus they are much much cheaper,” she said, although she was quick to add that in the eastern European country there was “a very strong commitment to fight illegal trade”.

Once the WHO protocol comes into force, it may spell trouble for the three remaining tobacco agreements.

The WHO has said that the deals are in conflict with the treaty to which the protocol is a supplement, the Framework Convention on Tobacco Control.

But Georgieva said the commission's legal service had a different interpretation, and that both the existing agreements, as well as a renewed PMI deal, would have been legally possible.

“This being said, we did take also this into account – that there is difference in interpretation – and that although we feel we are on sound legal ground, given that what matters is not just the legality of it, but what matters is our collective sense of justice and doing the right thing, and so we did not prolong," she added.

Successful

Although the agreement has gained several vocal opponents in the last two years, Georgieva said she wanted to stress that the PMI agreement has been “successful”.

“We cannot establish a direct causal consequence between: here is the agreement and here is the shrinking [of PMI goods being smuggled], but the fact is that 85 percent less tobacco products are smuggled,” she said.

“One of the things we need to learn as a human race is that when something is done, to call it quits. To say: great, we have achieved what we have been able to achieve, there is no need to continue.”

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