[Intl-tobacco] Chinas Tobacco Industry Could Get Smoked by WTO Entry (fwd)

[Robert Weissman]

China=92s Tobacco Industry Could Get Smoked by WTO Entry
Source: China Online, Tuesday, 5/16/00

The May 10 Zhongguo Jingji Shibao (China Economic Times) reports that
while China is a major tobacco country and taxes on tobacco bring in 10
percent of state revenue, the industry=92s long-standing domestic monopoly
has not toughened it for international competition, a serious problem if
and when China enters the World Trade Organization (WTO).

According to a source from the Economic Research Institute of the State
Tobacco Monopoly Bureau, China is the largest tobacco country in the
world. Currently, regular smokers in China account for 25 percent of the
global total, numbering 310 million.

During 1995-99, China purchased an annual average of 2.2 million tons of
tobacco and each year produced 33.4 million cases of cigarettes (one case
contains 50,000 cigarettes).

On average, China's annual production of leaf tobacco makes up some 35
percent of the global total while cigarette production and sales account
for 32 percent of the global total. In recent years, China has ranked
first in the world in terms of the number of smokers, the purchase of leaf
tobacco, and cigarette production and sales.

For a country with such a huge population of smokers and such a massive
scale of tobacco production, it is self-evident that the tobacco industry
plays an important role in the national economy.

In 1999, China's tobacco industry brought in a total of 98.9 billion
renminbi (US$11.9 billion) in industrial and commercial tax, or 10 percent
of state revenue. It has been the state=92s top revenue generator for 13
consecutive years.

China's tobacco industry is massive in scale and its industrial system is
relatively complete. It has fostered a number of large enterprises such as
Yuxi, Shanghai and Changsha cigarette factories, whose technologies and
equipment are world class and whose products are competitive.

However, due to China's long-standing restrictions on tobacco imports and
exports, the dependency of China's tobacco industry on foreign trade has
been minimal. During 1995-99, China's total imports and exports of leaf
tobacco was only about 4.5 percent of domestic purchases on average, and
total cigarette imports and exports made up a mere 0.8 percent of domestic
output on average.  On the international tobacco export market, China's
leaf tobacco exports accounted for just 3.5 percent of global exports and
cigarettes for only 1.8 percent.

Thus, the development of China's tobacco industry has clearly depended on
the domestic market. This does not accord with its position as the world's
No.1 tobacco producer and makes it difficult to integrate that industry
into the world economy in line with current emphasis on globalization.

Impact of WTO Entry on Tobacco Market

China=92s WTO entry will mean that all domestic tobacco products now under
the national monopoly will face increasing foreign competition. With the
industry=92s limited export capacity, the primary impact will be the
shrinking domestic market share of practically all tobacco products
produced under the monopoly.

I. Losses From Tariff Reductions

1. Leaf Tobacco

In 1999, China imposed a 40 percent import tariff and a 64 percent
consolidated tax, which increased the sales price of imported leaf
tobacco. For example, leaf tobacco imported from Zimbabwe sold for Rmb
16.25 (US$1.96) per kilogram, while the price of domestic leaf tobacco was
Rmb 5 (US$0.60) per kilogram, or one-third that of imports.

The high tariff has made domestic leaf tobacco highly competitive in
price.  However, if the tariff on leaf tobacco is lowered to 17 percent by
2004 as agreed to by the Chinese government, the price of imported leaf
tobacco per ton will be Rmb 10,000 (US$1,208.14)=97lower than it is now.

Even though large-scale imports could raise the price of leaf tobacco on
the international market, China=92s imports are likely to increase sharply
due to the lower prices, adversely affecting China's own leaf tobacco
production.

2. Cigarettes

China began to slash import duties on cigarettes in 1997 from a high of
150 percent. In 1999, the rate fell to 36 percent. Meanwhile, China=92s
consolidated tax on imported cigarettes dropped to 218 percent in 1999,
down 26 percentage points compared with 1997.

As China had committed itself to a large-margin cut of the average tariff
on all imported commodities, a high tariff on cigarettes violates that
promise.  Consequently, the Chinese government will continue to reduce the
import duty on cigarettes during WTO negotiations.

If the rate drops to the average for all imports, i.e. 15 percent in the
year 2000, one packet of imported cigarette that sells for Rmb 11
(US$1.33) now (corresponding to Marlboro and 555 brands) will sell for Rmb
2 to Rmb 3 (US$0.24 to US$0.36) less after the tariff reduction. This will
greatly enhance the competitiveness of imported cigarettes on the Chinese
market.

3. Cigarette Machines and Associated Materials

In 1999, the tariff on imported cigarette machines was 14 percent, on tows
it was 12 percent and on bobbins it was 20 percent. There is not much room
for reducing these tariffs, so the impact of tariff cuts on these products
after WTO entry will be minimal. Most of the impact will come from the
relaxation of non-tariff barriers.

II. Losses From Relaxation of Non-Tariff Barriers

Most of the adverse effect of cigarette imports on the domestic market
after China=92s WTO entry will not come from tariff reductions, but from th=
e
relaxation or even abolition of non-tariff barriers. Permitted a long
transition period, China's tobacco industry must gradually relax and
finally abolish the quota and license controls that are now in force.

Inevitably, a large influx of foreign cigarettes will result. Since there
is a huge potential demand for mixed cigarettes, because foreign tobacco
enterprises are strong enough to exploit the market and since foreign
cigarettes are higher in quality and less harmful to smokers=92 health, it
is likely that after China joins the WTO, imported cigarettes will attract
a large portion of Chinese smokers. Domestic cigarettes could lose 10
percent to 20 percent of their market share within five years.

Net imports of leaf tobacco will also grow rapidly. Imported leaf tobacco,
especially that of high quality, will account for some 10 percent of
domestic demand.

The impact on the market for cigarette machines and associated materials
will be severe. For example, the China-U.S. WTO agreement stipulates that
the tows import quota for China must be 113,000 tons, which equals
national demand at present. The agreement also calls for China to abolish
its tows import quota by 2001 and cigarette machine import quota before
2002.

Without the protection of non-tariff barriers, not only will the
enterprises that manufacture domestic cigarette machines and associated
materials have to lower the prices of their products, but also their
market share will be greatly reduced. If no effective countermeasures are
adopted, the impact on cigarette machine manufacturers could be
devastating. The import of associated materials will also shoot up.