Catch-22 on tobacco tariffs

RIGA - Latvia may be trapped into an international trade dispute if it increases import tariff on cigarettes. But if it leaves tariffs unchanged, a major foreign investor may consider pulling out.

The Parliament was scheduled to vote on a proposed tariff hike for tobacco March 11, but Prime Minister Vilis Kristopans suggested it should postpone the third reading for a month to make sure Latvia is not violating its international agreements.

Parliament's national economy commission has proposed amendments to the law on customs duties, calling for a 30 percent tariff on imported cigarettes. For those countries with which Latvia has a free trade agreement, import tariffs will be 10 percent.

Currently importers pay a customs duty of 0.1 lats ($0.16) per 1,000 cigarettes.

The new tariff rate was met with protest.

"We are very concerned about this proposal that breaks international obligations, clearly decreases competition and, consequently, lowers tobacco products' quality and raises cigarette prices," said Lars Onhmeus, Philip Morris managing director for the Baltics.

At a news conference March 9, Onhmeus said he was speaking on behalf of four international importers to Latvia: Philip Morris, RJR International, Rothmans and British American Tobacco.

The proposal to increase the import duty came from local producers who maintain that they are incurring losses and losing market share due to a low import tariff, Onhmeus claimed.

The parliamentary commission has worked out a plan to protect local producers that calls for a 30 percent tariff on all imported cigarettes for 200 days once the amendments on customs duties come into force.

Importers teamed up to prove that local industry is not in a state of emergency, claiming that local production increased by 24 percent in 1998.

Local producers don't agree.

"We are losing the market where we've worked for three years with profit," said Vladimirs Camans, director of House of Prince tobacco factory. "After the import tariff was reduced from 2.5 lats to 0.1 lats per 1,000 cigarettes in May, we started to incur losses."

Camans said his company's market share dropped from 52 percent last April to 43 percent today. Another local producer, Rigas Tabaka Fabrika, accounts for only 3 percent of the market.

Onhmeus disregarded the complaints, claiming that the Danish House of Prince wants to have a monopoly in Latvia.

He said the proposed amendments violate Latvia's international obligations.

Latvia's agreement with the World Trade Organization allows for a 10 percent import tariff on cigarettes. Under the Association Agreement between the European Union and Latvia, import tariffs of no more than 25 percent can be applied on EU imports if Latvia introduces temporary protective measures.

Onhmeus said if a local industry is in a state of emergency, protective measures may be applied, but Latvia should have notified the WTO and importers.

"It appears everything is done behind closed doors, irrespective of international agreements and the industry situation," he said.

Importers held their conference two days before the Parliament was scheduled to vote for the increase and announced that Latvia may expect retaliatory measures if it adopts tariff changes.

"Latvia will have a major trade dispute," Onhmeus said. "You can increase import duties to 30 percent, but then other countries may increase import duty on Latvian goods."

He said the Latvian furniture and wood processing industries may become targets for international attack. Also, the Latvian government would lose 2.5 million lats in revenue if a 30 percent tariff is adopted, and contraband would soar again.

Camans refuted importers' accusations that they are lobbying for a market monopoly.

"We are not asking for a special attitude towards us, we are not asking for special support - we are fighting for equal competition," he said, noting that in Poland the tobacco import tariff is 205 percent, in the EU 68 percent, and in Russia and Lithuania, 30 percent.

"Everywhere tariffs are higher. Our market is like a dump where every country sells its cigarettes. At the central market there are more than 100 different cigarette brands."

Although Onhmeus and Camans are from different camps, both accuse Latvia of making important decisions concerning the tobacco industry without consulting producers.

"No one asked our opinion when Latvia signed the WTO agreement and agreed to a 10 percent tariff," Camans said.

He said that Latvia has made a political step to get accepted by the WTO, but now it must make an economic step to protect local producers and foreign investors.

"What is the point of investing in Latvia if it does not protect its producers. Maybe we should move to Russia, Lithuania or Ukraine," Camans said.

"The government has a good example. Kellogg's has already withdrawn, and I wouldn't want House of Prince to be the next."