Tobacco: Government policies and programs affecting tobacco production and trade in major tobacco trading nations

Government policies and programs affecting tobacco production and trade in major tobacco trading nations – U.S. Dept. of Agriculture, Economic Research Service report

Sean Coady

Abstract: Government intervention influences the production and trade of most of the

world’s unmanufactured tobacco. This article summarizes government policies and

intervention in eight major tobacco trading nations and the European Community during 1982-87.

Together, the nine areas account for three-fifths of world trade in unmanufactured tobacco.

Keywords: International tobacco trade, government intervention, production and

trade policies.

Introduction

Government intervention influences the production and trade of most of the world’s unmanufactured tobacco. In some nations, government intervention is pervasive and weighs heavily in most production and trade decisions. High levels of intervention often involve domestic subsidies, trade barriers, legal restrictions, or agricultural production and export taxes, and have a significant influence on domestic and world tobacco production and trade.

In contrast, government intervention in some nations is minimal and has little or no influence on tobacco producers and traders. However, regardless of the extent of a nation’s government intervention, its tobacco production and trade opportunities can be affected by the actions of other nations.

Although the mix of a nation’s policies and programs can be roughly categorized, as presented in table B-1, measurement of overall intervention schemes is difficult because of the diversity and complexity of these policies (Peters, Cahill, and Legg). Several techniques have been developed to assess the degree of government support for agricultural commodities, but many difficulties remain concerning the implementation and use of these measures in trade negotiations.(2)

This article highlights the types of programs and policies that influence tobacco production and trade in major tobacco trading nations. The period 1982-87 was used in the article because detailed data were compiled for these years for the comprehensive forthcoming study cited earlier. However, it should be noted that recent reforms in India, Brazil, Argentina, and the EC have caused some policies to change.

Eight nations and the European Community are included in the study. They account for about three-fifths of world trade in unmanufactured tobacco. The wide array of policies and programs makes an exhaustive cataloging difficult and impractical. However, the listing and description of the major programs is useful for making initial comparisons of government intervention across nations.

Intervention Policies

Most measures listed in table B-1 affect all agricultural production and trade, not just tobacco. Some nations also have policies and programs specifically designed to affect only tobacco growers. However, even when a mix of policies is pursued, the mixture is often dominated by one or two policies.

Although most forms of intervention are considered to promote or protect grower revenues, not all measures are used to promote tobacco production or exports. For example, governments in many developing countries tax tobacco exports as a means of generating revenue. Moreover, government intervention measures may not always affect producers of different types of tobacco equally. In some nations, growers of certain types of tobacco may receive support while other tobacco producers are taxed.

The following sections present brief outlines of the policies and programs of eight major tobacco trading nations and the European Community (EC) during 1982 to 1987. Although the compilation is not exhaustive, major programs are discussed for each nation.

Argentina

Direct intervention in tobacco production and trade by Argentina’s Government between 1982 and 1987 consisted of a direct payment program, export taxes, and restrictions on tobacco imports. Indirect intervention (macroeconomic measures that affected tobacco production or trade) included fixed exchange rates.

The primary source of support for Argentina’s tobacco producers came from a direct payment program financed through cigarette excise taxes. While this program represented a direct transfer from consumers to producers, such a tax may also have reduced cigarette demand and lowered the revenue received by tobacco growers. Nonetheless, the direct payment program guaranteed producers at least 40 percent of the annually contracted price, which was determined through negotiations by the Government of Argentina, tobacco producers, and tobacco processors. The Argentine Government also protected domestic producers by restricting imports of foreign tobacco and tobacco products through the imposition of import licenses.

Although the Government of Argentina used a fixed exchange rate, the potential benefits of the fixed-rate regime were offset by the country’s high inflation. In addition, an export tax on tobacco limited export opportunities. Thus, while Argentina’s domestic market was protected, the effect of the overall policy combination was mixed because the level of exports was limited by the fixed exchange rate regime and the export tax.

Brazil

Brazilian Government intervention in tobacco production and trade between 1982 and 1987 was extensive. The measures included subsidized production credit, an indexed exchange rate, domestic and export taxes, and research expenditures. The Brazilian Government also subsidized crop insurance, fuel, and fertilizer expenditures. In addition, tobacco imports into Brazil were essentially prohibited through import licensing and high tariffs.

Government credit programs provided for interest rate and inflation subsidies for tobacco producers. Production loans were granted at reduced interest rates, and included an implicit inflation subsidy because, in real terms, the value of the repaid loan was less than the original loan value.

While these programs subsidized and supported Brazilian tobacco producers, the effects were outweighed by a domestic tax of 13 percent and an export tax that ranged from 8 to 20 percent. In addition, Brazil used an indexing system for exchange rate adjustments, but it did not match the rate of inflation. Thus, changes in the official exchange rate were positive for some years and negative in other years.

As in Argentina, the combination of rapid inflation and currency fluctuations created problems for tobacco producers. During this period, the real domestic price to growers of Brazilian tobacco fell.

European Community

The policy mix used in the European Community was very different from that used in developing countries. In some ways it possesses characteristics similar to those in the United States. There is a mixture of policies and programs used in the EC because it is an economic coalition of twelve nations, although the Common Agricultural Policy (CAP) guides policy decisions of each nation.(1) As a result, each nation in the Community had a voice in the agricultural programs and policies intended for its producers.

During the middle 1980’s, the most important component of the European system was a price support program that set prices for various tobacco varieties. An important component of the CAP related to tobacco production was a price support program. The EC annually set a norm price for 26 varieties of tobacco which guaranteed producers a “fair return”, taking into account production requirements and the viability of firms.

Under the norm price scheme, an intervention price was set somewhere below the norm price. The intervention price represented the lowest price growers could receive. Intervention agencies were required to buy all tobacco offered to them at the intervention price. In addition, export refunds were offered to tobacco buyers to offset losses in world markets, and to assist in clearing the market, thereby lowering storage costs.

Border measures were applied in the form of tariffs on tobacco imports. Tariffs varied with the economic level of the exporting country, with poorer, developing nations subject to lower rates than more developed nations. There were three tariff rate categories. The highest tariffs were imposed on “Class 1” nations such as the United States. Tariffs decreased for “Class 2” nations such as Brazil which were classified as non-African Caribbean Pacific (ACP) developing nations. No tariffs were imposed on the third category of nations known as ACP nations. These nations were either former European colonies or bordered on the Mediterranean. The tariff rate increased for other countries with a minimum and maximum tariff rate structure and by type of tobacco. The tariff rate was lowest for Oriental-type tobacco and slightly higher for flue-cured and burley.

Finally, infrastructure support is provided to agricultural producers and processors through programs designed to help modernize farms and to improve processing and marketing. The CAP provided this support to agriculture through the European Agricultural Guarantee and Guidance Fund. In general, however, the impact of the infrastructural support programs was minor.

India

In India, direct intervention was provided through Government-controlled tobacco trade, domestic price supports, and minimum export prices through a state trading corporation known as the Tobacco Board. The Government also provided technical assistance and organized extension programs for tobacco farmers. The Indian Government provided electricity at subsidized rates, supported irrigation projects, subsidized interest rates, and prohibited tobacco imports.

The Government of India controlled the trade in tobacco and supported prices through a system of domestic price supports and minimum export prices through a state trading corporation known as the Tobacco Board. The Tobacco Board of India normally bought higher quality leaf at support prices when auction market prices fell. Furthermore, imports of tobacco were generally prohibited. As a result, the most profound policy impacts on flue-cured producers were derived from Government of India controls on production and trade.

In addition, the Tobacco Board provided technical assistance and organized extension programs for tobacco farmers. The government of India also provided electricity at subsidized rates (the electricity was used primarily for irrigation) and supported irrigation projects. Tobacco farmers derived most support from irrigation subsidies, including the cost of electrification, construction, and maintenance of irrigation equipment. Short-term loans at below market rates were used primarily for fertilizers, while medium-and long-term loans were used for irrigation equipment. Production credit was used primarily for the purchase of fertilizers. Despite a range of support, India’s tobacco growers were taxed.

Japan

Between 1982 and 1987, the Japanese Government influenced tobacco production and trade decisions primarily through state controls. For example, the domestic market was controlled by a Government-owned monopoly called the Japanese Tobacco Corporation. Unmanufactured tobacco imports were restricted by regulations that required Japanese cigarettes to contain a certain amount of domestic tobacco. In addition, the importation of cigarettes was strictly

controlled by market impediments to protect domestic tobacco production. However, these restrictions were reduced in April 1987, and cigarette imports have increased substantially since that time.

In addition, other Government expenditures benefited tobacco production through programs such as rural electrification, land improvements, rural roads, research, extension, farmer pension plans, crop insurance, and disaster relief for farmers. In general, the Japanese Ministry of Agriculture’s expenditures supporting tobacco production involved programs targeting agriculture as a whole, not tobacco specifically.

Republic of Korea

The Republic of Korea primarily supported the production of tobacco through a public tobacco and cigarette corporation known as the Office of Monopoly. This state controlled corporation provided input subsidies and technical and extension services, and controlled the trade of tobacco and tobacco products. The subsidies included fertilizer subsidies and low-interest loans for the purchase of curing equipment.

In addition, the monopoly purchased leaf tobacco at fixed prices and set export prices below domestic prices. Tobacco producers also benefited from Government distribution of hand tillers and investment in the agricultural infrastructure.

Although the effects of state trade and price controls on grower returns fluctuated between 1982 and 1987, they were the main source of government intervention. However, these effects were not equally shared by all tobacco growers. Korean flue-cured tobacco producers received small subsidies, while burley tobacco growers were effectively taxed by government policies.

Turkey

The Turkish Government used a state monopoly (TEKEL), credit and fertilizer subsidies, and exchange rate controls to support domestic tobacco production. Support prices and minimum export prices were set by TEKEL, and tobacco imports were strictly controlled.

Prior to 1986, tobacco exports were taxed, and between 1986 and 1989 they were subsidized. The effect of the export tax was significant, but it was largely offset by input assistance and foreign exchange rate policies. Foreign exchange rates were influenced by the Government through exchange rate flexibility designed to enhance competitiveness.

The Turkish Government supported tobacco growers through general agricultural programs that supplied and regulated credit through the Agricultural Bank. Although fertilizer imports were taxed, retail subsidies were also provided. However, except in the eastern region, tobacco was produced in Turkey generally without the use of fertilizers.

United States

Between 1982 and 1987, Government support for tobacco production in the United States was based on a price support/supply control program. Price supports are established by formula. Since 1986, the formulas for flue-cured and burley involved a 5-year moving average of prices and changes in a cost-of-production index. The Secretary of Agriculture has had the discretion to set the price support between 65 and 100 percent of the calculated yearly increase or decrease.

For other kinds of tobacco under the price support program, as with flue-cured and burley before 1986, price support levels have been based on changes in the parity index (prices paid by farmers). Producers were guaranteed a minimum price through several tobacco grower stabilization cooperatives. If buyers do not bid more than the guaranteed minimum prices, the cooperatives acquire the tobacco and it serves as collateral for a loan from the Commodity Credit Corporation. In addition, tariffs apply on tobacco, but at relatively low rates; a drawback provision largely rebates the tariffs.

Marketing quotas were an important part of the overall program. The amount of tobacco which could be marketed without a severe penalty was restricted. Beginning in 1986, the quotas for flue-cured and burley tobaccos were based on a formula that consisted of manufacturers’ intended purchases, exports, and loan stocks.

Prior to 1982, losses on the storage and disposal of tobacco loan stocks were borne by the taxpayer. The No Net Cost Tobacco Program Act of 1982 authorized an assessment from growers to finance any losses from sales of loan stocks. In 1985, the assessments were extended to buyers, as well as producers, of flue-cured and burley tobacco.

In addition to the tobacco program, tobacco producers are eligible for various programs designed for rural America. These programs included low interest loans, investment tax credit (before 1986), crop insurance, and research and extension services. Intervention activities such as input subsidies, long-term support, taxation and state programs have relatively little impact on flue-cured and burley producers.

Zimbabwe

Zimbabwe was unusual among tobacco producing nations in that only minor levels of intervention were evident. Most of this support was in the form of research and extension services to small farmers. However, the Government banned importation of tobacco and tobacco products between 1982 and 1987. The overall effect of Government policies on producer returns was minor.

Tobacco in Zimbabwe was produced primarily on large plantation farms. All aspects of production assistance to these producers were provided by the producers themselves through the Zimbabwe Tobacco Association (ZTA). Contributions to ZTA were used to fund research and extension services and assistance in the marketing of tobacco. The ZTA occasionally announced voluntary production controls to increase prices.

Summary

The variations among the nations examined provide a good indication of the difficulties that arise in measuring and comparing the levels of intervention in tobacco trade and production. In many cases the mixture of government policies and programs simultaneously taxes and subsidizes tobacco growers. Thus, the elimination of all government intervention would not necessarily lead to production and trade solutions.

Furthermore, price-quality differences were not considered in this article, but are recognized as playing a major role in the allocation of tobacco market shares. However, even when it is clear that a nation’s world market share might increase, as in a case where production controls are lifted, it is not clear that growers would benefit.

For example, lower prices caused by expanded production in a market with inelastic retail demand would lead to lower total revenues, and also lower profits if production costs did not also decline. Thus, while the mix of policies and programs that influence the production and marketing decisions of tobacco producers is complex and often conflicting, the dismantling of trade barriers would likely occur gradually because of trade commitments, product blends, tastes, alternative crops, and other factors. [Table B-1 Omitted]

(2)A thorough discussion of government intervention measures and their use can be found in “Government Intervention in Agriculture: Measurement, Evaluation, and Implications for Trade Negotiations,” U.S. Department of Agriculture, ERS Foreign Agricultural Economic Report No. 229 (1987). A detailed examination of the issues related to tobacco trade in multilateral trade negotiations under the aegis of the General Agreement on Tariffs and Trade (GATT) is contained in “The World Tobacco Market – Government Intervention and Multilateral Policy Reform,” U.S. Department of Agriculture, ERS Staff Report No. AGES 9014 (1990).

(1)Belgium, Denmark, Germany, France, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, and the United Kingdom.

References

1. Cahill, C., and W. Legg. “Estimation of Agricultural Assistance Using Producer and Consumer Subsidy Equivalents: Theory and Practice,” OCED Economic Studies, No. 13: 13-43, Winter 1989-90.

2. Coady, Sean, and Greg Pompelli, “Government Intervention in Tobacco Trade Among Major Tobacco Trading Nations.” University of Tennessee Agricultural Experiment Station Research Report. 1991 (forthcoming).

3. Grise, V. “The World Tobacco Market – Government Intervention and Multilateral Policy Reform,” Staff Report No. AGES 9014. U.S. Department of Agriculture, Economic Research Service, Commodity Economics Division, February 1990.

4. Peters, G.H. “The Interpretation and Use of Producer Subsidy Equivalents,” Oxford Agrarian Studies 17: 25-37, 1988.

5. U.S. Department of Agriculture, International Economics Division and National Economics Division. “Government Intervention in Agriculture: Measurement, Evaluation, and Implications for Trade Negotiations,” Foreign Agricultural Economic Report No. 229. Washington, D.C.: Government Printing Office, April 1987.

COPYRIGHT 1991 For more information, contact US Department of Agriculture Economic Research Service. Phone: 1-800-999-6779 (8:30-5:00 ET).

COPYRIGHT 2004 Gale Group