Tobacco Firms Fuming Over Import Suspension : Trade: China takes the action after new policies effectively double foreign cigarettes’ retail price.

China recently introduced new tax and tariff policies retroactive from Jan. 1 that effectively double the retail price of legally imported cigarettes.

And that has led to a suspension of imports by the China National Tobacco Import & Export Corp. (CNTIEC), the country’s sole legal importer of cigarettes.

“The CNTIEC suspended imports because of the high duties that were imposed,” said Colin Goddard, regional manager for corporate affairs at Philip Morris Asia Inc., the Hong Kong-based arm of the U.S. food, beer and tobacco company. “They considered there would be little demand for imports when their price doubled under the new tax structure.”

Hit particularly hard are companies such as Philip Morris and BAT Industries, which have yet to conclude agreements to manufacture in China. At stake is access to a market of 1.72 trillion cigarettes a year, or 30% of world consumption. Further, it is an expanding market: It is expected to hit 1.96 trillion by the year 2000, according to a recent estimate by the Euromonitor market research firm in London.

Changes in duties on luxury goods and the imposition of consumption and value-added taxes put the total tax imposed on foreign cigarettes to 432% of the import price; it was 175% before.

The tax rise could make nonsense of China’s pledge in a October, 1992, memorandum of understanding with the United States to remove all import-licensing requirements for tobacco products by the end of 1994. Those requirements have restricted foreign tobacco companies to less than 1% of China’s legal cigarette market. The tax rise may also hinder China’s efforts to enter the General Agreement on Tariffs and Trade (GATT), tobacco company officials say.

Goddard said that the CNTIEC and the China National Tobacco Corp. (CNTC), the state-controlled cigarette monopoly that operates nearly 150 plants across the country, have sought a change in the tax system.

Robert Fletcher, Rothmans of Pall Mall Asia public affairs director, said he did not think China had sought to hurt the foreign tobacco companies.

Fletcher said that even should the licensing requirements end on Dec. 31, that would not signal a complete opening in China’s cigarette market.

“It won’t open up on a Taiwan kind of scale,” Fletcher said, reference to the increase in foreign firms’ proportion of the Taiwan market to 17% in 1987 from 1% before Taiwan opened its market.

Even leading anti-smoking campaigner Dr. Judith Mackay says the new tax system appears to be a strategy that cannot last for long, given the trade pressures. Mackay, a senior adviser to the Chinese Assn. on Smoking and Health (CASH), says higher taxes will exacerbate China’s smuggling problem.

Philip Morris recently signed an agreement for the production of Red and White cigarettes in eastern China to be exported to Europe.

The contract is part of an umbrella agreement the company reached last August with CNTC. That agreement provides the basis for the CNTC to produce and sell Marlboro cigarettes in China and for the two companies to develop and produce other brands to be sold in China and elsewhere.