Japanese FDI versus WTO Framework Convention on Tobacco Control

The Bangladesh Investment Development Authority (BIDA) has recently disclosed a piece of 'good news' amid an otherwise stagnant state of foreign direct investment (FDI).  Japan Tobacco Inc. (JTI), which is one of the top five tobacco companies in the world, has decided to acquire Akij Group's United Dhaka Tobacco Company Limited tobacco. The deal is worth USD 1.47 billion (Tk 12,430 crore approx) and is the biggest ever single private FDI in the country.

Dhaka Tobacco, with one-fifth of the market share, is the second largest player in the country's cigarette market after British American Tobacco. Dhaka Tobacco has been a contract manufacturer and distributor of JTI's Winston and Philip Morris' Marlboro in Bangladesh for the last three years. JTI became the owner of Dhaka Tobacco by purchasing Akij stake of $1.09 billion in it and clearing up trademarks and design rights at $386 million. The BIDA Executive Chairman is apparently happy with the deal and claimed the acquisition as a 'good example of FDI'. He also expected that it would add at least $100 million to the country's export earnings subject to the successful execution of JTI's investment plan.

BIDA Executive Chairman's observation about the acquisition, however, goes against the core spirit of the World Health Organisation's Framework Convention on Tobacco Control (FCTC). Bangladesh was the first country to sign the Convention back in 2003 and one of the first countries to ratify it later in 2004. The FCTC was developed in response to the widespread use of tobacco across the world, and to counter devastating tobacco-related illnesses.

The FCTC observes that the spread of the tobacco use is promoted through cross-border trade, FDI, and aggressive global marketing, among others. The fourth preamble of the FCTC articulates the serious concern about the increasing production and consumption of cigarettes and other tobacco products, especially in developing countries. As a signatory of the FCTC, Bangladesh is committed towards reducing production and consumption of tobacco, both locally and globally.

Because of devastating impact of tobacco use on human health, such products are regarded as synonymous to death. High rates of tobacco consumption lead to early deaths and high healthcare costs. Tobacco use kills an estimated 57,000 Bangladeshis every year - about one in six of all deaths among people aged 30 years and older. There are annually about 1.2 million cases of lung cancer, cerebrovascular disease, coronary artery diseases, chronic obstructive pulmonary disease and other tobacco-attributable illnesses in the country.

Globally, according to WHO, about half of the tobacco users die annually who number about 7.0 million people. Another about 0.89 million die due to second-hand use of tobacco. Despite such a big tobacco-related death toll and widespread fatal diseases, multinational tobacco companies have remained virtually remained unchallenged on the ground. The BIDA chief's positive statement regarding this big FDI deal will naturally encourage other manufacturers and multinationals of tobacco products.

Although tax and price measures are gradually being intensified, the use of tobacco products is not decreasing significantly due to price-inelastic nature of these products. For example, the estimated total sale of cigarettes was 64,890 billion sticks in 2017-18, and the government revenue generated from this sale was $2.13 billion. However, I found in my research that if the government maintains status quo in cigarette tax, the consumption would not decrease in the medium term and it does not demonstrate negative pattern in reduction of cigarette consumption even if tax rate is raised by 10 per on different price slabs. Because, it does not offset the positive consumption effect of growth rate of per capita income and food inflation. Therefore, the government has to raise the rate of tax on cigarette by at least 14 per cent per annum to have the desired impact on cigarette consumption. In addition, substantial increase in floor price of different brands is required to gain visible effect through price and tax measures. Similar price and tax measures are also required for reducing consumption of other tobacco products. Besides, new FDI needs to be discouraged in harmful sectors like tobacco.

 JTI's business in its home market in Japan market has recently decreased by 5.1 per cent due to strict regulation by Japanese government. Acquisition of Dhaka Tobacco is a part of scaling up of its global business in 130 countries; it also completed acquisition of Russia's tobacco company Donskoy Tobak in early-August this year.

Bangladesh Industrial Policy 2016 welcomes private FDI in all areas of the economy and there is no restriction on the volume of investment. Foreign investors are blessed with a wide range of tax concessions and other fiscal incentives. These benefits are also equally applicable to private FDI in tobacco products. It is, therefore, urgently needed to revise the FDI policy on tobacco to discourage tobacco production and use in the country.

Dr Mahfuz Kabir is Research Director at Bangladesh Institute of International and Strategic Studies (BIISS), Dhaka.

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