Out of dual necessities of tobacco industry reform and tobacco control, breaking tobacco monopoly is top priority

 

Tobacco Control under the Influence of Tobacco Monopoly in China

China Research Center for Public Policy

ChangCe Thinktank or Sinosight Thinktank

www.changce.org

Sponsor: Chinese Center for Disease Control and Prevention

 

SUMMARY

 

This research report is released against the background that China, on the one hand implements market economy and reform on monopoly industries, while on the other, it is increasingly concerned over bread-and-butter issues. China now endeavors to build a service-oriented government and amplify its medical and healthcare reform on the purpose of an escalated national health standard. China also conforms to WHO’s Framework Convention on Tobacco Control. Out of dual necessities of tobacco industry reform and tobacco control, breaking tobacco monopoly is top priority.

 

It first gathers and organizes information on other countries’ tobacco institutional reform process and tobacco industry supervision system. Generally speaking, given the requirements of opening markets and improved competitiveness, most countries have witnessed tobacco reform towards marketization and have consolidated such achievements through legislation. In these countries, there are specific regulatory agencies that supervise tobacco advertising, promotion, warning, products and ingredients disclosure so as to protect consumers’ health to the greatest extent. In contrary, China’s existing tobacco monopoly with low marketization is not seasoned well with modern corporation governance and national property management.Yet, there is still not a tobacco market of fully competition and tobacco monopoly departments are not fulfilling their responsibility in control tobacco health hazard.

 

Through straightening the evolution and status quo of China’s tobacco monopoly, we find out that this tobacco monopoly entity performs both functions of government and enterprise and mixes up government supervision with corporate management of production and operation. It impedes State Tobacco Monopoly Administration from effectively discharge its responsibility insupervision and regulation, and as well as waives China National Tobacco Corporation’s right on national properties as a stakeholder of its affiliated enterprises. Tobacco monopoly departments, using monopoly, divide national market that should be united and open into insular segments.

 

Under the framework of the theory of rational addiction to tobacco, the theory of industrial organization (SCP analysis) and the theory of institutional economics, this research report points out that while bringing considerable tax revenue, China’s tobacco industry, at the same time, causes even more substantial social costs and negative externalities that severely disturbs public health and life. In other words, the social benefits generated by tobacco industry not only cannot make up economic costs of smoking, but the social costs of smoking exceed economic benefits realized by tobacco industry. The report also finds out that existing monopolistic competition under the regional protection gives rise to poor performance of tobacco market. Tobacco monopoly entity with a mixture of government and enterprise functions might unilaterally exaggerates considerable tax revenues brought by tobacco industry while neglects greater social costs caused by tobacco products’ negative externalities. This is a lose-lose, not win-win, deficient arrangement. Therefore, taking advantage of current market, industrial and institutional shifts, a comprehensive reform on tobacco monopoly is with high priority. Also, under current tobacco monopoly, tobacco monopoly departments are always concerned about tobacco industry’s overall interest which increases tobacco products’ social costs and necessitates a reform on tobacco monopoly.

 

This research report carries out a multi-dimensioninquiry into the legitimacy of China’s tobacco monopoly. Tobacco monopoly and Law of the People’s Republic of China on Tobacco Monopoly was developed with the guidance of “Efficiency Prioritization with Equity Consideration” ideology in 1980s and 1990s. Apparently, institutions and provisions like these lag behind the requirement of the epoch and fall short of building a foundation for tobacco monopoly legitimacy. China’s existing tobacco monopoly does not conform to constitutional equity protection, nor to the explicit provisions in Anti-Monopoly Law, Advertisement Law, Price Law or Law against Unfair Competition. It as well violatesWHO’s Framework Convention on Tobacco Control. Hence, it is necessary to revise Law of the People’s Republic of China on Tobacco Monopolyand related regulations for the sake of disintegrating tobacco monopoly and establishing legitimate tobacco market with fair competition.

 

In the formulation and implementation of China’s tobacco control policies, tobacco monopoly departments exploit their specific monopoly position to place industrial interest over public health in the insincere name of proper maintenance of dialectic relationship between tobacco control and economic growth. Tobacco monopoly departments make use of media to neutralize tobacco control policies and avoid, rather than implement as it seems, provisions in WHO’s Framework Convention on Tobacco Control regarding tobacco packaging and labeling, tobacco advertising, promotion and grant, tobacco pricing and taxing, and ingredients regulation of tobacco products.

 

Based on the above analysis, our study identifies institutional reform objectives of tobacco industry:

-- Progressively reform tobacco monopoly by means of selective market opening-up with transition periods. Gradually reform and abolish tobacco monopoly and promote marketization of tobacco industry.

-- Split government departments with enterprises. By abolishing State Tobacco Monopoly Administration, government can regulate tobacco industry through plans, regulations, standards and industrial policies. Government should also tighten social regulations based on risk supervision ideology in the interest of tobacco risk reduction and control.

-- Reform corporate governance structure of tobacco enterprises. Transform China National Tobacco Corporation into state-owned enterprise supervised by State-owned Assets Supervisionand Administration Commission of the State Council (SASAC). SASAC will represent State Council to fulfill the responsibilities as a sponsor with the parent-subsidiary company system coming into actual being.

 

The report also points out that, as the first step, current tobacco monopoly should be reformed. Gradually reform and disintegrate tobacco monopoly in the 2010-2012 period. Abolish State Tobacco Monopoly Administration in a proper time and turn China National Tobacco Corporation into state-owned enterprise supervised by State-owned Assets Supervision and Administration Commission of the State Council. Complete the construction of tobacco enterprises’ internal administration, and promote marketization of tobacco industry. Encourage and guide diversified entities to enter tobacco industry.

 

Step Two: Abolish the Law of the People’s Republic of China on Tobacco Monopoly in time and formulate Law on Regulation and Supervision on Tobacco Industry as soon as possible. Around 2013, establish China Tobacco Industry Supervision and Administration Commission regulated by a specific department in State Council or set up National Tobacco Supervision and Administration Bureau under the framework of Minister of Health or State Food and Drug Administration. Work out a framework that regulates tobacco health warning, advertising and promotion and tobacco tar content. Before the promulgation of Law on Regulation and Supervision on Tobacco Industry, an Ordinance on Regulation and Supervision on Tobacco Industry formulated in advance by State Council is recommended.

 

Step Three: Adjust leadership mechanism in implementing WHO’s Framework Convention on Tobacco Control based on its requirements. Currently, the structure can be transformedto make Ministry of Health a leading unit with participation of Ministry of Industry and Information Technology. According to Framework Convention on Tobacco Control, government should abolish the Law of the People’s Republic of China on Tobacco Monopoly as soon as possible and gradually clean up China’s current laws, rules, regulations and regulatory documents on tobacco control.

 

 

 

TABLE OF CONTENTS

 

1. Research Background and Objectives

 

2. Other Countries’ Experience of Institutional Reform in Tobacco Industry

 

2.1 An Overview on Other Countries’ Administrative Structure in Tobacco Industry

2.2 An Overview on Other Countries’ Reform in Tobacco Monopoly: The Japan Case

2.2.1 The Evolution of Tobacco Industry Reform in Japan

2.2.2 The Existing Framework of Japan’s Tobacco Industry Institution

2.2.3 Review

 

2.3 Legal Framework of Supervision and Regulation System in Tobacco Industry abroad

2.3.1 Functional Division of Supervision Agency in Conformity with Laws

2.3.2 Supervision on Tobacco Advertisements and Promotion

2.3.3 Supervision on Tobacco Health Warnings

2.3.4 Supervision on Ingredients of Tobacco Products and Their Disclosure

 

2.4 Review

 

3. The Evolution and Status Quoof China’s Tobacco Monopoly

 

3.1 The Evolution of China’s Tobacco Monopoly

3.1.1 Thoughts on Tobacco Administration in Late Qing Dynasty

3.1.2 Tobacco Monopoly in the Republic of China Era

3.1.3 Tobacco Administrative System in the Period between the Establishment of PRC and the Reform and Opening-up

3.1.4 Tobacco Administrative System in the Post Reform and Opening-up Era

 

3.2 An Analysis on China’s Existing Administrative System of Tobacco Monopoly

3.2.1 The Status Quo of National Administrative System of Tobacco Monopoly

3.2.2 The Status Quo of Regional Administrative System of Tobacco Monopoly

3.2.3 China’s Current Detailed Tobacco Industry Structure

3.2.4 Review

 

4. An Inquiry into the Economic Rationality of Tobacco Monopoly

 

4.1 The Theory of Rational Addiction to Tobacco

4.2 The Theory of Industrial Organization (SCP Analysis)

4.3 The Theory of Institutional Economics

4.4 Review

 

5. An Inquiry into the Legitimacy of Tobacco Monopoly

 

5.1 An Inquiry into the Constitutionality of Tobacco Monopoly

5.2 The Deficiency of the Law of the People’s Republic of China on Tobacco Monopoly

5.2.1 The Law of the People’s Republic of China on Tobacco Monopoly is a Law with Rich Tint of Industrial Administration

5.2.2 The Deficiency of the Law of the People’s Republic of China on Tobacco Monopoly Can Be Inspected through the Provisions inAdministrative License Law

5.3 The Application of the Anti-Monopoly Law

5.4 The Application of Other Laws and Regulations

5.4.1 The Application of the Advertisement Law

5.4.2 The Application of the Price Law

5.4.3 The Application of the Law against Unfair Competition

5.5 The Application of Framework Convention on Tobacco Control

5.6 Review

 

6. The Practical Impact of Tobacco Monopoly

 

6.1 Comprehensive Assess of the Social Costs and Benefits of Tobacco Products in China

6.1.1 Social Costs of Tobacco Industry in China

6.1.2 Social Benefits of Tobacco Industry in China

6.1.3 Comprehensive Assess of the Social Costs and Benefits of Tobacco

6.1.4 Tobacco Control Policies and National Economy

6.1.5 Review

6.2 The Impact of Tobacco Monopoly on China’s Tobacco Control

6.2.1 The General Role of State Tobacco Monopoly Administration in the Negotiation and Implementation of Framework Convention on Tobacco Control

6.2.2 The Requirement of Tobacco Packaging Health Warning Messages Guided by Tobacco Monopoly Departments

6.2.3 Advertisements, Promotion and Sponsored Activities of China’s Tobacco Industry

6.2.4 Tobacco Monopoly Departments Reduce the Impact of Excise Escalation

6.2.5 Tobacco Monopoly Departments Use Media to Neutralize Tobacco Control Policies

 

6.3 Plight of Tobacco Monopoly and Its Impact on Tobacco Industry Development

 

7. Promoting Institutional Reform in Tobacco Monopoly

 

7.1 Clear Identification of Institutional Reform Objectives in Tobacco Industry

7.1.1 Tobacco Monopoly Reform

7.1.2 The Realization of the Split of Government and Enterprise and the Shift of Government Function

7.1.3 Corporate Governance Structure Reform in Tobacco Enterprises

 

7.2 Promotion of Multi-Phase Measures in Tobacco Monopoly Reform

7.2.1 Step One: Institutional Reform of Tobacco Monopoly

7.2.2 Step Two: Establishment of Legitimate Institutional Framework for Tobacco Regulation

7.2.3 Formulation, Modification and Refinement of Implementation Mechanisms, Policies and Provisions Consistent with WHO’s Framework Convention on Tobacco Control

 

8. Summary