By Thomas Schmid
TPD2 is causing quite some headaches among EU-based manufacturers, as Tobacco Asia has learned from the European Smoking Tobacco Association.
The revamped European Union (EU) Tobacco Products Directive – colloquially referred to as “TPD2” – was originally hailed by the economic bloc as a step forward to better track and trace tobacco product movements and also help stamp out illicit tobacco. Since May 2020, TPD2 applies to fine-cut tobacco and cigarettes across the EU’s 27 member states. But, commencing from May 2024, the directive will also encompass all other tobacco products, except raw materials. The United Kingdom, which recently left the EU following chaotic “Brexit” procedures, is - at least for the time being - maintaining a tobacco product T&T regimen compatible with TPD2.
TPD2 found wanting
However, despite the initial EU fanfare about TPD2’s supposed benefits, the directive has not been well received by Europe’s tobacco manufacturers, let alone having been lauded as “a step forward”. “Our main concern with TPD2 from the outset was that legislators were focused on production and distribution processes specific to factory-made cigarettes,” Peter van der Mark, secretary-general of the European Smoking Tobacco Association (ESTA), told Tobacco Asia. “But, other merchandise as well as [smaller, independent] tobacco companies that are producing niche products were not given sufficient consideration when TPD2 was developed – and, therefore, it is they who are now disproportionally impacted,” he explained.
An unnecessarily complex T&T system
More specifically, the European Commission (EC) devised an extraordinarily convoluted T&T system without actually drawing on in-depth knowledge of tobacco manufacturing and distribution processes. At the same time, the diversity of Europe’s tobacco industry was blatantly disregarded by EC bureaucrats. As a result, the T&T system prescribed by TPD2 turned out an unnecessarily complex volume-control mechanism that lacks harmonization in many aspects. Indeed, the T&T requirements represent an unfortunate deviation from the spirit of the original “TPD1” regulation, TPD2’s forerunner. “Because the European Commission failed to appropriately consult with relevant stakeholders, the cost of the system is now disproportionally higher for lower-volume manufacturers [than it is for continents-spanning multinationals, for example],” van der Mark said.
Incompatibilities with non-EU markets
Then there also have been claims from various stakeholders that TPD2 is incompatible with the T&T mechanisms of various non-EU markets, and it’s an issue that ESTA had identified long before TPD2 was even adopted. “We voiced our concerns to the European Commission at the time, but were completely ignored,” van der Mark recalled. As a matter of fact (and as common sense would dictate), TPD2 initially only required its T&T mechanism to apply to products traded within the European market. “But that was later extended to also include product exports to non-EU destinations,” van der Mark said. Because of that expanded T&T scope, TPD2 can now effectively bar EU-based companies from exporting their products to markets outside the EU. According to van der Mark, this is of great concern particularly to “smaller companies producing niche and traditional tobacco products and which have no possibility of shifting their production facilities [to locations] outside the EU if they want to circumvent that exporting problem.”
And yet more complications
Export hurdles aside, there also are incompatibility issues in two other areas: Firstly, packaging and labeling laws in certain non-EU destinations may not permit that packaging is emblazoned with EU codes. Secondly, there are cases where the destination market maintains its own specific T&T technology which is not set up to handle code pairing. But it just as well could be a combination of both, according to van der Mark. “This completely defeats all principles of international trade,” he said, adding that it were highly unusual that a jurisdiction such as the EU would willfully establish trade barriers for its own companies.” Or, in other words: Because of TPD2’s expanded scope and incompatibilities with (some) foreign T&T mechanisms, European tobacco companies are facing hassles if they intend to market their European-made products in markets outside of Europe. “Depending on the nature of the issue – whether it’s packaging or code-pairing - companies are forced to either re-package their products or try to double-code them, thereby increasing production costs significantly,” van der Mark pointed out the conundrum.
Failed policymaking
Whilst TPD2 admittedly harmonized some aspects of tobacco regulations applied within the EU, as a whole, the directive is lacking clarity on many other levels, such as, for instance, ingredient regulations and reporting, product presentation, and, of course, those darned T&T requirements. And, it severely undermines smaller companies’ competitiveness. “The de-facto export problem that I already mentioned earlier is a prime example of failed policymaking,” said van der Mark. Short of scrapping their export business or relocating their manufacturing outside the EU under tremendous investment cost, the only other option especially for SMEs would be to close down for good. “Some European companies and factories already have shut down,” claimed van der Mark. “Others have decided to stop exporting to certain markets altogether and re-focus their distribution and activities [to within the EU].”
TPD2 “cannot curb the illicit trade”
But what about illicit tobacco products? Wasn’t stamping out – or at least substantially decreasing – the illicit trade one of the main objectives TPD2 was promised to achieve? Peter van der Mark said ESTA was in full support of that objective. “The illicit tobacco trade in the EU can take many forms, ranging from counterfeit products to contraband and cheap whites,” he explained. However… he also expressed strong concern with recent (as in “TPD2 post-launch”) reports from various European customs authorities that actually showed an increase of illicit manufacturing in the EU itself. “[TPD2’s track and trace requirements cannot curb the illicit trade because the very elements engaged in illicit trade simply never use the system,” van der Mark revealed. He said the very regulations adopted to deal with illegal trading had achieved almost nothing in that direction and instead only increased the burden for legal companies, driving up their production costs and final product prices.” “And when [consumer] prices go up, it provides even more incentive for illegal activity,” he pointed out.
Tax hikes aid illicit consumption
If there weren’t already enough issues with TPD2, there’re more on another front: According to van der Mark, an evident link between increased tax rates and illicit tobacco product consumption existed on the demand (i.e. end consumer) side, whereas “the latter is being triggered by the former.” Therefore, the best – and perhaps the only viable - way to effectively curb the illicit trade was to adopt smarter tax regimes. Taking fine-cut tobacco as an example, van der Mark explained that ensuring a tax differential between cigarettes and fine-cut allowed fine-cut tobacco to assume a “buffer function” by capturing price-conscious cigarette consumers that would otherwise have gone for cheaper, thus often illegal, cigarettes. “And this is particularly true in times of economic downturn when consumers’ disposable incomes are under pressure —as will soon be the case following the Covid-19 global crisis,” he argued.
TPD2, an undue burden
TPD2 has indeed put a considerable burden on Europe’s manufacturers, especially the smaller and mid-sized companies trying to stay viable with traditional and niche products. In addition, TPD’s T&T set-up also extends that burden to distributors and wholesalers as well. Though the overall burden could be acceptable and manageable if only TPD2 would achieve EU legislator’s erstwhile intention of coming up with a sensible regulation framework that is actually fit for its purpose. But as we have seen, it fails on many levels. “TPD2 is not quite adequate for intra-EU trade, and is indeed even more inadequate for international trade,” van der Mark concluded. Europe’s manufacturers have no option but hold out and wait and see what the bureaucrats in Brussels are cooking up next.
Light at the End of the Dark TPD2 Tunnel?
As inadequate and burdensome TPD2 currently seems to be for Europe’s tobacco industry players, there might be a glimmer of light at the end of the tunnel. According to ESTA, the EU supposedly has already embarked on reviewing procedures for the regulation framework, with a European Commission report expected to be due in May 2021. But, these news have of course emerged at a time when several requirements stipulated in the current version have not even been implemented yet. And, in the opinion of ESTA a hasty revision could actually create more issues than it helps to solve.
“We believe that more is not always better, and the EU would be well-advised to first ensure that the [current] TPD2 is fully in place [before], removing [or adjusting] those parts of [the directive] that are clearly not yielding any benefits,” elaborated Peter van der Mark. “ESTA would like to reaffirm that its members can fully comply with any regulation framework and that we are committed to engaging with EU institutions and member states that favor proportionate, adequate, and effective legislation.”
Representing Europe’s Tobacco Industry
The European Smoking Tobacco Association (ESTA) is headquartered in the Belgian capital of Brussels. It was jointly founded in 1990 by the two national organizations representing the smoking tobacco industries in the Netherlands and in Germany. ESTA presently has 52 members, including manufacturers and distributors of fine-cut smoking tobacco, pipe tobacco, cigarettes and cigars, traditional snuff, chewing tobacco, and several national trade associations. Most ESTA members are small to mid-sized companies - many of them family-owned - based throughout the European Union as well as in Switzerland and (since “Brexit”) the United Kingdom. The body represents the interests of its member companies and organizations and engages on their behalf with the EU and national legislators and institutions. It also supports members in implementing applicable laws and regulations pertaining to tobacco products.