Tobacco Exports: USDA's Foreign Agriculture Service Lacks	 
Specific Guidance for Congressional Restrictions on Promoting	 
Tobacco (30-MAY-03, GAO-03-618).				 
                                                                 
Since 1994, the Agriculture Appropriations Act has prohibited the
funding of tobacco export programs and restricted the U.S.	 
Department of Agriculture's (USDA) tobacco-related activities.	 
Since 1998, the Commerce, Justice, and State Appropriations Act  
has placed similar restrictions on the Departments of Commerce	 
and State and the Office of the U.S. Trade Representative (USTR),
although it has not prohibited them from addressing foreign	 
discriminatory trade practices. Congressional requesters asked	 
GAO to (1) assess the agencies' guidance on the restrictions to  
their overseas personnel, (2) describe how the agencies'	 
activities changed in response to the restrictions, and (3)	 
identify the mechanisms that the agencies use to monitor	 
compliance.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-618 					        
    ACCNO:   A07041						        
  TITLE:     Tobacco Exports: USDA's Foreign Agriculture Service Lacks
Specific Guidance for Congressional Restrictions on Promoting	 
Tobacco 							 
     DATE:   05/30/2003 
  SUBJECT:   Exporting						 
	     Restrictive trade practices			 
	     Tobacco industry					 
	     Trade agreements					 
	     International trade restriction			 
	     USDA Market Access Program 			 
	     CCC Export Credit Guarantee Program		 
	     USDA Foreign Market Development Program		 

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GAO-03-618

Report to Congressional Requesters

United States General Accounting Office

GAO

May 2003 TOBACCO EXPORTS USDA*s Foreign Agricultural Service Lacks
Specific Guidance for Congressional Restrictions on Promoting Tobacco

GAO- 03- 618

Commerce, State, and USTR have issued timely guidance implementing the
tobacco- related restrictions specified in their annual appropriations
act. However, USDA*s Foreign Agricultural Service (FAS) has not issued
guidance specific to its appropriations act. Instead, since 1998, FAS has
relied on the tobacco- related guidance in a periodic cable sent to the
overseas staffs of USDA, State, Commerce, and USTR. This guidance does not
address whether certain FAS activities, such as providing tobaccorelated
information reports and assisting in trade negotiations on tobaccorelated
issues, are consistent with USDA*s 1994 restrictions. GAO did not seek to
determine whether ongoing FAS activities are prohibited by the
appropriations restrictions.

The agencies have discontinued some tobacco- related activities and
continued others. For instance, Commerce overseas staff ceased providing
market research information to tobacco exporters, but staffs of Commerce

and State still provide routine business assistance to exporters. FAS
ended the tobacco component of USDA*s Export Credit Guarantee Program,
Foreign Market Development Program, and Market Access Program. However,
FAS has continued, as part of its commodity- reporting program, to gather
and disseminate tobacco- related information that identifies foreign
production and consumption rates, import trends, and changes in foreign
regulations. Our analysis showed that some of FAS*s reports provided
insights into market niches for tobacco exporters.

To monitor compliance with the restrictions, senior FAS and Foreign
Commercial Service officers at overseas posts review their staffs*
tobaccorelated activities. Overseas staffs refer to headquarters U. S.
firms* requests for assistance that could violate the restrictions
contained in the periodic guidance. Since 1994, the Agriculture

Appropriations Act has prohibited the funding of tobacco export programs
and restricted the U. S. Department of Agriculture*s (USDA) tobacco-
related activities. Since 1998, the Commerce, Justice, and State
Appropriations Act has

placed similar restrictions on the Departments of Commerce and State and
the Office of the U. S. Trade Representative (USTR),

although it has not prohibited them from addressing foreign discriminatory
trade practices. Congressional requesters asked GAO to (1) assess the
agencies*

guidance on the restrictions to their overseas personnel, (2) describe how
the agencies* activities changed in response to the restrictions, and (3)
identify the mechanisms that the agencies use to monitor compliance.

To ensure that FAS fully addresses congressional restrictions on the
promotion of tobacco or tobaccorelated products, we recommend that the
Secretary of Agriculture (1) develop guidance that reflects FAS*s specific
restrictions and (2)

review FAS*s tobacco- related activities to determine whether they are
consistent with the restrictions. In response to our

draft, FAS stated it will issue guidance but does not believe that the
restrictions cover the collection and dissemination of tobacco related
information.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 618. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact David Gootnick at (202) 512- 3149 or gootnickd@ gao.
gov. Highlights of GAO- 03- 618, a report to

congressional requesters

May 2003

TOBACCO EXPORTS

USDA*s Foreign Agricultural Service Lacks Specific Guidance for
Congressional Restrictions on Promoting Tobacco

Page i GAO- 03- 618 Tobacco Exports Letter 1 Results in Brief 2 Background
4 Commerce, State, and USTR Provided Guidance on Tobacco

Restrictions, but FAS Did Not 5 Agencies Have Stopped Some Activities and
Continued Others 7 Agencies Rely on Staff to Monitor Compliance with
Restrictions on Promoting Tobacco 13 Conclusions 13 Recommendations 13
Agency Comments and Our Evaluation 14 Appendix I Scope and Methodology 17

Appendix II Excerpts from 2001 and 2002 Foreign Agricultural Service
Tobacco Attache Reports 18

Appendix III Comments from the U. S. Department of Agriculture 20

Figures

Figure 1: FAS Tobacco- Related Programs and Activities 9 Figure 2:
Subscribers to FAS Worldwide Tobacco Reports 10 Contents

Page ii GAO- 03- 618 Tobacco Exports Abbreviations

FAS Foreign Agricultural Service FCS Foreign Commercial Service HHS
Department of Health and Human Services USDA U. S. Department of
Agriculture USTR Office of the U. S. Trade Representative

This is a work of the U. S. Government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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United States. It may be reproduced and distributed in its entirety
without further permission from GAO. It may contain copyrighted graphics,
images or other materials. Permission from the copyright holder may be
necessary should you wish to reproduce

Page 1 GAO- 03- 618 Tobacco Exports

May 30, 2003 The Honorable Richard J. Durbin Ranking Minority Member
Subcommittee on Oversight of Government Management, the Federal Workforce,
and the District of Columbia Committee on Governmental Affairs United
States Senate

The Honorable Henry A. Waxman Ranking Minority Member Committee on
Government Reform House of Representatives

The Honorable Lloyd Doggett House of Representatives

Since fiscal year 1994, the annual Agriculture Appropriations Act has
prohibited the U. S. Department of Agriculture*s (USDA) Foreign
Agricultural Service (FAS) from using appropriated funds to promote the
sale or export of tobacco or tobacco products. Additionally, since fiscal
year 1998, the Commerce, Justice, 1 and State Appropriations Act similarly
has prohibited those agencies, including the Office of the U. S. Trade
Representative (USTR), from using appropriated funds to promote the sale
or export of tobacco or tobacco products and from seeking the removal of
nondiscriminatory foreign restrictions on the marketing of tobacco. While

both appropriations acts prohibit agencies from helping U. S. firms market
tobacco products overseas, they differ in that the 1998 Act allows the
Departments of Commerce and State and USTR to address potentially
discriminatory trade practices faced by U. S. tobacco firms.

As you requested, this report (1) assesses the tobacco- related policy
guidance on restrictions issued to overseas personnel by USDA, Commerce,
State, and USTR; (2) describes how the agencies* past and present
activities changed in response to the legislative restrictions on the

1 Although the Department of Justice is included in the legislated
appropriations and is also subject to the tobacco- related restrictions,
we did not examine its activities because it does not promote U. S.
exports. United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 618 Tobacco Exports

marketing of tobacco and tobacco products; and (3) identifies how the
agencies monitor compliance with restrictions on promoting tobacco.

In conducting this review, we reviewed agency documents, performed legal
analyses, and conducted interviews with responsible agency officials. We
analyzed tobacco- related publications, including all FAS tobacco
commodity reports for 2001 and 2002. We did not seek to determine whether
ongoing agency activities are, or are not, prohibited under the
appropriations restrictions. (See app. I for further details of our scope
and methodology.)

Commerce, State, and USTR have issued timely guidance implementing
tobacco- related restrictions in their annual appropriations act, but the
USDA*s FAS has not. Since fiscal year 1998, USDA, Commerce, State, and
USTR have issued guidance to diplomatic posts as a periodic cable that

implements the restrictions in the agencies* appropriations. Between 1993
and 1997, FAS issued no guidance implementing its tobacco- related
restrictions. Since 1998, FAS has relied on the periodic cables to provide
policy guidance to its overseas personnel. However, this guidance*
developed through an ongoing interagency process that includes FAS* does
not provide specific direction to FAS staff. For example, it does not
specify whether certain FAS activities, such as providing tobacco- related
information reports on foreign market conditions and assisting in trade

negotiations on tobacco- related issues, are consistent with its
appropriations act*s restrictions.

In response to the legislative restrictions, the agencies discontinued
some tobacco- related activities and continued others. Commerce overseas
staff ceased providing market research information to potential U. S.
tobacco exporters. Consistent with the 1998 cable guidance, the staffs of
both Commerce and State still provide routine business assistance to
exporters needing security, customs, or regulatory information. In fiscal
year 1994, FAS ended the tobacco component of USDA*s major export
programs*

specifically, the Export Credit Guarantee Program, the Foreign Market
Development Program, and the Market Access Program. 2 FAS has continued,
as part of its commodity- reporting program, to gather and disseminate
tobacco- related information that identifies foreign production and
consumption rates, import trends, and changes in foreign regulations

2 Formerly the Market Promotion Program. Results in Brief

Page 3 GAO- 03- 618 Tobacco Exports

that may assist tobacco exporters. Additionally, FAS, like other U. S.
agencies, has provided USTR negotiators with information on foreign tariff
rates, U. S. market shares, and trade concessions* potential impact on

exports. To monitor implementation of the legislated restrictions,
Commerce, State, and FAS rely on their overseas staffs to identify U. S.
firms* requests for tobacco- related assistance not covered in the
periodic guidance. Overseas staff are instructed to refer such requests to
headquarters for review, and headquarters staff make case- by- case
determinations on the permissibility of each request. Overseas staff have
asked, for instance, whether they can help U. S. tobacco firms address
different types of potentially unfair trade practices and whether to list
tobacco as an export prospect in publicly available country commercial
guides that highlight export opportunities.

We are recommending that the Secretary of Agriculture (1) develop guidance
to implement the legislative restrictions on promoting the sale or export
of tobacco or tobacco products that fully reflects FAS programs

and activities and (2) review FAS*s ongoing activities to determine
whether they are consistent with those restrictions.

In commenting on a draft of this report (see app. III), USDA disagreed
with our finding that the guidance of the State cable does not fully
implement FAS*s tobacco- related prohibitions, but USDA noted that, in
response to our recommendation, it will prepare separate guidance for FAS
staff overseas and will cite any needed clarifications. USDA also
disagreed with our recommendation that FAS assess its tobacco- related
activities* specifically, the collection and dissemination of information
on tobacco* to clarify whether these activities are consistent with FAS*s
legislative restrictions on the promotion of tobacco exports. USDA stated
that it does

not consider these activities to be within the scope of its restrictions.
However, USDA has not provided us with any documentation in support of
this position. Because FAS*s mission is largely promotional, we maintain
our recommendation that FAS review its ongoing activities and determine
whether they are consistent with its restrictions. Commerce, State, and
USTR did not comment on the draft report.

Page 4 GAO- 03- 618 Tobacco Exports

In general, the overseas staffs of USDA, Commerce, and State help
facilitate a broad range of U. S. exports. Specifically, USDA*s FAS and
Commerce work to improve export opportunities for U. S. products in
foreign markets. 3 Their activities include developing export
opportunities for U. S. businesses, participating in trade agreement
negotiations and countering foreign discriminatory trade practices, and
collecting and analyzing statistics and market information. Each agency
produces information reports on foreign market conditions. For example,
FAS staff provide monthly reports on various commodities and annual
reports on foreign markets, and Commerce overseas staff prepare country
commercial guides that identify targeted industry sectors for U. S.
exports and discuss the country*s political, regulatory, and economic
climate. State overseas staff*s trade responsibilities include
facilitating trade negotiations, providing economic analysis, and
providing commercial assistance in countries where Commerce has no
presence. These agencies are part of an interagency process established
under the Trade Expansion Act of 1962, which provides for an interagency
structure and process that

consults and advises USTR on trade policy and negotiations. In the early
1990s, these agencies, as well as the Departments of Health and Human
Services (HHS) and the Treasury, were also members of an interagency
group, called the Trade Policy Staff Committee Task Force on Tobacco
Exports, that examined the dichotomy between tobacco- related health
concerns and the economic benefit of tobacco exports. 4 Charged

with assessing U. S. tobacco policy in light of trade and health concerns,
the group outlined the agencies* tobacco- related responsibilities. 5
Those responsibilities included collecting and analyzing production,
trade, and consumption data on tobacco and related products; addressing
unfair

regulations inconsistent with international trade agreements; combating
discriminatory trade practices; and supporting foreign government health
policies.

3 In 2001, USDA had 244 staff in 73 overseas offices, and Commerce had 1,
245 staff in 157 overseas offices. USDA has responsibility for marketing
nonmanufactured agricultural products, while Commerce has responsibility
for marketing manufactured agricultural and other products. In 2002, State
had 6, 103 staff located in 259 overseas offices.

4 U. S. General Accounting Office, Trade and Health Issues: Dichotomy
Between U. S. Tobacco Export Policy and Antismoking Initiatives, GAO/
NSIAD- 90- 190 (Washington, D. C.: May 15, 1990).

5 Members of the interagency group included representatives from the
National Economic Council, State, Commerce, USDA, HHS, Treasury, and USTR.
Background

Page 5 GAO- 03- 618 Tobacco Exports

In August 1992, Congress passed the Agricultural Appropriations Act for
fiscal year 1993, prohibiting the use of appropriated funds to pay the
salaries of personnel who carry out USDA*s Market Promotion Program with
respect to tobacco. In October 1993, Congress broadened the tobacco-
related prohibition, as part of the fiscal year 1994 appropriation act, to
include FAS in the prohibitions. Specifically, since fiscal year 1994
Congress has prohibited FAS from using appropriated funds to promote

the sale or export of tobacco or tobacco products. In November 1997,
Congress passed the fiscal year 1998 Commerce, Justice, and State
Appropriations Act, prohibiting agencies funded by the act, including
USTR, from using appropriated funds to promote the sale or export of
tobacco or tobacco products. This act also prohibited the use of
appropriated funds to reduce or remove nondiscriminatory foreign country
restrictions on the marketing of tobacco or tobacco products. The act
allows the use of funds to address foreign- country, tobacco- marketing
restrictions that discriminate against U. S. products. Subsequent
appropriations acts have retained these prohibitions.

Guidance implementing the fiscal year 1998 restrictions on Commerce,
State, and USTR*s promotion of tobacco and tobacco- related products was
first issued in February 1998; about 3 months after the restrictions went
into effect. The guidance, issued in a State cable to overseas posts,
identified prohibited and permitted activities. By contrast, from 1994
through 1997, FAS did not provide any written guidance to its overseas
staff regarding the restrictions on its tobacco- related activities. Since
fiscal year 1998, according to FAS officials, the agency has participated
in developing the guidance contained in the periodic State cables.

The cabled guidance, first issued in February 1998, implements the tobacco
restrictions contained in the fiscal year 1998 Commerce, State, and
Justice Appropriations Act. This guidance prohibits the agencies from 
promoting the sale or export of tobacco or tobacco- related products and

assisting with the efforts of U. S. firms or individuals that do, 
participating in trade events or receptions sponsored by tobacco
interests,

and  challenging host country laws and regulations directed toward
reducing

the negative impact of tobacco. Commerce, State, and

USTR Provided Guidance on Tobacco Restrictions, but FAS Did Not

Commerce, State, and USTR Issued Guidance on Their Tobacco Restrictions

Page 6 GAO- 03- 618 Tobacco Exports

The guidance also clarifies the activities that overseas staff may engage
in, specifically permitting these agencies to provide

 routine business facilitation services to all U. S. citizens or firms,
such as providing information on foreign country conditions, policies,
laws, and regulations;  assistance in resolving business problems, such
as customs or port

clearances; and  assistance in resolving potentially discriminatory trade
restrictions.

Since February 1998, State has periodically updated and reissued this
guidance to overseas staffs of State, Commerce, and USDA. The February
1999 cable reiterated the same guidance and encouraged overseas staff to

refer to headquarters any issues not covered by the guidance. This cable
also encouraged overseas posts to report on their actions supporting
foreign- country, tobacco- control efforts. The February 2000 cable again
encouraged posts to assist in foreign tobacco- control efforts and
provided suggestions for doing so. The cable specifically recommended that
posts help foreign governments to

 identify and promote tobacco- control programs;  find funding for
tobacco prevention and control projects, including from

U. S. sources;  report on the country*s tobacco- control projects and
progress; and  track, and report on, tobacco- control legislation. FAS
did not develop guidance implementing the statutory restrictions,

effective in fiscal year 1994, that specifically prohibit it from using
appropriated funds to promote the sale or export of tobacco or
tobaccorelated products. FAS did cease funding certain tobacco- related
activities in 1994. However, FAS officials could not cite or produce any
internal policy or guidance implementing their restrictions, nor could
they explain what guidance they relied on from 1994 through 1997.

FAS officials stated that since fiscal year 1998, when the restrictions on
State, Commerce, and USTR activities became effective, FAS has relied on
the February 1998 and subsequent State cables containing guidance to FAS
Has Not Issued Guidance Implementing Its

Tobacco Restrictions

Page 7 GAO- 03- 618 Tobacco Exports

overseas posts as a means to inform its overseas staff of the
tobaccorelated restrictions. All of the FAS officials we interviewed were
aware of this guidance. For example, FAS staff at headquarters and
overseas were aware that they were prohibited from promoting tobacco and
its products, and the overseas staff members we communicated with were
aware that participation in trade events promoting tobacco and attendance
at tobacco company- sponsored functions was prohibited.

Although FAS participated in drafting the original 1998 State- issued
guidance cables, the cables do not specifically address what FAS
activities are prohibited under the USDA appropriations act restrictions.
In particular, the cables do not address FAS*s continuing activities
related to (1) collecting and disseminating information on foreign tobacco
markets

or (2) participating in negotiations on tobacco- related trade agreements.
USDA, Commerce, State, and USTR have altered their activities in response
to the legislated tobacco restrictions by discontinuing the tobacco-
related component of export programs and stopping direct assistance to
tobacco exporters, but the agencies have continued certain other
activities related to information gathering and dissemination and

trade negotiations. For example, the agencies routinely collect and
publish information on foreign countries* commercial environment, which
may include information related to tobacco. Such information might be
useful to U. S. tobacco exporters. These agencies also provide information
useful

to USTR when it negotiates trade agreements or addresses discriminatory
trade barriers. Commerce*s Foreign Commercial Service (FCS) staff have
ceased assistance to potential tobacco exporters but continue to provide
basic assistance to all potential exporters. FCS representatives told us
that FCS staff no longer (1) provide market information on tobacco in
FCS*s country commercial guides; (2) facilitate meetings with foreign
tobacco buyers; (3) set up trade shows for tobacco products; or (4)
provide

customized fee- based research that identifies key competitors, the price
of comparable products, customary distribution and promotion practices, or
possible business partners. However, FCS identified a few instances in
which its overseas staff inadvertently assisted tobacco exporters. In
2001, for example, FCS staff prepared research reports on Pakistan*s
tobacco market for a U. S. tobacco firm* an activity clearly prohibited in
the guidance provided to overseas posts. FCS reminded its staff of these
prohibitions in 2002 by resending the 2000 cable to its posts. FCS policy
is Agencies Have

Stopped Some Activities and Continued Others

Commerce Stopped Providing Market Research Information

Page 8 GAO- 03- 618 Tobacco Exports

to limit assistance to tobacco firms to the same routine business
facilitation services provided to any U. S. firm, such as briefing them on
the security, political, and commercial situation in a country and helping
them resolve customs or tax issues. Commerce staff, in conjunction with
other agency staff here and abroad, also helps resolve potential
discriminatory trade practices.

Commerce, State, and other federal agencies assist USTR by providing trade
information on foreign markets, commodities, or barriers to trade, and
they work together to assist exporters faced with potential discriminatory
trade practices. In 2001, for example, representatives from USTR, State,
Commerce, and the Centers for Disease Control and

Prevention negotiated with the Republic of Korea to reduce proposed import
tariffs on tobacco that would have violated an existing market access
agreement between the United States and Korea. In another instance, U. S.
agencies worked together to address Thailand*s proposed cigarette
ingredient disclosure requirement* a potential infringement of the
intellectual property rights of U. S. cigarette brands. U. S. agencies
assist exporters in other ways, such as working with foreign governments
to address cigarette counterfeiting, as U. S. agencies did in Pakistan in
1998.

USTR is responsible for developing and coordinating trade policy,
negotiating trade agreements, and addressing unfair trade practices. USTR
relies on an interagency structure, established in the Trade Expansion Act

of 1962, 6 to provide information on foreign trade policies, regulations,
and practices. Since 1998, the Commerce, Justice, and State Appropriations
Act has specifically allowed the use of appropriated funds to address
foreign- country, tobacco- marketing restrictions that discriminate
against U. S. products. This allowance is reflected in the implementing
guidance contained in the periodic State cable. Beginning in fiscal year
1994, when the tobacco restrictions contained in

USDA*s appropriations went into effect, FAS ceased funding the tobacco
component of USDA*s export programs (see fig. 1). The tobacco component of
USDA*s Export Credit Guarantee Program had provided U. S. tobacco
exporters with guaranteed credit to facilitate U. S. tobacco

6 Public Law 100- 418. Commerce, State, and

USTR Provide Trade Agreement- Related Support

FAS Discontinued Some Tobacco Programs

Page 9 GAO- 03- 618 Tobacco Exports

exports and had provided subsidy payments that allowed the tobacco
exporters to compete in world markets against the subsidized exports of
other countries. USDA also stopped funding the tobacco component of the
Foreign Market Development Program, which was designed to encourage
commercial exports through federal subsidies for advertising, trade

servicing, and technical assistance. The tobacco component of the Market
Access Program (formerly the Market Promotion Program) ended in fiscal
year 1993. This program funded the promotional activities of U. S. tobacco
producers, exporters, private companies, and trade organizations.

Figure 1: FAS Tobacco- Related Programs and Activities

a Now the Market Access Program. FAS continues to produce tobacco- related
reports that can be useful to tobacco exporters. Historically, FAS has
reported on foreign- country tobacco imports and provided production,
pricing, and consumption data, as it routinely does for other commodities.
Currently, FAS continues to put monthly tobacco trade statistics on its
Internet Web site, and it publishes

printed copies of its quarterly report Tobacco: Worldwide Markets and

FAS Continues to Report on Foreign Tobacco Markets

Page 10 GAO- 03- 618 Tobacco Exports

Trade. (FAS officials said that they would stop publishing the report at
the end of 2003 but that the information would continue to be available on
their Web site.) FAS also makes available on the Internet annual

commodity reports on tobacco, referred to as *attache reports.* 7 These
reports contain numerous data tables and some evaluative information on
major foreign consumers and producers of tobacco products.

We examined the subscription lists for FAS*s quarterly reports and found
that the majority of subscribers are tobacco industry- related
organizations such as U. S. and foreign tobacco firms and tobacco- related
organizations

such as investment banks, trade associations, and tobacco control
organizations (see fig. 2). Figure 2: Subscribers to FAS Worldwide Tobacco
Reports

7 FAS attache reports are issued on numerous commodities.

Page 11 GAO- 03- 618 Tobacco Exports

We also analyzed the content of all FAS annual attache reports covering
tobacco during 2001 and 2002 and found that they provide information on
foreign market conditions that may be useful to tobacco exporters. The 62
annual reports from 2001 and 2002 8 that we analyzed commonly contained
discussions on marketing, consumption and production, trade issues, and
policies. (See app. II for detailed information on the nature of these
reports.) General FAS guidance on commodity reporting encourages posts to
view the countries as markets for U. S. exports and competitors to U. S.
products, and the attache reports identified import and export trends.
Each report narrative was supplemented with an average of 14 tables,
including estimates on projected production and consumption of leaf
tobacco and cigarettes. Additionally, some reports contained information
on health and safety policies, market share, advertising regulations, and
brand or tobacco preference. The following excerpts from selected reports
illustrate the kind of information that might be useful to U. S. tobacco

exporters.  Malaysia, 2002: *Younger Malaysians prefer to smoke American-
blended

cigarettes. With about half of the population below age 25, the demand for
these cigarettes should continue to climb. The local market share for
American- blend cigarettes has expanded from 38 percent in 1998 to 45
percent in 2001.*

 Italy, 2002: *Prospects for U. S. tobacco into the Italian market* are
unfavorable, in view of both the continued reduction of domestic brand
cigarettes sold on the Italian market, and stronger competition from other
suppliers, such as Brazil and Zimbabwe.*

 Dominican Republic, 2002: *The Dominican Republic continues to be one of
the most important trading partners with the United States in tobacco*. U.
S. exports to the Dominican Republic surpassed US$ 85

8 Attache reports for 2002 cover Argentina, Brazil, Bulgaria, China,
Croatia, Dominican Republic, Egypt, France, Germany, Greece, Guatemala,
Hong Kong, Hungary, India, Indonesia, Italy, Japan, Korea, Malaysia,
Mexico, the Netherlands, Pakistan, the Philippines, Poland, the Russian
Federation, Spain, South Africa, Taiwan, Thailand, Turkey, and the

United Kingdom. The European Union annual report was not included. Attache
reports for 2001 cover Argentina, Austria, Brazil, Bulgaria, China, Egypt,
France, Germany, Guatemala, Hong Kong, Hungary, India, Indonesia, Italy,
Japan, Korea, Malaysia, Mexico, Moldova, the Netherlands, Pakistan, the
Philippines, Poland, the Russian Federation, South Africa, Spain, Taiwan,
Thailand, Turkey, the United Kingdom, and Zimbabwe.

Page 12 GAO- 03- 618 Tobacco Exports

million in CY 2001, positioning the Dominican Republic among the top five
largest importers of U. S. tobacco.*

Moreover, an analysis of report narratives in combination with information
contained in the data tables might provide insight into market niches for
potential exporters. For example, from the narratives and tables of the
FAS 2002 report on Taiwan, we learned that (1) domestic unmanufactured
tobacco production had declined because of privatization of the country*s
tobacco monopoly, and the remaining production will incorporate U. S. leaf
tobacco; (2) competitors* imports of unmanufactured tobacco were projected
to decrease; (3) Taiwanese consumers considered U. S. tobacco desirable;
and (4) small, steady increases in total tobacco consumption were
forecast. Taken together, this information identifies an opportunity for
U. S. tobacco exporters of unmanufactured leaf. The report itself claims
that in Taiwan there are *opportunities and challenges for U. S. tobacco
and tobacco product exports.* 9 The 2001 report from the Netherlands is
another example in which

combined reported information gives U. S. tobacco exporters insight into
the Dutch market. 10 The tobacco report indicates (1) increased domestic
production of cigarettes, (2) a Dutch preference for U. S. flue- cured
unmanufactured tobacco, and (3) the importance of competitive pricing for
U. S. exports to be able to compete with imports from Brazil and

Zimbabwe. Additionally, information on the European Union*s lower tar and
nicotine requirements provides the exporter with useful information.

FAS supports USTR and State regarding trade policy and trade agreement
issues. FAS staff participate in the interagency process that supports
trade negotiations and addresses discriminatory trade practices, providing
data and analysis on a variety of commodities, including tobacco. The
Secretary of Agriculture, under the Food, Agriculture, Conservation, and
Trade Act of 1990, 11 has authority to *provide technical services to the
USTR on matters pertaining to agricultural trade and with respect to
international negotiations on issues related to agricultural trade.* FAS,
for example, has

9 Foreign Agricultural Service, Taiwan Tobacco and Products, number
TW2020, June 3, 2002. 10 Foreign Agricultural Service, The Netherlands
Tobacco and Products, number NL1055, August 10, 2001. 11 Public Law 101-
624. FAS Continues to Provide

Tobacco- Related Information to USTR

Page 13 GAO- 03- 618 Tobacco Exports

supported USTR*s efforts to foster free trade agreements with Australia,
Chile, Jordan, Morocco, and Singapore by providing tobacco- related data
and information on production, supply and demand, and tariff- rate quotas.

Senior FAS and FCS officers at overseas posts oversee their staffs*
tobacco- related activities. Overseas staff are aware that they are to
refer to these officers any requests for assistance or other activities
that could

violate the restrictions outlined in the periodic guidance they receive.
When clarification of a requested activity is required, these officers, as
outlined in the periodic State cables, seek headquarters- level approval
before assisting U. S. tobacco firms. Headquarters staff make case- by-
case determinations on the permissibility of each request. Agencies do not
systematically collect information on requests made for assistance by
tobacco exporters; therefore, information on the exact number of requests
was unavailable. However, overseas staff have, for example, asked

whether they should discuss proposed tariff increases on imported
cigarettes with foreign governments, whether it would be appropriate to
hold embassy meetings with tobacco firms, and whether to include tobacco
as a good export prospect in Commerce*s Country Commercial Guide for
Russia. To each of these requests, headquarters staff said no.

Since 1998, USDA, Commerce, State, and USTR have participated in an
interagency process that has developed and periodically updated guidance
to their overseas staff, outlining restrictions on the promotion of
tobacco and tobacco- related products. However, this guidance appears to

implement only the restrictions of the Commerce, State, and USTR
appropriations and does not provide specific direction to FAS staff
regarding restrictions on its tobacco- related programs and activities.
FAS discontinued funding the tobacco components of its major export
programs in 1994. However, FAS has not assessed whether its activities
regarding the collection and dissemination of information* information
that is used by tobacco producers and exporters of tobacco products* are
consistent with FAS*s statutory restrictions on the promotion of tobacco
or tobacco products.

To ensure that the Foreign Agricultural Service has fully addressed its
restriction on the promotion of tobacco or tobacco- related products, we
recommend that the Secretary of Agriculture (1) develop guidance to
implement the legislative restrictions on promoting the sale or export of
tobacco or tobacco- related products that fully reflects FAS programs and
Agencies Rely on Staff

to Monitor Compliance with Restrictions on Promoting Tobacco

Conclusions Recommendations

Page 14 GAO- 03- 618 Tobacco Exports

activities. We also recommend that the Secretary (2) review all ongoing
activities that pertain to tobacco or tobacco- related products*
specifically, the collection and dissemination of information on tobacco*
to determine whether these activities are consistent with the Department
of Agriculture*s restrictions in its appropriations.

We provided a draft copy of this report to USDA, Commerce, State, and
USTR. We received written comments from USDA. Commerce, State, and USTR
did not comment on the draft report. USDA disagreed with our conclusion
that the State cable, formulated to implement the restrictions that apply
to Commerce, State, and USTR and adopted by FAS, provides insufficient
guidance to FAS staff. Specifically, FAS claims that the Commerce, Justice
and State Appropriations Act

restricts agency action to a greater degree than the USDA amendment
covering FAS because it adds an additional restriction on trade
negotiations not found in the USDA amendment. By following this guidance,
FAS states, it is therefore implementing its restrictions and voluntarily
adopting additional limitations.

We disagree. The tobacco- related restrictions contained in FAS*s annual
appropriation act and the restrictions contained in Commerce, State, and
USTR*s appropriation act are essentially the same and only differ in one

respect. The restriction in the Commerce, State, and USTR appropriation
act prohibits those agencies from seeking the reduction or removal of
foreign- country restrictions on the marketing of tobacco, but allows
those agencies to address, in limited circumstances, foreign- country
restrictions on the marketing of tobacco that potentially discriminate
against U. S. products. Because FAS programs and activities differ from
those of the other agencies and its overall mission is largely
promotional, 12 we continue to recommend that FAS develop guidance that
fully reflects its own activities.

FAS also disagreed with our recommendation that it review its
tobaccorelated activities* specifically, the collection and dissemination
of market intelligence regarding tobacco* to determine whether these
activities are in keeping with USDA*s tobacco restrictions. FAS states
that it does not

consider market intelligence reporting (the collection and dissemination
of information on tobacco) to be within the scope of their amendment*s

12 7 U. S. C. S:1761- 1768. Agency Comments

and Our Evaluation

Page 15 GAO- 03- 618 Tobacco Exports

restrictions. It states that the legislative history does not address this
activity and that an interagency task force considered it to be outside
the amendment*s scope. During the course of our review, we asked FAS for,
but did not receive, documentation that supports their contention that
such reporting falls outside the scope of the restrictions.

In recommending the need for such a review of current tobacco- related
activities, we note that FAS*s overall mission is to promote the export of
U. S. agricultural products* and one of the primary responsibilities of
the FAS officers overseas is market development. 13 The attache reports we
examined identify (1) changes in domestic production or consumption that
could affect tobacco leaf or cigarette sales; (2) foreign competitors,
characterizing the competitiveness of their products; and (3) potential
market impediments, such as regulations or duties. Some reports also make
suggestions on commodity pricing that could increase U. S. firms* sales
over foreign competitors* and help U. S. firms market their tobacco and
tobacco products overseas. USDA does not permit FAS officers overseas to
discuss or provide this type of information with potential exporters. We
would expect FAS to assess its market intelligence reports by the same
standards.

In addition, FAS stated that the USDA amendment is a limitation on the use
of FAS*s Salaries and Expenses appropriations, and not, as represented in
our draft report, *a general restriction on the Department of
Agriculture*s tobacco- related activities.* Nowhere in our report do we
state that the USDA amendment constitutes such a general restriction. In
this report*s highlight sheet, we do summarize that *Since 1994, the
Agriculture Appropriations Act has prohibited the funding of tobacco
export programs and restricted the Department of Agriculture*s
tobaccorelated activities.* We believe this latter statement accurately
summarizes the amendments provisions as reflected in the statement made
throughout this report that the USDA amendment prohibits FAS, which is
responsible for USDA*s agricultural export promotion programs and
activities, from using appropriated funds to promote the sale or export of
tobacco or tobacco- related products.

FAS also stated that a review of the USDA amendment*s legislative history
demonstrates that tobacco interests* participation in *FAS sponsored trade
shows and other promotional activities* were the type of activities that

13 7 U. S. C. S:5693.

Page 16 GAO- 03- 618 Tobacco Exports

were encompassed by the prohibition. We do not contest FAS*s
interpretation of the of the legislation. As FAS correctly points out in
its comments, we did not seek to determine whether ongoing agency
activities are, or are not, prohibited. However, FAS assertions regarding
the types of activities demonstrated by the legislative history to be
encompassed by the prohibition beg the question of what FAS means by **
promotional activities.* This underscores our point regarding the need for
FAS- specific guidance for implementing the prohibition.

As you requested, unless you publicly announce its contents earlier, we
plan no further distribution of this report until 30 days from its issue
date. At that time, we will send copies of this report to the appropriate
congressional committees. Copies of this report will also be sent to the
Secretary of Agriculture, the Secretary of Commerce, the Secretary of
State, and the U. S. Trade Representative. Copies will also be made
available to others on request. In addition, the report will be available
at no additional charge on the GAO Web site at http:// www. gao. gov.

If you or your staff have any questions regarding this report, please call
me at (202) 512- 3149. Key contributors to this assignment were Virginia
Hughes, Patricia Martin, Ella Mann, Ernie E. Jackson, Reid Lowe, and
Daniel Gage. David Gootnick

Director, International Affairs and Trade

Appendix I: Scope and Methodology Page 17 GAO- 03- 618 Tobacco Exports

To assess the tobacco- related policy guidance on tobacco restrictions
issued to overseas personnel by the Departments of Agriculture (USDA),
Commerce, and State and the Office of the U. S. Trade Representative

(USTR), we obtained and analyzed copies of the legislation governing the
agencies* tobacco- related restrictions. We also analyzed, when available,
State cables containing guidance implementing the restrictions contained

in the laws, as well as reports and E- mails detailing the development or
provision of guidance to the overseas staffs of these agencies. We
discussed the process for establishing the evolution and implementation of
the guidance with cognizant officials of these agencies. However, we found
few officials remained at the agencies from the time of the legislation.
Although the Department of Justice is included in the legislated
appropriations and is also subject to the tobacco- related restrictions,
we did not examine its activities because it does not promote U. S.
exports.

To determine how USDA, Commerce, State, and USTR adjusted their activities
in response to their legislative restrictions on the marketing of tobacco
and tobacco products, we identified these agencies* past tobacco export
promotion programs and current activities related to tobacco. However, we
did not seek to determine whether the agencies* ongoing

activities are prohibited. We obtained funding histories for USDA*s
tobacco programs and discussed the nature of the programs and activities
with agencies* officials here and abroad, obtaining documentation when
available. We communicated with USDA*s Foreign Agricultural Service (FAS)
and Commerce*s Foreign Commercial Service (FCS) staffs in

Croatia, Italy, Turkey, and the Philippines. We also obtained information
on trade agreements and discussed the interagency process used to develop
trade policy and negotiating positions. In addition, we contacted
officials of antitobacco organizations, such as the American Cancer
Society and Campaign for Tobacco Free Kids, and asked them to identify
federal tobacco export promotion programs.

We conducted our review from October 2002 to March 2003 in accordance with
generally accepted government auditing standards. Appendix I: Scope and
Methodology

Appendix II: Excerpts from 2001 and 2002 Foreign Agricultural Service
Tobacco Attache Reports

Page 18 GAO- 03- 618 Tobacco Exports

Appendix II: Excerpts from 2001 and 2002 Foreign Agricultural Service
Tobacco Attache Reports

Appendix II: Excerpts from 2001 and 2002 Foreign Agricultural Service
Tobacco Attache Reports

Page 19 GAO- 03- 618 Tobacco Exports

Appendix III: Comments from the U. S. Department of Agriculture

Page 20 GAO- 03- 618 Tobacco Exports

Appendix III: Comments from the U. S. Department of Agriculture

Appendix III: Comments from the U. S. Department of Agriculture

Page 21 GAO- 03- 618 Tobacco Exports

Appendix III: Comments from the U. S. Department of Agriculture

Page 22 GAO- 03- 618 Tobacco Exports (320155)

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