Like many trade disputes, this one involves health standards and whether they are being abused for protectionist purposes. It centers on the clove and tobacco blends known as kretek that dominate the tobacco market in Indonesia but are little smoked outside the Southeast Asian country.
The U.S. Food and Drug Administration banned cigarettes with fruit, confectionery or clove flavors last September, arguing such cigarettes were particularly attractive to children.
But the U.S. ban does not include flavored cigarettes that are produced widely in the United States and smoked by about 19 million Americans.
Indonesia argues that discriminates against foreign producers of flavored tobacco to help domestic manufacturers.
"They have to prove that menthol doesn't have a bad impact," said the official, who asked not to be identified.
A spokeswoman for the U.S. Trade Representative's Office said U.S. officials were studying Indonesia's request for consultations, which comes as the two countries have been taking steps to boost trade and investment ties.
President Barack Obama abruptly canceled a trip to Indonesia in March to lobby for healthcare reform, but is expected to visit the country this year.
MENTHOL YES, CLOVES NO
U.S. tobacco companies told the FDA on March 31 that adding menthol did not make cigarettes more harmful or addictive [ID:nN31100715].
Under WTO rules, the two countries now have 60 days to resolve their differences through consultations, otherwise Indonesia can ask the WTO to create a panel of experts to rule on the issue.
The case is only the fifth brought at the WTO by Indonesia, the world's 21st biggest exporter.
Kretek cigarettes account for the bulk of tobacco consumption in Indonesia, the world's fifth biggest tobacco market, although unflavored or "white" sticks are gaining in popularity.
Indonesian exports of cigarettes and cigars totaled $357.8 million in 2008, the last year for which data is available.
Only relatively small numbers of kretek cigarettes are exported, and anecdotally they are coveted by young people in the United States who see them as an alternative to more conventional brands.
Foreign tobacco producers, keen to gain a bigger share of expanding markets for cigarettes in emerging economies, have been buying up Indonesian manufacturers to acquire kretek brands and expertise and build on the potential for white stick sales.
Last June, the world's No. 2 cigarette maker, British American Tobacco, bought an 85 percent stake in Indonesia's fourth largest cigarette maker by volume, PT Bentoel Internasional Investama.
Philip Morris International acquired the majority of Hanjaya Mandala Sampoerna in 2005. Other Indonesian manufacturers include Gudang Garam and unlisted conglomerate Djarum.
Supervising the consultations with Indonesia will be one of the first tasks of the new U.S. ambassador to the WTO, Michael Punke, whose Senate confirmation was held up for six months by a Republican senator from the tobacco-growing state of Kentucky.
