China: Avoid returning to the planned economy in e-cigarette regulation

/March 25, China/ Regarding the regulation of the e-cigarette industry, it is necessary to take into account the characteristics of different products, and it is advisable to adopt refined regulation rules instead of “one size fits all”.

Recently, the website of the Ministry of Industry and Information Technology issued the “Decision on Amending the Implementation Regulations of the Tobacco Monopoly Law of the People’s Republic of China (Draft for Solicitation of Comments)” (hereinafter referred to as the “Draft for Comments”), proposing that new tobacco products such as e-cigarettes should be implemented in accordance with relevant regulations of cigarettes.

One stone stirred up a thousand waves. Although the “Draft Opinions” has not yet issued specific regulatory rules, the impact on the market has already appeared. On the same day, a Chinese e-cigarette brand listed company was affected by it. Its stock price fell by more than 40%, and its market value lost more than 12 billion U.S. dollars, or nearly 100 billion yuan.

Obviously, the capital market with feet voting is full of doubts about the future of China’s emerging e-cigarette industry, which may affect a market with a scale of hundreds of billions or even trillions in the future.

Different voices also began to appear. According to a report from the Beijing Daily on March 23, the Beijing Tobacco Control Association responded that the chaos of e-cigarettes should be regulated stronger, but it is recommended not to include tobacco monopoly regulation, but sent to the health department, food and drug regulation department or market regulation and management bureau for regulation. Zhang Jianshu, president of the Beijing Tobacco Control Association, also believes that regulation by food and drug regulation and management or by market regulation and management departments has proved feasible and effective in foreign countries.

Objectively speaking, in order to promote the regulation and development of the e-cigarette industry and maintain public health, necessary regulation is indeed indispensable. However, it must also be reminded that while bringing e-cigarettes into the regulatory track of the rule of law, it is also necessary to avoid a fully competitive industry returning to the “old path” of a planned economy.

According to China’s “Tobacco Monopoly Law”, the total annual output plans of cigarettes and cigars in provinces, autonomous regions, and municipalities directly under the Central Government are issued by the planning department of the State Council. According to the annual total production plan issued by the planning department of the State Council, the China National Tobacco Corporation assigns to provincial tobacco companies tiered and categorized cigarette production indicators. Provincial tobacco companies, based on the cigarette production indicators of grades and types issued by the China National Tobacco Corporation, and combined with market sales, assign cigarette production indicators of grades and types to tobacco product manufacturers. Tobacco product manufacturers may appropriately adjust the cigarette production indicators of grades and types within the scope of the enterprise’s total annual output plan according to the market sales situation.

This may not be wrong for the traditional tobacco industry, but if e-cigarettes refer to tobacco regulation, does it mean that the annual production capacity of e-cigarette companies must also be managed by the plan? At present, the e-cigarette industry is mostly private enterprises. If the operational autonomy of private enterprises is included in the planning scope of relevant departments, it will obviously conflict with the company law. This will also touch the bottom line of China’s market economy system.

In addition, the state implements monopoly management on the production, sale, import and export of tobacco monopoly products in accordance with the law, and implements a tobacco monopoly license system. If the same regulatory measures are adopted for e-cigarettes, the free production and circulation of e-cigarettes will be restricted, causing serious setbacks for industry enterprises. Nowadays, for many people, it is hard to imagine that the circulation of an electronic product will still require multiple levels of approval in the future. This is not in line with the original intent of the market economy, and it will even create room for rent-seeking and corruption by seeking accommodation from local authorities.

From the perspective of the global market, the e-cigarette industry has formed an industrial pattern of “Made in China, consumed in Europe and America”, and has formed a relatively sufficient competitive landscape; at the same time, the e-cigarette industry has contributed a lot of trade exchanges and exports to China. Obviously, to include the e-cigarette industry under regulation, it is also necessary to fully consider the market structure and development prospects of this emerging industry, as well as the resulting impact on foreign trade and foreign exchange earnings.

However, China’s tobacco administration has also imposed strict restrictions on the import and export of tobacco. For example, the “Regulations on Strengthening the Administration of Cigarette Exports” issued by the State Tobacco Monopoly Administration requires that the export of cigarettes should be registered in a timely manner in accordance with relevant national regulations. It should also be reported to the Import and Export Corporation; customers who export cigarettes must undergo qualification and credit review. The Import and Export Corporation shall establish a national export cigarette client file. In extreme cases, if such regulation becomes a reality, it will also severely impact the overseas trade of China’s e-cigarette industry, and affect the dominant position of China’s e-cigarette companies in the global competitive landscape.

In fact, from a global perspective, the current regulatory thinking adopted is to regulate e-cigarettes in accordance with “medicine” or “consumer category.” Australia and Japan have adopted the first model, and the UK and Indonesia have adopted the second model. The regulatory experience of these countries avoids the regulatory thinking of equating electronic cigarettes with tobacco, and may provide a reference for China’s regulatory authorities to formulate detailed rules.

In general, it is necessary to consider many factors in order to protect the health of the public and regulate the electronic cigarette industry. Therefore, when formulating the corresponding rules, the relevant departments may wish to involve more relevant enterprises in the discussion, absorb more social feedback, and learn more from the mature experience of foreign countries to form more scientific and reasonable decision-making to achieve the balanced development of the industry’s economic and social benefits.

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