Like many trade disputes, this one involves health standards and whether they are being abused for protectionist purposes. It centres 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 (FDA) banned cigarettes with fruit, confectionery or clove flavours in September last year, arguing that such cigarettes were particularly attractive to children.
But the U.S. ban does not include menthol-flavoured cigarettes that are widely produced in the United States and smoked by about 19 million Americans.
Indonesia argues this discriminates against foreign producers of flavoured 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.
Menthol Yes, Cloves No
U.S. tobacco companies told the Food and Drug Administration on March 31 that adding menthol did not make cigarettes more harmful or addictive.
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 by Indonesia, the world's 21st biggest exporter, at the WTO.
Kretek cigarettes account for the bulk of tobacco consumption in Indonesia, the world's fifth biggest tobacco market, although unflavoured or "white" sticks are gaining in popularity.
Indonesian exports of cigarettes and cigars totalled $357.8 million in 2008, the last year for which data is available.
Only a relatively small number of kretek cigarettes is 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.
In June last year the world's number two 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.
Senator Jim Bunning wanted President Barack Obama's administration to challenge Canadian anti-smoking legislation -- including a ban on flavoured tobaccos -- that he said hurt his state. Obama finally put Punke into office at the end of March with a recess appointment. (Reuters)
