On July 23, 2010, Uruguay’s minister of health went on state television to explain the major public health initiatives planned for the five-year term of new President José Mujica. But the seemingly routine talk came with a twist — two “minor” changes to planned new controls on tobacco sales.

In fact, the changes represented a major victory for the tobacco industry, part of a global counterattack being waged, especially in developing countries, as the world imposes tougher restrictions on smoking. Uruguay, with just 3.5 million people, might seem an unlikely arena for Big Tobacco to make a stand. But Mujica’s predecessor, physician Tabaré Vázquez, had pushed new tobacco controls that threatened to turn the small South American nation from a smoker’s paradise into one of the toughest places to sell a cigarette.

In his broadcast, the health minister failed to say that the changes — cutting back on the proposed size of cigarette pack health warnings and lifting restrictions on the number of brand variations companies could sell — were the result of months of direct negotiations between Philip Morris, Uruguay’s Foreign Minister Luis Almagro, Health Minister Daniel Olesker, Economics Minister Fernando Lorenzo, and presidential aide Diego Cánepa. Looming over the talks was a potent weapon in the industry’s arsenal: the threat of tying up the government in years of legal wrangling. Unknown to the public, tobacco giant Philip Morris International had filed a multi-million dollar lawsuit with the international trade dispute arbitration branch of the World Bank. If Uruguay loses, Philip Morris reportedly will demand at least $2 billion in damages.

A cautionary tale

Uruguay offers a cautionary tale for other small countries willing to take on the tobacco industry. In 2009, Uruguay’s GDP was $32 billion, while Philip Morris’s revenues that year hit $62 billion.Uruguay’s leaders worried, for good reason, whether they could successfully wage a years-long fight against a sophisticated multinational corporation.

The nation finds itself in the middle of a fight, ironically, as it hosts this week’s latest round of talks on implementing the Framework Convention on Tobacco Control (FCTC), the world’s first public health treaty, which calls for strict controls on the industry and smoking. Hundreds of health officials, diplomats, anti-smoking activists, and tobacco industry executives will gather in the resort city of Punta del Este to work out key points in a treaty now signed by 171 countries.

Uruguay had ratified the FCTC in 2004, but a tough new attitude came with the 2005 election of Vázquez. In March 2006, Vázquez, an oncologist, began an anti-tobacco crusade, determined to change the fact that 32 percent of Uruguayans were smokers. By 2009, that number had dropped to 25 percent .

Vázquez ordered a ban on smoking in all enclosed spaces except private homes, and moved to fully comply with the FCTC. Under Vázquez, a 2008 law forced tobacco companies to place health warnings over half their cigarette packs. It also crimped tobacco advertising and event sponsorship and prevented the use of words like “light” and “ultralight” in tobacco ads or on packs. Last year the government turned the screw again, calling for an increase in the size of the health warnings and limiting each brand sold to just one variety, eliminating alternatives such Marlboro Gold or Blue. (In order to get around prohibitions against labeling cigarettes as “light” or “ultralight,” some manufacturers have taken to color-labeling cigarette packs.)

For his campaign, Vázquez, a former professor in the medical school at the University of the Republic, began to receive awards and invitations to speak at international forums.

Finally, in Feburary, 2010 — a week before turning over the presidency to his political ally Mujica — Vázquez raised tobacco taxes to 70 percent of the cost of a pack, which nearly doubled the price of an average pack of cigarettes (now between $2.75 and $3.50).

The Philip Morris complaint

At roughly the same time, Philip Morris lawyers in Uruguay said the company would initiate legal action against Uruguay’s tobacco controls. On February 19, company lawyers appeared before the World Bank’s International Center for Settlement of Investment Disputes and lodged an official complaint: Uruguay’s regulatory measures violated a bilateral investment protection agreement signed in 1991 between Uruguay and Switzerland, where the company is headquartered.

The tobacco company claimed that by requiring warnings over 80 percent of its packs, Uruguay interfered with its Marlboro logo, and that this was expropriation without compensation by the government. The company has also complained the single-brand presentation limit was an “extreme” regulation that would force it to stop selling some of its popular brands. “We have supported and will continue to support effective and sensible tobacco regulations,” a company statement reads. “The three measures challenged, however, are neither. They are extreme, have not been proven to be effective, have seriously harmed the company’s investments in Uruguay and have deprived the company of its ability to use its legally protected trademarks and brands.”

The Uruguayan cigarette battle intensified in April, when local companies complained that Philip Morris and British American Tobacco (BAT) were selling cigarettes at prices well under Uruguayan brands. That’s when Compañía Industrial de Tabacos Monte Paz, maker of the country’s best-selling cigarettes, filed a dumping complaint with Uruguayan authorities against the multinational competitors.

According to a study commissioned by Monte Paz, the main consequence of Vázquez’s crusade had been a drop in per-capita cigarette consumption. Prices stayed low, the study said, because of Uruguay’s competitive cigarette market and ample supplies of contraband smokes. The company’s report claimed that smuggled tobacco’s portion of the market rose from 20 percent in 2008 to 28 percent in 2010. Former President Vázquez countered that his research showed smuggled cigarettes were only 12 percent of the market.

Still, through their study and their political connections, Monte Paz representatives had sounded an alarm: smuggling, coupled with alleged predatory pricing by multinational companies, could kill the domestic industry.

Mujica, the new president, initially said he doubted that would happen. But with Philip Morris’ legal challenge on one side, and Uruguayan tobacco executives complaining about dumping and smuggling on the other, Mujica chose a negotiated exit, aides said. He reasoned that Philip Morris has deeper pockets than his own government.

By July, Mujica had agreed that Uruguay would drop its limit on brand presentations, and reduce to 65 percent the proposed size of the warnings — space enough to share a pack with brand logos. In return, Philip Morris agreed to “normal” pricing, which would end Monte Paz’s dumping claim, the aides said.

“Pressure and blackmail”

Former President Vázquez reacted strongly. The day after the health minister’s televised declaration, Vázquez went on TV and accused the Mujica administration of showing “weakness” by giving in to “pressure and blackmail” by Philip Morris.

“I fully support the activities, thoughts and actions of our dear comrade Mujica, but in this I cannot accompany him,” Vázquez said. “I really want to express my thorough, public rejection of this.”

Vázquez’s statement struck like a bomb. Two days later, during a regular meeting with his ministers, Mujica said he was unhappy that no one warned him of his predecessor’s plan to speak out on the Philip Morris matter. After the meeting, Mujica’s top aides told reporters that the President was, in fact, still shaping Uruguayan tobacco policies. Almagro, the foreign minister, said the government maintained its “commitment to fighting” against smoking, but that the government had been “studying” adjustments as “legal tidying up” to make the measures consistent with international agreements.

Mujica responded personally in a radio address. Without naming Vázquez, he said that friends ought not “strike at the throat” or hit fellow party members with “frying pans.” He said his tobacco decision had been “no simple thing” because the country faced “a clever and powerful enemy.” He warned that in 2008 foreign companies had controlled just 10 percent of the Uruguayan tobacco market, and that this year the share was up to 25 percent.

“They are winning the war right under our noses and apparently nobody notices it,” Mujica said. “How is this possible that amid a furious campaign to get people to give up this vice, multinationals will quietly take over the market?” The President called for “collaboration” to find “other ways” that don’t involve “contract lawyers at $1,500 an hour for several years”

The conflict persisted until August 4, when Mujica visited Vázquez’s home. The weekly newsmagazine Búsqueda reported that, in friendly terms, the former President urged Mujica to take on Philip Morris. He conveyed his belief that international courts would side with Uruguay. During the private meeting, Mujica reportedly acknowledged that Vázquez had made “strong arguments,” but answered that he was concerned about losing a great amount of public money in a lawsuit.

Still, Mujica decided to fight back. In October his government paid $200,000 to the Foley Hoag law firm in Washington, D.C., to prepare a defense against Philip Morris. Meanwhile, support for Uruguay has come from other places: the governing board of the Pan American Health Organization voted to support Uruguay, and NGOs have vowed to help finance the country’s defense.

Philip Morris, in a public statement, said that as long as the excessive regulations are unchanged, the company will prepare for trial before a panel of World Bank arbitrators. The case could take up to four years to resolve.

But perhaps it’s too early to say how the fight will end.

“We will fight with every weapon against Philip Morris”, said an aide to Mujica. “But we do not preclude the possibility of reaching an agreement if satisfies the government’s requirements and if it’s good for the public.”

Claudio Paolillo is editor of Búsqueda, a weekly newsmagazine in Montevideo, Uruguay.