Uruguay Battles Big Tobacco Over Cigarette Restrictions

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Two people walk through an anti-tobacco installation set up by Uruguay's Resources National Fund, depicting cigarettes' harmful components, in Montevideo, Uruguay. Matilde Campodonico / AP

Except over a glass of ruby Tannat wine or a sizzling tenderloin, most people pay little mind to Uruguay. But just mention this demure South American nation to the tobacco industry and watch the smoke billow. A long-burning row between the government in Montevideo and cigarette maker Philip Morris is slowly turning into the mother of asymmetric battles.

Earlier this year, little Uruguay (68,000 square miles, half again the size of Cuba), with a population of 3.5 million and a GDP of $44 billion, tightened the already drastic restrictions on local sales of cigarettes. The international tobacco colossus, with a market capitalization of $107 billion and legions of high-priced lawyers and lobbyists from Bern to the Washington Beltway, struck back, filing a complaint with the World Bank's International Centre for Settlement of Investment Disputes. The battlefield is minuscule, the size of a pack of smokes. But the case is starting rows over national sovereignty, free trade, and public health that show little sign of dissipating any time soon. Through it all, Uruguay has stood firm, showing it can go toe to toe with giants.

By muscle alone, the multinational should have the upper hand or at least the ability to snarl the authorities in Montevideo in a drawnout and costly lawsuit. But a win over a diminutive adversary could cost Big Tobacco dearly, tarring its reputation and global brand. And that is where this Latin Lilliput is showing its poise. President José Mujica, who took office in March, recently ordered Philip Morris, maker of Marlboro, to cover at least 80 percent of each pack of smokes with grisly images of the perils of the habit. One shows a grotesquely disfigured baby, another a haggard woman languishing on a hospital bed, while a third is a closeup of mouth cancer.

The company protested, not on grounds of dubious taste but that the obligatory gallery of horrors partially covered the company logo, amounting to an undue expropriation of profits without compensation, and so violating Uruguay's free-trade pact with Switzerland, Philip Morris's operational headquarters. Both sides are digging in, but this is not a revolt of rancorous Third-World lefties eager to stick a thumb in the eye of the transnational empire. For its defense, Uruguay has amassed world-weight allies, including the health ministers of 171 nations, the Pan American Health Organization, and New York Mayor Michael Bloomberg. A rabid anti-smoker, the mayor has donated thousands of dollars from his Bloomberg Philanthropies and legal aid to Uruguay, whose "leaders did the right thing."

It's an odd alliance. President Mujica, a one-time gun-toting guerrilla, dedicated much of his previous political existence railing at über-capitalists like Bloomberg. Today, at age 75 and in charge of a nation, he's turned into a militant pragmatist, dedicated to parsimony and fighting the bureaucratic monster. Since taking office in March, he has slashed spending, faced down a general strike, and asked Congress to enact a sweeping reform of the oversized state. Most recently, he had to order government employees to work at least six hours a day, and was rewarded by a lawsuit. "Anything you do in this country is like going through labor pains," he recently complained.

What's impressive is how much Uruguay has already done. A wedge of land created by European colonial powers as a buffer between giants, this nation seemed destined to be a backwater. Instead, successive governments plowed money into education, health, and infrastructure, turning Uruguay into a Latin Singapore or Hong Kong, says Walter Molano of BCP Securities. It breezed through the Great Recession (growing 2.9 percent in 2009) and its GDP is expanding at 7.8 percent a year, more than three times the average of the past half-century. It was recently named the most prosperous nation in Latin America, according to the London-based Legatum Institute, which ranks nations by variables that include economic fundamentals, public health, education, and even general happiness.

Part of this success owes to Uruguayan society's ability to adapt to historic circumstances, and the good sense to preserve policies that work, regardless of what party or ideological banner is in power. The other part is the more recent conversion to prudent economics and a shared allergy to populism that has lifted the country's international reputation and fortified its credentials in the battle against Philip Morris. Along with the stable economy, Mujica inherited from his predecessor, Tabaré Vasquez—a trained oncologist—the zeal that turned Uruguay into not only one of the most hostile places to light up on earth but also into an incubator for global insurgency against Big Tobacco.

The quarrel is hardly trivial. With rich-world smokers kicking the habit by the droves—their ranks have fallen by half in the U.S. since 1965—cigarette makers are struggling to reinvent the industry. Increasingly they are looking to—where else?—the developing world, where aspiring generations are just beginning to light up. Emerging markets kicked in two thirds of British American Tobacco's revenue in 2009. A newly confident Uruguay has said no, and as modest as that sounds, it may well be a health warning to an industry on the run.