WASHINGTON, Oct 21 (Reuters) - The United States has floated excluding tobacco products from a key section of a 12-nation Pacific trade deal and signaled it may present a formal proposal to trading partners at talks in Australia, sources briefed on the negotiations said.
Dropping tobacco from the investor-state dispute settlement, or ISDS, section of the Trans-Pacific Partnership would prevent tobacco companies taking action against any TPP government under those legal protections, for example over health care measures.
Marlboro maker Philip Morris International is challenging Australia's plain packaging laws, which ban branded cigarette packs, under the country's investment treaty with Hong Kong, arguing that the laws breach intellectual property rights.
One source, who has knowledge of the negotiations but asked not to be named because of the sensitivity of the discussions, said the United States had floated the idea of a carve-out for tobacco under ISDS among senior TPP officials.
No language had yet been circulated, but the United States signaled it could formally present a proposal during TPP meetings that are under way in Australia, the source said.
A spokesman for the U.S. Trade Representative said it did not expect to present such a plan and countries were still debating how to tackle tobacco-related public health issues in the TPP.
"The United States has not tabled any new U.S. proposal on tobacco products and is still engaged on congressional and stakeholder consultation on an appropriate approach. We do not expect to table a new proposal in Australia," he said.
An industry representative said a U.S. suggestion to carve out tobacco from ISDS had also been read by a non-U.S. TPP country to sources who are following the negotiations.
TPP chief negotiators, from countries including Japan, Canada, New Zealand, Mexico and Malaysia, are currently gathered in Canberra and trade ministers will meet in Sydney for three days of talks starting Oct. 25.
Australia's packaging laws, which also face a World Trade Organization challenge, are being closely watched by other countries, including Ireland, New Zealand and the United Kingdom, which are mulling or introducing similar steps.
The United States said in 2013 it supported including a general exception for health regulations, including on tobacco, in the TPP and requiring government-to-government talks between health authorities before any ISDS challenge over tobacco.
A carve-out would strengthen those protections further, but stop short of a call by Malaysia and anti-smoking groups to completely exclude tobacco from the TPP. Excluding tobacco would allow countries to keep tariffs on U.S. tobacco products.
Any different treatment for tobacco risks a backlash in the United States. State lawmakers from Kentucky, a major U.S. tobacco-producing state, and the North Carolina Agribusiness Council have warned that excluding tobacco would hurt exporters, jobs and the regional economy.
Senate Republican leader Mitch McConnell of Kentucky had raised concerns with U.S. Trade Representative Michael Froman about the impact such an "unprecedented approach" would have on jobs, a spokesman for McConnell said. (Reporting by Krista Hughes; Editing by Chizu Nomiyama)