Uruguay may be down with marijuana, but it’s definitely not having it with Big Tobacco

Six years ago, when Philip Morris International took Uruguay to court over the country’s aggressive anti-smoking policies, few people would have bet on the gauchos. After all, Uruguay’s gross domestic product of $53 billion was about two-thirds of the tobacco giant’s yearly sales in 2015, and its newly elected president was a septuagenarian chain smoker.

But the small South American nation, best known as the first nation to legalize marijuana, wasn’t just blowing smoke. On July 8, the International Center for Settlement of Investment Disputes, an arbitration court run by the World Bank, ruled that Uruguay not only had the right to continue its in-your-face anti-cigarette marketing, but also ordered Philip Morris to reimburse the country for some $7 million in legal costs for the drawn-out court battle.

More than a blow to corporate clout, the unanimous ruling by the Washington-based trade body also may have been a tipping point in the global tussle between Big Tobacco and its discontents. Shortly after the unanimous decision, anti-smoking activists were scrambling. “I got phone calls from just about everywhere,” said Eduardo Bianco, a Uruguayan cardiologist who is president of the Tobacco Epidemic Research Center, an anti-smoking group. “We are almost certainly going to be seeing other countries taking more aggressive measures to protect public health.”

What caught the world’s attention over the Uruguay case was the high drama of a Lilliputian country facing down a borderless behemoth. The broader victory may have been that a trade treaty cannot be used as a delivery device for consumer products that a nation deems harmful to individual and public health.

Philip Morris framed its claim to the World Bank’s arbitration panel against Uruguay not in terms of public health, but of fair play and free trade. The row dates to the mid 2000s, when then Uruguayan president Tabare Vazquez got tough on smoking. Vazquez, a practicing oncologist who continued treating patients while running the country, banned public smoking and ordered cigarette makers to cover half their packs with health warnings, including grisly photos of victims of cancer and other smoking-related diseases.

Before he left office in early 2010, Vazquez increased the size of the health warning to 80 percent of each cigarette pack, front and back, and also limited tobacco companies to one package design for all brands.

Philip Morris claimed that those rules infringed on the company’s intellectual property rights and harmed competition, in violation of the Uruguay-Switzerland Bilateral Investment Treaty. The company claimed such measures do not reduce smoking and encourage black market cigarettes, and asked for $25 million in damages.

Uruguay countered that the number of smokers plunged since the crackdown began: from 32 percent of the adult population to 22 percent from 2006 to 2013, according to Bianco. (He said the rate of teenage smoking, a bellwether for smokers globally, had fallen even more drastically.) Admissions to public hospitals for smoking-related ailments had fallen 22 percent over the past decade, Bianco said.

Vazquez stepped down in 2010, but that brought little relief to the makers of Marlboro. Although his successor, Jose Mujica, was a heavy smoker, he also was a former guerrilla fighter and a lifelong contrarian, who’d spent several years in dictators’ dungeon. When Philip Morris filed its complaint in March of that year, the newly-sworn leader upheld Vazquez’s hard line.

To those who asked how Uruguay could tighten controls on cigarettes while licensing sale of marijuana, Mujica answered that both substances need regulation.

Mujica’s term ended last year, and now Vazquez is back in office.

Clearly, the prize for Big Tobacco is not the market in Uruguay, one of South America’s smallest countries, with about 3.5 million people. “I’m certain that Philip Morris sells more cigarettes in any borough of New York than it does in Uruguay,” said Mujica.

Paul Reichler, lead counsel for Uruguay during the World Bank arbitration, saw another motive for the world’s biggest tobacco company to go on the attack in Uruguay: to dissuade other would-be challengers to its products. “If a state knows it could cost tens of millions of dollars to pursue a case, and then possibly pay hundreds of millions of dollars damages, clearly it’s going to think twice about taking legal action,” Reichler told me. “This was typical intimidation.”

Uruguay’s anti-smoking campaign isn’t done. Though the number of smokers has plunged, cigarette sales have recently been rising. Despite the heavy-handed marketing and heavy taxes, which represent two thirds of the price of every pack, the volume of cigarette sales actually increased 8 percent from 2010 to 2014, according to Euromonitor, which tracks the world tobacco market. Anti-smoking advocates say that while more people are giving up cigarettes, those who still smoke are smoking more intensely.

Now that Vazquez is back, cigarette makers are bracing for what’s next in Uruguay and beyond. Canada and Malaysia are just two of the nations now mulling tougher rules to amp up the graphic health warnings while also forcing cigarette makers to sell their smokes in plain packages, under bland colors and generic lettering that governments — not advertising wizards — will determine.

Whatever the choice, smoking is bound to get uglier.

Mac Margolis is a Bloomberg View contributor based in Rio de Janeiro.