Prime Minister John Key has admitted that enforcing plain packaging on cigarette packets was not a "slam-dunk" policy due to the risk of legal challenges from tobacco giants and tobacco-producing countries.
The Government is seeking consultation on proposed changes to cigarette packaging, which it hopes will discourage smoking by cutting off the tobacco industry's last avenue of marketing.
The plain packet regime has been pushed by the Maori Party, but Mr Key refused to commit to it yesterday .
"There is a lot of things we need to consider - I wouldn't say it's a slam dunk by any chance that plain packaging would take place but nor would I rule it out."
Government documents released yesterday said legal challenges from tobacco companies could cost up to $6 million per case to contest, and challenges from countries for breaches of trade could cost up to $2 million.
The cost of potential compensation was "unable to be quantified" but would be based on the loss in value of the tobacco company's investments, including its trademarks.
Mr Key said he had not been advised on compensation. "But if it ended up being the only way through this, then that would be yet another factor we'd have to take into consideration."
The Australian Government was being sued for its plain packet regime by tobacco giant Philip Morris, which alleged that the new policy breached a free trade treaty with Hong Kong,
Tobacco-producing countries Ukraine, Honduras, and the Dominican Republic were also suing Australia through the World Trade Organisation (WTO), claiming plain packaging was a barrier to trade and a breach of intellectual property rights.
Free trade expert Professor Jane Kelsey, of the University of Auckland, said the Government should be concerned about the WTO case because New Zealand could face a similar challenge.
She said a WTO challenge on plain packaging would be complicated by New Zealand pressuring Thailand not to put warning labels on alcohol.
New Zealand did not have significant trade with the tobacco-producing companies which were suing Australia, but a WTO case would blemish New Zealand's trading image.
Asked whether making changes in the tobacco sector could cause countries to retaliate by demanding changes to New Zealand's product labelling - such as wine and dairy - Mr Key said it was "possible".
Maori Party co-leader Tariana Turia said legal risks could be minimised, but not eliminated.
"We know global tobacco companies have deep pockets and they seek out opportunities for legal action," she said. "The purpose of this public consultation process is to sift out the views of New Zealanders on this issue, before any decisions are made."
* Plain packets would remove "the last remaining major avenue for the marketing and promotion of tobacco products", the Ministry of Health says.
* Warning labels on cigarette packs could be expanded from 30 per cent of front of pack to 75 per cent.
* Brand names would remain but colours, fonts, and print size would be standardised.
* Submissions on plain packaging can be made before October 5.