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Tobacco and Cancer Programme International Union Against Cancer 3, Rue du Conseil-Général, 1205 Geneva, Switzerland Tel: (4122) 809 1830, Fax: (4122) 809 1810 E-mail: tobacco-control@globalink.org | Tobacco and Cancer Programme |
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How big is the problem?
Global Cigarette Exports and Imports (Millions of Cigarettes)
Source: US Department of Agriculture 1994 (4)
The magnitude of the smuggling problem can be estimated by looking at the difference between global exports and imports; most of the "missing" cigarettes are smuggled. World cigarette production is known fairly accurately, and since cigarettes do not keep for very long, world production is very close to world consumption, that is there are not large quantities of cigarettes in storage. Global imports should thus be close to exports, after allowing for legitimate trade usually excluded from national statistics. These are principally imports for duty free sales to travellers, to the diplomatic community, and to military establishments. But for many years imports have been lower than exports to a degree that cannot be adequately explained by legitimate duty free sales.
Although the volume of duty free trade is not on public record, it has been estimated with some confidence by the tobacco trade at about 45,000 million cigarettes a year (1). Even the time lag of three to six months between recording export and import statistics cannot explain the export-import differences, which have remained at high levels for years. In the table which shows annual global exports and imports from 1990 to 1994, there has been a steady increase in the number of missing cigarettes. In 1994, 910,000 million cigarettes were exported but only 586,000 million imported, a difference of 324,000 million. After deducting 45,000 million for legitimate duty free sales, there are still almost 280,000 million cigarettes missing. The only plausible explanation is smuggling (2, 3). At a conservatively estimated average duty on these cigarettes of only US$ 1/pack (and it is much, much higher in most developed countries), it represents revenue of more than US$ 16,200 million being lost annually by governments.
It is clear that governments are the main losers of tax revenue. But it is interesting to look at who benefits from smuggling. Given the magnitude of the gap between world cigarette exports and imports, it is intriguing to speculate what might be the attitude and role of the chief beneficiaries of this illegal trade: companies that manufacture the cigarettes. They benefit from smuggling in several ways. First they gain their normal profit by selling the cigarettes (legally) to distributors. The cigarettes then find their way on to the streets where they sell at greatly reduced prices, stimulating demand. This puts pressure on governments not to increase tax because of the loss of revenue, which may also result in lower prices and higher consumption. Then the industry uses this to urge governments to reduce, or not to increase, taxes. Finally, contraband cigarettes that are intercepted by customs have then to be replaced-yet more sales.
In the last few years, governments in many countries have become concerned about smuggling, particularly in the following regions: Latin America, Canada, Southern, Central and Eastern Europe, and several parts of Asia.
Latin America
In the 1960s, the entry of transnational companies (TNCs) into the Latin American market had a strong temporal relationship with contraband trafficking in cigarettes. Contraband has been used in order to open the closed domestic markets for TNCs. In Argentina, smuggling was a major problem in the 1960s. Only when all the nationally owned firms were acquired by TNCs did contraband finally decline in the early 1970s (5).
Asia
Hong Kong's Independent Commission Against Corruption in 1995 discovered the involvement of Chinese triad gangs in smuggling Western cigarette brands to China. The Commission has exposed collusion by customs officers and shipping companies in an illicit cigarette trade which is said to cost China up to $ 1 billion in lost revenue a year. Despite tough restrictions of imports to tourist shops, smuggled cigarettes now account for up to 4% of the Chinese market (6).
Canada
During the 1980s, Canada had a tobacco control policy which included progressive price increases, with the result that by the early 1990s a pack of Canadian cigarettes cost about US$ 4.70. Canadian policies were extremely successful in reducing consumption, resulting in a fall in per capita adult consumption (total consumption from all sources including smuggled cigarettes) of almost 40% from 1982 to 1991 (7).
However, the United States has one of the lowest levels of tax on cigarettes in the developed world (about US$ 0.50 per pack in 1994). Consequently the price difference between Canadian and American cigarettes became the largest in the world. By 1991 the prices were about US$ 4.70 and 1.70 respectively, an almost threefold difference. The result was a massive increase in smuggling, from an estimated 1,270 million cigarettes in 1990 to 14,210 million in 1993 (6).
The Canadian tobacco industry lobbied fiercely for a reduction in tax, which they suggested was the only real solution to the problem. There was concern about loss of government revenue and loss of business in Canada. For a variety of political reasons the Canadian government gave in to the industry pressure and lowered taxes, resulting in a rise in per capita consumption of 7% from 1993 to 1994 and of 9% in the overall market (8). However, the situation was not as simple as it might seem.
Americans and Canadians do not smoke the same brands. There would thus be very little demand in the United States for Canadian brands. In the mid- 1980s, exports represented less than 3% of total Canadian cigarettes shipments, yet by the end of 1993 exports represented more than 37% of total shipments, most of them to the United States. To whom? In fact, the cigarettes were exported to warehouses in the USA from which they were smuggled back across the border to undercut the higher Canadian prices.
Since about 90% of the cigarettes smuggled into Canada were manufactured by the Canadian tobacco industry, which is likely to be the case since Canadian smokers like Canadian brands, the industry could hardly complain that this was damaging production and jobs in Canada. On the contrary, since these cigarettes were much cheaper than those sold legally, the whole enterprise was stimulating demand and thus production, to the benefit of the industry. Put simply, cigarettes made in Canada were being exported to a country with no market for them.
In response to fierce lobbying by the industry, the Canadian government dramatically reduced the tobacco tax in February 1994. The reasons were complex and included political calculations in the light of an impending election. This reduction had several undesired consequences, perhaps the most serious being an increase in consumption. It is too early to see the full effects of the price reduction, but the data suggest an already detectable increase in prevalence in 15-19 year olds (8). The Non Smokers' Rights Association estimates that there will be a 50% increase in teenage tobacco consumption and an eventual increase throughout Canada of 250,000 deaths as a result of the decrease in price.
The Canadian experience cannot be used as a model for what is happening in other parts of the world. In the first place, the USA has exceptionally low tobacco tax over which Canada obviously has no control. Secondly, the Canada-USA border is the longest undefended land border in the world (many times the length of the border between USA and Mexico), and most Canadians live within two hours' drive of what is effectively an open border (7).
Europe
Canada has been cited as an example of what will happen in Europe as a result of price differences within Europe and the removal of border controls. But the situation in Europe is completely different. It is important to reiterate that, in general, brand preferences are nationally determined. Although the most popular brand in Spain, Ducados, is five times cheaper than the most popular Danish brand, Prince (in January 1995, ECU 0.76 compared with ECU 3.80), the Danish market is not flooded with cheap Spanish cigarettes. The price differential between national brands is less important than the price difference between well-known international brands, which smugglers prefer to concentrate on because they can be sold almost anywhere (9).
The largest difference-between 20 Marlboro in Denmark and Portugal-is 240%, but the differences between neighbouring countries, a much closer approximation to the Canada-USA situation, are much smaller. For example, 20 Marlboro cost (all figures given in ECU) about 3.42 in the UK, 2.56 in Germany, 2.55 in Belgium, and 2.51 in France. These differences are not great enough to pay for intermediaries and transport and then offer a sufficient price reduction to tempt consumers to buy black market cigarettes. Nor do they allow enough in reserve to pay the fines when contraband cargoes are discovered through customs operations. Duty free (tax unpaid) cigarettes are another matter.
Even in European countries where cigarettes are cheap, tax still accounts for about 70% of the retail price. For smugglers there is no point in buying an international brand in Portugal for ECU 1.53 a packet, tax paid, if it can be bought from the American manufacturers untaxed at ECU 0.30 (about US$ 0.37 a pack). This is the smuggling market in Europe-not the movement of cigarettes from the cheaper south to the more expensive north-but the (illegal) movement of duty free imported international brands from northern ports to the south and increasingly to the east. In Spain and Italy, the black market is made up essentially of smuggled American cigarettes.
Solutions
Restriction on sales
Clamping down on the outlets for smuggled cigarettes, which in some states are almost part of the culture, would require not only law enforcement, but a considerable change in smokers' attitude towards authority. Restricting sales to licensed premises and charging heavy fines to unlicensed vendors would clearly help. In Spain both policies have had a measurable impact.
Reduction of supply
Finally, and probably most important, is the reduction of supply. This will require greater cooperation between customs officials. There is already increasing cooperation within Europe, and the media are reporting customs seizures with what appears to be increasing frequency. The European Union (EU), recognizing the extent of the problem, has looked into the possibility of computerizing transit arrangements. In 1994, it set up a Tobacco Task Force to combat organized crime (11).
The EU recognizes, however, that solutions cannot be developed only within Europe: "the comprehensive strategic approach is more effective than a country-by-country, case-by-case approach". As with illegal drugs which, from the control point of view, nicotine seems increasingly to resemble, we believe it is time for an international convention controlling the transport of cigarettes, not only by road, but by any means of transport. In view of the involvement of organized crime, this convention would need the support of governments throughout the world and of some central organization.
Acknowledgement
This UICC fact sheet is based on an article by Luk Joossens and
Martine Raw, "Smuggling and Cross Border Shopping of Tobacco
in Europe", British Medical Journal, 310, 27 May 1995,
1393-1397. Used with the
permission of BMJ.
References
Further reading
"Protecting Health and Revenue: An Action Plan to Control Contraband and Tax-Exempt Tobacco", Canadian Cancer Society, Ottawa, Ontario, January 1994. This paper contains 44 recommendations taken from Canada, the USA, and around the world in regards to the Smuggling problem in Canada and its potential solutions.
2/1996
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Tobacco and Cancer Programme International Union Against Cancer 3, Rue du Conseil-Général, 1205 Geneva, Switzerland Tel: (4122) 809 1830, Fax: (4122) 809 1810 E-mail: tobacco-control@globalink.org | Tobacco and Cancer Programme |
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