The rise of illicit tobacco

The World Health Organization meets next week in Washington DC and will discuss the rise of illicit cigarettes, which are increasingly caused by WHO efforts against smoking. Smoking cigarettes kills millions every year and the WHO established the Framework Convention on Tobacco Control (FCTC) in 2005 to lower the death toll. The FCTC encourages developing nations to copy mature market policies of raising taxes and introducing and then expanding regulation on tobacco products.  

As a result overall smoking has probably declined, but illicit cigarettes have flourished. Smuggling major brands from low tax areas, like North Carolina, to high tax areas, like New York, was historically the main form of illicit trade. But as the major cigarette manufacturers have worked with national governments to secure their supply chains, such trade has diminished. Its fast-growing replacement is a much harder form of trade to combat.

Illicit whites are legally manufactured cigarettes illegally imported into myriad markets. For example, dozens of companies in Paraguay and the United Arab Emirates produce tens of billions of cigarettes each year, the vast majority of which are smuggled into other nations.  My research team asked consumers in London and Buenos Aires whether they ever bought these products: roughly a fifth had. In addition we found that illicit whites were easily available in all ten cities we assessed. The poorer the city the more likely one could buy illicit whites. In richer cities, where customs and police prevent easy access to illicit whites, people are buying more raw tobacco and rolling their own.

Our results are in my paper “Smoking Out Illicit Trade” published this week. Perhaps the most interesting finding is that a significant minority of smokers are annoyed about high tax rates and happy to buy illicit products. Anti-tobacco policymakers seem to ignore that smokers are human actors. Many smokers may be addicts but that doesn’t mean they are stupid. Some rationally avoid paying high prices (often 3 or 4 times lower), even if doing so is illegal.

WHO anti-smoking advocates are also easy to ridicule.  The WHO Syria representative recently suggested that Syria should prioritize tobacco control at a time of total chaos in the country. And WHO praises Turkmenistan for its anti-tobacco policies and holds meetings in that country, which is one of the most oppressive on the planet.

It was inevitable and perhaps necessary that WHO would react to the rise of illicit tobacco. It has established the Protocol to Eliminate Illicit Trade in Tobacco Products (ITP) under the FCTC in 2012. While in principle sound, the ITP faces numerous challenges in implementation. The primary objective of the ITP is to control the supply chain of tobacco products. The spillover effects of production and trade in tobacco requires most, if not all, jurisdictions to share aims and ambitions; without that, coordination is likely to fail. Yet WHO has no expertise in trade policy or overcoming economic objections to health priorities. WHO also has zero experience in combatting organized crime. And you can bet that crime organizations and the governments that protect them, such as Belarus, UAE, Paraguay and others,  will undermine coordination.

ITP has some excellent guidelines but it is incumbent on individual governments to control demand and prevent illicit production. Voluntary support for the Protocol is patchy: For example, UK, Russia, India and China are Parties to the FCTC but have not ratified the ITP; US is not even Party to the FCTC.

Studies of illicit activity demonstrate that illegal operations are highly dynamic and respond swiftly to deterrent measures. It is likely that only with the cooperation of the entire supply chain (including the major cigarette companies) will illicit tobacco be limited.  However, FCTC utterly rejects agreements with industry involvement. Cigarette producers and any group ever funded by them are explicitly excluded from implementation of ITP; this includes Interpol which received funding from Philip Morris International. This is idiotic. Interpol knows more about illicit trade than any other government or private group.

The head of the FCTC says that allowing big tobacco to take part in any future agreements is like letting the fox into the hen house. But Margarete Hofmann, policy director of the EU anti-fraud office, is critical of such thinking: “That would assume we have a hen house — we don’t,” she told reporters in March. Even normally efficient and organized nations like Germany are having trouble combatting organized criminals and tobacco smugglers. Simply put, the only really successful arrangements to control tobacco smuggling were undertaken between the European Commission and the major cigarette manufacturers, yet FCTC rejects this approach. 

Meanwhile the illicit tobacco market is flourishing. Without assistance from international security experts and tobacco producers, and no funds to offer signatories in technical assistance, the WHO’s Illicit Trade Protocol has only a slim chance of being implemented in emerging markets, even if nations ratify it.

Author Dr Roger Bate is a scholar at the American Enterprise Institute, his paper “Smoking Out Illicit Trade” is published this week.

This article was first published in Cape Times Business Report on 30 September 2016


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