Smoking out illicit trade: How some policies intended to limit smoking drive illegal trade

Sep 26, 2016

From: AEI Economic Perspectives


The World Health Organization (WHO) states that smoking cigarettes is the largest cause of preventable premature death globally. The WHO Framework Convention on Tobacco Control (FCTC) entered into force in 2005 with an aim to lower the death toll.

FCTC has adopted a policy of encouraging developing nations to follow the demand reduction strategy of mature markets in raising taxes and introducing and then expanding regulation on tobacco products. In many cases such policies result in the rise of illicit tobacco (either counterfeits or legally produced smuggled cigarettes), especially where policy changes are implemented rapidly and enforcement capacity is limited. According to KPMG, illicit tobacco makes up roughly 10 percent of the global cigarette market, and the figure is rising.

This paper reports on a novel empirical assessment of smoker opinion and availability of illicit whites (smuggled legally produced cigarettes), which shows a sizeable minority of smokers bought illicit whites in most cases because they are far cheaper. It is also established (across 10 cities) that illicit whites are easily available in most markets, even in the wealthy markets of London and Singapore. Low education levels are correlated with widespread illicit white availability.

Reacting to the spread of illicit tobacco, WHO established the Protocol to Eliminate Illicit Trade in Tobacco Products (ITP) under the FCTC in 2012. While sound in principle, the ITP faces numerous challenges in implementation. The ITP’s primary objective is to control the supply chain of tobacco products, which necessitates a very high level of international and commercial cooperation. The spillover effects of production and trade in tobacco require 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, whose representatives will undermine coordination. ITP has some excellent guidelines, but it is incumbent on individual governments to control demand and police free trade zones (FTZs), where illicit activity of all kinds proliferates.

Voluntary support for the protocol is patchy. For example, the UK, Russia, India, and China are parties to the Framework Convention, but have not ratified the protocol; the US is not even party to the convention (United Nations 2003).

Since 2004, cigarette manufacturers and the European Union have cooperated in comprehensive systems, including “track and trace” operations, aimed at limiting illicit activity. These agreements have drastically reduced smuggling of major brands. Better control of the major cigarette supply chain has changed the nature of the illicit market. 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 and governments that currently allow smuggling) will illicit tobacco be controlled.

However, WHO’s FCTC utterly rejects these agreements due to the involvement of industry. Cigarette manufacturers and any group that has ever worked with them is explicitly excluded from implementation of the protocol, including Interpol (World Health Organization 2016a), which received funding from Philip Morris International.

WHO’s constitution states that it should seek assistance from other UN bodies, yet FCTC is not collaborating fully with the World Customs Organization, which has an explicit role in enforcement, nor with the UN Office on Drugs and Crime, which already operates and enforces agreements that would be fundamentally useful to FCTC (Sou and Preece 2013).

None of these negative consequences needs to happen. The ITP has demanded policies for signatories, sometimes requiring significant changes in domestic laws, so implementation will take time, especially in poorly resourced emerging markets. After four years, only 20 countries have ratified ITP, which means ITP is probably many months even years from entering into force, which occurs when 40 have ratified. Meanwhile, the illicit tobacco market is flourishing. The trade in illegal cigarettes, particularly through free trade zones and sometimes with the collusion of governments, is huge, lucrative, and sophisticated. Without assistance from international security experts and producers, and without 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.

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