Illicit Trade in Tobacco

2007 Johns Hopkins Bloomberg School of Public Health

Illicit Trade in TobaccoIllicit Trade in Tobacco

Ayda A. Yurekli, PhDResearch for International Tobacco ControlInternational Development Research Center

2007 Johns Hopkins Bloomberg School of Public Health

Section ASection A

Introduction to Illicit Trade

3 2007 Johns Hopkins Bloomberg School of Public Health

Background

Smuggling is not a new phenomenon; almost all countries experience some degree of smuggling around the world through: Bootlegging

Individuals try to avoid taxes in their jurisdiction

Often involves individual activities for personal consumption

Small-scale smuggling Often involves unorganized small-scale

activities between one or two countries or states

Cigarettes are purchased in low-price countries and sold for profit in high-price countries


Background

Smuggling is not a new phenomenon; almost all countries experience some degree of smuggling around the world through: Large-scale smuggling (organized activities

targeting multi-countries) Occurs through international trade Targets exported cigarettes Often orchestrated by organized crime

groups


Illicit Trade

A complex issue

Evolves over the years

Involves many players

Smuggled cigarettes have no boundaries


Large Scale Organized Smuggling

This type of smuggling targets not only international markets, but also countries where cigarettes are exported

Example: Brazil In the 1990s, Brazil experienced huge

smuggling activities Brazil‘s export of cigarettes to neighboring

countries ended up back in Brazil illegally Grey market smuggling (re-exporting)


Measuring the Level of Smuggling

Smuggling levels have been studied in the U.S. and western countries, but not in developing countries due to lack of technical skills and funding

Smuggling information often comes from the tobacco industry Industry hires companies to do market surveys

to assess smuggling levels and carry information to policy makers

Industry associates smuggling activities with the level of taxes in the country As a result, smuggling levels are often

exaggerated to manipulate tax policy


Assessing Illicit Market: Uzbek Evidence

Lack of country-level research to assess level of illicit trade Governments often receive this information by

the industry (e.g., Kyrgyzstan, Uzbekistan, Moldova, Georgia)

Consequently, the level of smuggling can be exaggerated to manipulate tax policy

In 2004, the tobacco industry in Uzbekistan estimated that 30% of the legitimate market was illicit cigarettes

In 2006, independent research in Uzbekistan estimated that around 22% of the legitimate market consists of illicit cigarettes


Assessing Illicit Market: Uzbek Evidence

Source: adapted by CTLT from Estimated 2006 Uzbek Household Data.

Age Group Prevalence Rate Number of SmokersCigarettes Smoked a

Year/Pack

Male Female Male Female Total

15-19 2% 0.00% 38 0 3,299,213

20-24 8% 0.00% 102 0 11,589,233

25-29 16% 2.91% 178 32 29,103,571

30-34 27% 0.00% 272 0 41,694,827

35-39 33% 2.27% 281 20 40,326,506

40-44 43% 1.78% 350 15 58,350,284

45-49 42% 2.01% 290 14 69,816,038

50-54 33% 1.00% 159 5 34,789,727

55-59 20% 0.00% 58 0 13,624,477

60+ 10% 1.80% 72 18 22,538,717

Total 1799 104 325,132,592

Assuming 10% underreporting [1] 357,645,851

Tax-paid consumption in 2005 [2] 293,496,000

Illicit consumption as percentage of legal consumption [3] = (1-2)/2

22%


Measuring Size and Impact of Worldwide Smuggling

Most estimates are based on expert opinion due to complex smuggling activities and limited data

Expert opinions Joosens and Row (1998) Mackay and Ericson (2002) United States Department of Agriculture (USDA)

(152 countries, 1999)


Source: adapted by CTLT from ECOSOC Trade Database: calculated by the author.

Assessing Global Illicit Trade Level

Licit trade difference: 400 billion pieces in the mid-1990s


Source: adapted by CTLT from Yurekli and Sayginsoy. (2006).

Assessing Global Illicit Trade

Econometric analysis in 1999 by 110 countries

Actual tax-paid cigarette sales in 109 countries(billion pieces)

5,229

Estimated worldwide consumption (billion pieces) 4,572

Estimated smuggled cigarettes (billion pieces) 156

As percentage of global consumption 3.4%

As percentage of total exports 22%

Estimated global tax revenue generated from cigarettes (excise+VAT)-billion PPP (purchasing power parity) U.S. dollars

211

Global revenue lost due to smuggling 7.3%


Vast Interest Groups and Potential Winners and Losers


Costs of Smuggling to Major Players in the Economy

For government Evasion of tax revenues—excise, import duties, income

taxes Increasing costs of fighting organized crime Higher allocation of tax payers’ money to finance

public health expenditures for tobacco-associated diseases

Stagnant development due to premature tobacco-associated deaths and diseases

For public health Available, accessible, and affordable cigarettes,

especially for the youth Undermining the impact of tobacco control measures

to prevent children from taking up the behavior Increasing premature tobacco-associated deaths and

diseases


Costs of Smuggling to Major Players in the Economy

For families/society Increasing organized crime, which reduces

economic welfare Penalizing poor and old street sellers for

smuggled cigarettes Creating high opportunity cost of tobacco

expenditures to families Contributing to a vicious cycle of poverty

For economy Loss of investment opportunities—loss of revenue

for legitimate producers Unemployment in legitimate production Lower economic growth due to lower productivity

of sick tobacco workers


Routes for Organized Smuggling

Evidence shows that worldwide smuggling routes are many and complex

Various documents were used in 1999 to identify major smuggling routes, including USDA attaché reports, the WHO Tobacco Atlas, the Market File Database, and other research


Source: adapted by CTLT from Yurekli and Sayginsoy. (2006).

Organized Illicit Cigarette Trade Routes


Major Route for Counterfeit Cigarettes to EU

From the Asian region

Source: adapted by CTLT from WCO Customs and Tobacco Report. (2004).

To the European region

Documents

Illicit Trade in Tobacco