Big Tobacco and the smugglers: do you believe this conspiracy theory?

    3 June 2015

    In an information sheet on its website, the Tobacco Manufacturers’ Association draws a link between the illegal cigarette trade and prostitution, arms trafficking and terrorism.

    Given the number of people killed by their trade, it’s hard to believe that the TMA is motivated by altruism. So why do these companies campaign against black-market cigarettes?

    One answer is that they eat into profits. But the scale of the problem also allows Big Tobacco to argue for lower taxes on its products. From the TMA’s website:

    The UK’s high tobacco tax policy has provided economic incentives for criminals to meet the demand that exists for cheap tobacco products. This has implications for Government revenue and for law and order. It threatens the livelihoods of many legitimate businesses, in particular independent tobacco retailers.

    The TMA’s claim is that the Government could reduce the amount of illegal trade by lowering taxes on tobacco. It’s an argument Big Tobacco has been losing for years.

    Meanwhile, the anti-smoking lobby Action on Smoking and Health (ASH) has produced a briefing that accuses Big Tobacco of complicity in the illegal trade. It claims that tobacco companies are flooding foreign markets with non-counterfeit cigarettes and rolling tobacco, thus bolstering the black market in the UK. Why would big tobacco companies do that? To make money from sales to smugglers, obviously. But also so they can argue for lower taxes (see the quote above). According to ASH,

    The tobacco industry wants to use the threat of illicit trade to block or delay tobacco control policies, such as the tobacco tax escalator and the introduction of standardised (‘plain’) packaging.

    All of which makes Big Tobacco appear crafty as well as wicked. But does this conspiracy theory stand up? Be wary of its source. My colleague Christopher Snowden blogged about ASH this week. You don’t have to agree with his libertarian views on smoking to grasp that not everything ASH says can be taken at face value.

    One key point: the TMA has never been successful in its campaign for lower taxation. And, even if the tax were reduced slightly – which even under a Conservative government isn’t likely to happen – it wouldn’t increase profits nearly enough to counteract the losses caused by the illegal trade that tobacco companies are supposedly helping to create. On the other hand, a ‘tax escalator’ probably wouldn’t make much difference, either.

    Why? Take a look at the the map at the top of this post, showing premium cigarette prices in March 2015. It’s a detail from a map produced by the TMA (click here to see it in full), so it should perhaps carry a health warning, but even if you dispute the exact figures there is clearly a major disparity between the UK and every country in Europe except Norway.

    Given how cheap cigarettes are in Europe, it’s hard to see how a small cut or a small rise in British excise duty or VAT would make much difference to smuggling, irrespective of whether Big Tobacco is implicated in it. The gap is just too great.

    ASH is right when it says that life has become more difficult for smugglers. In March, Border Force officers intercepted nearly three million cigarettes at Harwich. They were hidden inside hollow sections of stacked sheet glass. Smugglers have to go to elaborate lengths to get tobacco into Britain – but they still think the risk is worth it.

    Reliable figures on black-market cigarettes are hard to come by. Philip Morris International gets its reports on the illicit trade from KPMG, who estimate it at 16.4 per cent of the total market. On the other side of the fence (and with its own motives for distortion) HMRC claims nine per cent.

    Either way, ASH’s conspiracy theory just doesn’t add up. There is evidence that Big Tobacco was massively over-supplying some European countries back in the early 1990s. Now, after a series of fines, that practice has diminished. ASH’s best evidence that non-counterfeit imported tobacco is a major problem for Britain today is a vague claim by Margaret Hodge, who in 2013 accused HMRC of getting its figures wrong.

    As for the other part of the conspiracy theory, if tobacco companies are denouncing smugglers in order to lower (or keep the lid on) taxes – knowing how ineffective that lobbying or even a small tax break is likely to be – then they aren’t as intelligent as their annual profit reports would suggest. The simplest explanation is that Big Tobacco’s ‘outrage’ at the black market is a PR stunt. And ASH has fallen for it.