The Smugglers of Tobacco Cove

Dr Eric Crampton
8 November, 2022

Nowhere in New Zealand is as landlocked as the southern Manitoba farm where I grew up. Reaching the ocean, by road, required at least 24 hours of non-stop driving.  

The sea was a place of mystery where anything might happen because no one you had ever met had ever been there to tell you otherwise.

For eight-year-old me, the sea meant smugglers.

Every few weeks, a canvas sack of hardbound Hardy Boys mysteries would arrive at the small-town post office from the Winnipeg Public Library’s extension service – until I’d finished all they had on offer.

And most batches had a story about smugglers.

Earlier this month, Otago University Professors Nick Wilson and Richard Edwards wrote in The Conversation that worries about illicit tobacco and tobacco smuggling are about as solid as the Hardy Boys stories I used to devour.

Wilson and Edwards summarised work that they, with co-authors, had published in Tobacco Control. Their team collected discarded tobacco packages to try to figure out what proportion were foreign-sourced, and thus potentially smuggled.

KPMG has undertaken similar surveys, commissioned by one of the tobacco companies, to estimate the prevalence of foreign packages. But Wilson and Edwards note that, because foreign visitors may bring a small quantity of cigarettes with them legitimately, it might be hard to tell in normal times which packs have been smuggled.

So the Otago team ran their survey while the borders were still mostly closed, from May 2021 to April 2022. They found that just over 5% of packs were foreign-sourced, a similar proportion to that found in prior surveys they had run in 2008/09 and 2012/13.

They concluded that worries about tobacco smuggling may be overstated: just the fantasies of a tobacco industry wishing to push back against excise and other regulations.

But two weeks ago, the Customs Service issued its annual report. Customs tracks smuggling – they’re responsible for collecting tobacco duties at the border. While they cannot tell how much smuggling is taking place, they do know how much illicit tobacco they have seized at the border.

The overall amount that Customs intercepts is not large, depending on how you count things. It has increased sharply over the past five years, but from a very low base. In 2017/18, the excise value of intercepted tobacco was well under $5 million. By 2021/22, it had grown to about $30 million.

$30 million is pretty small relative to the overall tobacco excise tax take of about $1.6 billion in 2021. But tax on a single cigarette is a little over a dollar, so $30 million in lost excise is about 28.5 million cigarettes.

The Ministry of Health estimated that, on the 2020/21 data, about 26,000 adults are heavy smokers, defined as those consuming at least 21 cigarettes per day. If each of those heavy smokers goes through about 8,000 cigarettes per year, the tobacco that Customs intercepted last year could have fuelled the habit of about 14% of the country’s heavy smokers.

But nobody really knows how much illicit tobacco makes it through. Oxford Economics estimated that, in 2017, illicit tobacco made up about 10% of the overall market. Since smoking rates have declined since then but seizures have increased substantially, it seems likely that the illicit trade now makes up a larger proportion of a smaller market.

It isn’t just New Zealand. Australia’s Illicit Tobacco Taskforce estimates that it intercepted tobacco with excise value of $561 million in 2021/22 – a $249 million increase as compared to 2020/21. Australian customs intercepted tonnes of loose tobacco and tens of millions of cigarettes in a single detection event. They estimate that smuggling remains profitable even if Customs catches 29 out of every 30 containers of smuggled cigarettes.

But the more interesting part of the New Zealand Customs report was the change in the composition of seizures. In 2017/18, 88% of intercepted tobacco was cigarettes, with the rest loose tobacco. In 2020/21, cigarettes were 76% of seizures. But in 2021/22, cigarettes had dropped to 22% of seizures, with loose tobacco making up the rest.

It is hard to tell whether the large change in composition is because smugglers have shifted tactics with border closures, because Customs has gotten better at catching loose tobacco, or a little of both.

Either way, the Otago survey’s finding of no particular increase in the interception of smuggled cigarette packs tells us little about overall smuggling rates. Illicit loose tobacco does not come in those packs and now makes up the large majority of seized illicit tobacco. It seems likely that it also now makes up a much larger proportion of overall smuggled tobacco.

And it seems likely to get worse if the government goes ahead with some of the proposals in its latest round of tobacco control measures.

Currently, illicit tobacco has a substantial cost advantage over legal tobacco; it saves over a dollar per cigarette in excise, though those savings will not all pass through to the consumer. But it still has to compete with legal cigarettes and with vaping.

Under proposed rules, the illicit market will be the only place to find a real cigarette.

The government has proposed setting very low nicotine content rules for tobacco that are comparable to the near-beer rules under American alcohol prohibition a century ago. During prohibition, which sparked a rather obvious black-market problem, near-beers with less than 0.5% alcohol remained legal. But nobody wanted to buy them. Drinkers preferred getting alcohol from bootleggers.

Since nicotine will remain available in safer form through vaping, the prohibition-style approach will not provide quite as strong a boost to the illicit market as US alcohol prohibition did.

Even so, the timing seems remarkably poor. Smokers have been flipping to vaping as a far safer and cheaper alternative. But vaping has not worked for everyone and some take time to make the shift.

Action on Smoking and Health warns that the Ministry of Health, relying on other work from Otago University, has substantially overestimated the number of smokers who might quit with the prohibition-style rules and underestimated shifts to the illicit market.

If a smoker flips over to the illicit market to find a proper cigarette, it will likely be harder to encourage that smoker to consider vaping. The cost advantage of vaping over illicit tobacco will be smaller.

The government has pledged more funding for anti-smuggling operations: $10 million over four years, or less than the excise content on two tonnes of tobacco. Two and a half million dollars a year might not get the job done if smuggling here is as potentially profitable as it is in Australia.

My submission on the proposed rules, written jointly with the Reason Foundation, urged a renewed emphasis on harm reduction rather than a turn to prohibition.

I live a lot closer to the coast than I did when I was a kid. I can see Wellington Harbour and Petone from our balcony. And we play by the sea.

If dumb tobacco policy does increase smuggling, it is unlikely to involve sneaky boats landing in secluded coves near abandoned lighthouses or hidden caves, like in my old Hardy Boys books. Smuggled tobacco is more likely to be hidden in shipping containers.

But were I to come across any while tramping out in more remote places, playing Hardy Boys would be the last thing on my mind. Smugglers are dangerous and I’m a desk-jockey. But if the government’s determined to make smuggling the only way for anyone to find a real cigarette, I’m cheering for the smugglers.

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