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Authors: Yong Hwee Shi, Tan Chok Geow Region Head: Tan Chok Geow
Editor: Akshat Daga
Illustration by Pua Yen Ting
Abstract
The illicit markets in Brazil are growing right below Brazil’s watch and its very existence dates back to the 1960s. Systematic measures were used to detect their presence but none were effective in stopping their growth. Comes the Covid-19 in 2020, and not surprisingly, these markets are at its mercy, as lockdowns and restrictions made it hard for markets to operate smoothly. As countries began lifting their restrictions, many wonder if these markets are making a comeback. The Brazilian government definitely has to be creative in policy implementation, incorporating taxations as well as soft measures to ensure that these markets are kept at a humble level.
The Story
Brazil can be proud to claim their spot as the top 3 players in the global tobacco market over the decade. The country is the second-largest tobacco-growing country in the world, and has a strong foothold in the global tobacco market . However, more than 150,000 tobacco-related deaths are recorded annually, despite the efforts of anti-tobacco policies. In fact, these policy makers would be heartened to witness the fall in cigarette consumption in the traditional market in the last 5 years.
Anti-tobacco taxation policies have certainly hit the bullseye. BMC Public Health claimed increased cigarette prices, coupled with the price elastic nature of consumers in the country, drove consumption in the traditional market down.
So, where are these smokers getting their coffin nails? The Illicit Market. With e-cigarettes banned in Brazil, many are turning towards the illicit market for cheaper alternatives.
History of Latin America’s Illicit Cigarette Market: Paraguay being the central hub and supplier to Brazil.
Since the 1960s, Paraguay has been a vital transit hub to smuggle illicit tobacco products by transnational tobacco companies (TTCs) from the United States into Argentina and Brazil. In the 1990s however, the nature of illicit cigarette and tobacco trade in Latin America changed.
Cigarette production was increasingly diverted to Paraguay during the regional economic downturn in the 1990s, and also after the adoption of a 150% export tax on Brazilian cigarettes. By 1998, Paraguayan became a paramount supplier of illicit cigarettes to Argentina and Brazil since (Iglesias, Gomis, Carrillo Botero, 2018).
Detecting the Presence of the Illicit Cigarette Operation: How Do We Know of its Existence?
The estimated baseline percentage of illegal cigarette use is 42.8% in 2016 (Szklo, Iglesias, Souza, Szklo, Almeida, 2018), contradicting legal records of declining cigarette consumption. To tackle this, the Brazilian health system spends USD 15 billion on smoking-induced health issues yearly, despite many anti-tobacco and cigarette taxes (Da Silva, Piras, Moreira, 2019).
Comparing Brazil’s unmanufactured tobacco and legal cigarette production levels, we notice a discrepancy. The supply of tobacco inputs is rising when we expect input production to fall with the decreasing production of final goods (Ribeiro, Pinto, 2020). Besides imports being consistently greater than exports, there are also no legal records of exports of Paraguayan cigarettes into Brazil, even though Paraguayan brands such as Eight and Gift are well-known in Brazil (Ribero, Pinto, 2020).
Oddly, the volume of inputs imported into Paraguay is in excess of their potential legal demand (Ribeiro, Pinto, 2020) and these discrepancies signals two possibilities: unrealistic inventories or the diversion of inputs to illicit cigarette production (Ribeiro, Pinto, 2020) (refer to Appendix 1,2).
COVID-19 led to a Surge in Illicit Cigarette Movements
There has been a surge in demand for illicit goods in Latin America with the increasing COVID-19 restrictions and shutdown of factories. Authorities in Argentina have seized 100,000 contraband cigarette packets in mid 2020, which is one-fifth the amount seized in 2019 (Salomón, 2020). Brazilian authorities also reported sustained contraband seizures in the Tri-Border region (Ottolenghi, 2020). This suggests that demand for cigarettes, legal or illegal, remain high and inelastic even during a pandemic. Addressing demand may perhaps be a more sustainable solution than taxation.
Introducing Cigarette Tax Cuts… is Probably Not a Good Idea.
In 2019, the Brazilian Ministry of Justice and Public Security published a ruling that seeks to establish a working group to assess the possibility of tax cuts on cigarettes manufactured in Brazil, aimed at decreasing the consumption of contraband cigarettes (Da Silva, Piras, Moreira, 2019). This however, is unwise and counteractive to the government’s long-running efforts to reduce cigarette consumption.
There is a positive correlation between higher taxes and prices and a reduction in tobacco consumption - a 10% increase in cigarette prices can decrease tobacco consumption by 4% in high income countries and 5% in medium and low income countries (U.S. National Cancer Institute, World Health Organisation, 2017). Thus, tax reductions will likely reverse the progress made in reducing cigarette consumption.
Potential Remedies
We can concur that reducing the illicit market in the short-term appears elusive. The Covid-19 pandemic has exposed the cracks in price-focused taxation policies. As a result, Brazil might look to make some adjustments and adopt new policies to complement anti-tobacco taxation policies heading into the future.
Reshaping the country’s education system might be the first big step towards a smoke-less future. Education Against Tobacco (EAT) was implemented in 2016 in more than 10 medical schools in Brazil. They have an education-based approach where medically trained volunteers would visit local schools to provide education on the effects of smoking. While the impact of this initiative is unknown, it appears that EAT has become less active in the last two years, and publications have ceased since 2019. Similarly, in Sri Lanka, the Research Intelligence Unit found that the government needs to establish a task force of industry stakeholders and government agencies led by those representing Finance, Customs and Heath - to focus on educating the youth, whose hands have often found their way to contraband cigarettes. Brazil can learn from this, and aim to rejuvenate EAT with the cooperation of different stakeholders.
The latter is especially crucial given that illicit trade is facilitated by poor surveillance and scarce infrastructure at international borders between Brazil and Paraguay, which provide ideal backdoors for smuggling. Beyond regional cooperation with Paraguay to strengthen border controls, Brazil can also explore possible international relation solutions, not only with neighbouring countries but the rest of the world as well.
Interviews with law enforcement by KPMG indicated that the manufacture of illicit whites and counterfeit cigarettes in illegal factories is increasing. Insights also refer to emerging organised crime groups that specialise in the smuggling and sale of illicit raw tobacco. This is also compounded by the fact that Brazil has negotiated a free trade agreement as part of the EU-Mercosur agreement, to liberate tariffs and restrictions between these two regions. This could potentially increase smuggling traffic within these two regions.
Furthermore, Brazil might be potentially facing backlash from the Mercosur Trade bloc that was signed by 3 other countries, namely, Argentina, Paraguay and Uruguay. The trade bloc aimed to alleviate internal tariffs (Appendix 3). Difference between global and Mercosur trade volume leads us to wonder if this trade bloc has ultimately nurtured the rise of illicit markets over the years.
Final Say
The illicit market in Brazil has grown tremendously under the government’s careless watch, and now the country is paying the price. But just like any other market, illicit markets in Brazil are volatile and susceptible to economic boom and recession. To tackle the rise of these markets, it is imperative that Brazil adopts all-rounder solutions to address the multiple facets and complexity presented in its country.
Appendix
Appendix 1:
Source: UN COMTRADE, taken from research paper “Discrepancies in the Brazilian tobacco production chain: raw inputs, international trade and legal cigarette production”by Ribeiro and Pinto.
Appendix 2
Source: UN COMTRADE, taken from research paper “Discrepancies in the Brazilian tobacco production chain: raw inputs, international trade and legal cigarette production”by Ribeiro and Pinto.
Appendix 3:
Source: CFR “Mercosur: South America’s fractious Trade Bloc”
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