METHODS

Trade data on cigarette manufacturing, imports, and exports are compiled by the World Health Organization and the United Nations Statistics Division and disseminated through NATIONS.^1,9 Per capita cigarette consumption was estimated for Brazil and neighbouring countries from 1970 to 1998 using the following formula:

RESULTS

From 1970 to 1986, per capita cigarette consumption in Brazil fluctuated between 1266 and 2328 cigarettes (table 1). During the 13 year interval from 1986 to 1998, Brazil's estimated per capita consumption of cigarettes, as derived from production and trade data, decreased by 63% whereas the estimate of per capita cigarette consumption in Paraguay increased over 16-fold.

Most of the apparent decrease in Brazil's per capita consumption during the same interval reflects the more than 8000-fold increase in Brazil's cigarette exports between 1988 (when exports represented less than 1% of cigarette production) and 1998 (when exports represented more than 51% of production) (fig 1). Brazil's exports of cigarettes increased from 11 metric tonnes in 1988 to over 87 000 metric tonnes in 1998. The principal destinations for Brazil's cigarette exports were Belgium and Paraguay, but the final destination where the cigarettes are ultimately consumed cannot be determined from publicly available data.

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Figure 1

Brazil cigarette consumption and exports, 1985 to 2000. Source: NATIONS¹

Figure 2 depicts the large increase in cigarette imports into the neighbouring country of Paraguay during the 1990s. If those imports were, in fact, consumed in Paraguay, the estimated per capita consumption of cigarettes would have increased from 678 in 1986 to an astounding 10 929 in 1998 (table 1). (In comparison, estimated per capita cigarette consumption was 1748 in the UK, 2255 in the USA, and 2403 in Japan in 1998.) An alternative explanation for Paraguay's anomalously large volume of cigarette imports is that imported cigarettes have been diverted illegally to other countries, including back to Brazil. This large scale cigarette smuggling could account for the large anomalous fluctuations in Brazil and Paraguay's per capita consumption, as derived from official trade data.

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Figure 2

Paraguay cigarette imports, 1970 to 2000. Source: NATIONS.¹ FAO data 1970–87, COMTRADE data 1985–2000.

Figure 3 illustrates the explosive growth in consumption of contraband cigarettes in Brazil between 1992 and 2000 as estimated by the Federal Tax Bureau of the Brazil government. Peaking at 58 billion cigarettes, smuggled contraband captured 37% of the domestic cigarette market in 1998.

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Figure 3

Consumption of contraband cigarettes, Brazil 1992 to 2000. Source: Brazil Federal Tax Bureau.

DISCUSSION

In 1988, less than 1% of Brazil's domestic cigarette production was exported. By 1998, official statistics reported that 51% of Brazil's cigarette production was being exported.

This large apparent increase in Brazil's cigarette exports during the 1990s created an appearance of declining domestic consumption. Strong evidence suggests that the bulk of Brazilian cigarettes ostensibly exported to Paraguay in the 1990s were either never exported or were smuggled out of Paraguay to neighbouring countries, including back into Brazil. This circuitous trade represented a successful effort to evade Brazil's domestic cigarette excise taxes and undermine national tobacco control efforts.^20,22

Estimates of Brazil's contraband cigarette trade range from 31–37% of the domestic market for the peak year 1998. At least 45 billion illegal and contraband cigarettes were consumed in Brazil in 1999 representing about one third of the Brazilian domestic market of 145 billion cigarettes per year. The main source for Brazil's contraband cigarettes appears to be neighbouring Paraguay. In some cases, it is suspected that cigarettes ostensibly exported to Paraguay never left Brazil. In other cases, smugglers exploited differential excise taxes, buying Brazilian cigarettes in Paraguay where taxes are under 20%, compared with Brazil's 70% tax in 1999. Legal cigarettes, upon which all taxes have been paid, sold for 1.20 Brazilian real (US$0.56) per pack while an illegal pack could be purchased for a 25–58% discount in 2001, between 0.50 and 0.90 Brazilian real (US$0.24–0.42).²³

In 1999, Brazil collected US$5.5 billion in tobacco taxes. Brazilian tobacco exports and tobacco products totalled US$ 1 billion, representing 2.5% of total Brazilian exports.²⁴ Brazilian cigarettes falsely exported to Paraguay and smuggled back to Brazil remained inexpensive to Brazilian consumers. This large scale illegal trade deprived the Brazilian government of vital revenues estimated at $500 million in 1998 alone.²⁵ Excess deaths and other health costs attributable to the adverse health effects of lower price, smuggled cigarettes on smoking initiation, intensity and duration in Brazil have not been fully calculated.

To address the large scale smuggling problem, Brazil imposed a 150% export tax in December 1999 to prevent the false export of cigarettes to Paraguay and their subsequent re-sale in Brazil.²⁵ This new tax structure resulted in an 89% drop in reported Brazilian cigarette exports from 6.3 billion sticks in 1999 to 700 million sticks in 2000.²⁶

The pernicious health effects of cigarette smuggling continue, however, because multinational tobacco companies accelerated the construction of cigarette manufacturing plants in Paraguay and other neighbouring countries, thereby circumventing Brazil's 1999 cigarette export tax. Paraguay had only two cigarette manufacturing plants in 1995, but within four years an additional 17 were constructed. Paraguay currently boasts 22 cigarette manufacturing plants with seven more under construction.²⁷ Brazilian tax authorities suspect that a significant proportion of Paraguay's cigarette production is smuggled across the border and consumed in Brazil.

In October 2000, Brazil extended its 150% export tax to raw tobacco leaf used by cigarette manufacturing plants in neighbouring Paraguay and Uruguay, but not to tobacco leaf exported to Argentina, Chile, and Ecuador. In March 2001, Uruguay's Monte Paz S/A tobacco company encouraged the Uruguay government to object to Brazil's differential export tax on tobacco leaf under the common tariff terms of the regional MERCOSUL customs union.†In October 2001, a MERCOSUL adjudication panel upheld Uruguay's complaint against Brazil's export tax policy for raw tobacco, but Brazil has promised to appeal the decision to an international arbitration forum.²⁸ Brazil argues that public health imperatives to control the illegal cigarette trade take precedence over the tobacco industry's attempts to evade regulation under cover of the MERCOSUL customs agreement.²⁹

This descriptive study is limited by an exclusive reliance on readily available trade statistics to calculate per capita consumption trends. Surveillance data available for the most recent two or three years are generally preliminary and/or unpublished because of the time required to compile and disseminate the data. These preliminary data may not be comparable with more complete data on production and trade from earlier years.

International surveillance efforts, working closely with national or regional partners, can help to evaluate and publicise a particular regional issue of global significance, such as cigarette smuggling, to stimulate communication between countries with similar problems, and to accelerate the development of effective interventions. Illegal trade practices such as smuggling and tax evasion may be detected through analyses of cigarette trade data.^30,31 Addressing the health problems arising from smuggling and other illegal trade practices requires international attention and systematic cooperation under formal agreements, such as the Framework Convention on Tobacco Control.

Anomalous patterns in trade data are also observed in many other countries and these trade patterns also deserve further study. Taiwan, Cyprus, United Arab Emirates, Lebanon, Brunei Darussalam, Bosnia and Herzegovina, Republic of Korea, and Croatia, among other countries, report trade data where imports far exceed the demand of local markets indicating that cigarettes are transiting to other markets without proper controls. Investigators and law enforcement agencies have identified extensive international cigarette smuggling networks providing evidence that cigarette smuggling is an organised, pervasive, and widespread industry practice.^32–35

Recommendations

Cigarette smuggling poses a global problem for tobacco control that must be addressed by international agreements that effectively regulate the international cigarette trade. Smuggled cigarettes are estimated to account for 6–8.5% of total cigarette consumption.³⁰ Cigarette smuggling undermines public health and efforts to control tobacco consumption by reducing prices, increasing demand, and evading distribution restrictions and government taxes. Smuggled cigarettes compete with legal cigarettes, lowering the price and encouraging consumption. Youth and low income groups are disproportionately affected because cigarettes are particularly price sensitive among those groups.³⁶

International effort is required to eradicate cigarette smuggling.^37–39 Proposed measures include the following:

• Ban duty-free cigarette sales

• Harmonise cigarette tax rates between neighbouring countries and devise effective penalties to negate financial incentives for cigarette smuggling

• Secure the distribution chain and require accountability; producers and distributors should be held accountable for sales to legitimate dealers

• Require records for every transaction in the wholesale distribution chain; a clear chain of custody should be established at every wholesale transaction to prevent large scale diversion to illegal markets

• Label the origin (manufacturing plant) and destination (country) on every pack

• Require health warnings in the language(s) of the destination market

• Require international cooperation between law enforcement authorities prosecuting organised smuggling and money laundering operations.

Tobacco control is an indispensable tool in the control of cancer. Brazil has made significant strides in curtailing deceptive marketing practices, restricting youth access, and promoting cessation, but the deleterious effects of cigarette smuggling require international attention for effective control. This analysis suggests that strict international controls are required within the Framework Convention For Tobacco Control to prevent multinational tobacco companies from circumventing national tobacco control efforts by engaging in large scale international cigarette smuggling.