To counter smuggling, cut taxes and bureaucracy

Op-ed by Pieter Cleppe – Independent publicist, based in Brussels. Non-resident fellow of the Property Rights Alliance

One of the less visible effects of the Covid crisis has been the increase in smuggling. All kinds of restrictions preventing legitimate businesses to trade left the market wide open to illegal competitors. We could witness this at the EU’s external border with Belarus, where Latvian customs confiscated 21 million illegal cigarettes during the course of 2020. This is twice the amount of what was caught in 2019.

A 2020 report by Euromonitor  details how Covid provided organized crime group with lots  of extra opportunities, singling out medical protection equipment but also illicit cigarettes. It recalls how the government of South Africa even went as far to “place an outright ban on the sale and use of tobacco products to curb use during the COVID-19 pandemic”. As a result, “in South Africa, the price of a pack of cigarettes has reportedly tripled”.

But it’s not only at the EU’s external borders where smuggling activity increased a lot. Also in France, where reselling medical masks had been made illegal, the government dismantled smuggling rings valued at over 30 million euro in April 2020 alone.

Apart from Covid, taxation is an important driver for the illegal economy. Especially tobacco products, which are taxed much more highly in the EU than in Belarus, are attractive for crime groups, in particular as taxes on tobacco in the EU only ever go up. Cigarettes are priced so low in Belarus and taxed so high in the European Union that contraband remains lucrative, even with millions of illicit products being confiscated every month. 

Just like in North Korea, also the regime in Belarus is involved in smuggling, at least according to a report by a group of Belarusian and Russian investigative journalists published this month. They allege the involvement of the Belarusian state and close associates of President Lukashenko. In other words, high tobacco taxes in the EU not only benefit criminals but also prop up dictators like the strongman of Belarus, Alexander Lukashenko.

Still, half of illegal cigarettes smuggled into the EU came from Asia, and only around a third come from the part of Eastern Europe that does not belong to the European Union.

A similar challenge presents itself for the United Kingdom, which has even higher tobacco taxes than EU member states like Belgium or France.

Already before Brexit, the main destination of Belgian contraband cigarettes was the United Kingdom, where 19.3% of cigarettes consumed are contraband, with France as the second most popular destination.

The smuggling trade between Belgium and the UK has skyrocketed in “Covid” year 2020, as nearly 410 million illegal cigarettes were seized in Belgium last year, which is twice as much as in 2019. Several illegal factories were also busted. In December, such an illegal factory near Ypres, which produces contraband cigarettes destined for the UK, was discovered. 4,5 million cigarettes with a British brand were found.  

According to a spokeswoman of the Belgian Finance Ministry, the intense smuggling activity in Belgium is “a problem that concerns the entire European Union”. A 2019 KPMG study stresses that “the high excise rates in [the UK and France] explain, in part, the attractiveness of these markets to smugglers.”

With Brexit, organised crime may now get even more opportunities. Now that new bureaucracy has been imposed on EU-UK trade following Brexit, the difference between trading goods legally or illegally have increased a lot. This means greater opportunities for profit for organised crime groups, something they will most certainly exploit, especially when it comes to products that are taxed more in the UK than the EU.

Even without a follow-up deal, the UK could unilaterally alleviate bureaucracy for businesses, for example by making sure there are only digital forms to be filled in, which is not the case yet. The Belgian government has already complained about this, but so far, to no avail.

With Covid restrictions expected to be lifted soon, we may see smuggling go down again. However, if they want to tackle the problem at its root, governments must go further and simply cut taxes and bureaucracy, in particular on products vulnerable to smuggling.