The UK is facing a tobacco tariff timebomb. Britain’s black market in cigarettes is set to boom if trade talks with the European Union fail to bear fruit by the end of the year.
The damage can be easily avoided easily if the department of international trade makes some minor changes to its post-transition period tariff regime. But so far, there is no sign that politicians are aware of the problem.
The issue stems from the UK Global Tariff – our post-Brexit replacement for the EU’s Common External Tariff. In the absence of a trade agreement, the UKGT will apply to all imported goods from 1 January 2021. At present, cigarettes imported from the EU for sale in the UK (which make up the overwhelming majority of our market) are liable for tobacco duty and VAT but are not subject to any tariff.
Presumably, though, in an unfortunate oversight (since there’s virtually no domestic tobacco industry to “protect”) the UKGT in its current form will slap an eye-watering 50 per cent tariff on cigarettes and a 70 per cent tariff on roll-your-own tobacco. That’s on top of existing charges. Even with an EU-UK trade deal, if we get our rules of origin requirements wrong, the tariff could still end up applying.
The results will be all too predictable. Standard economic theory suggests that the brunt of tax hikes on products with inelastic demand, like tobacco, is shifted onto consumers. The empirical research on tobacco taxation fits the theory and shows that sudden, large hikes in specific tobacco taxes (as would be the case with the new UK tariff) translate into significantly higher prices for smokers across the board.
How will the UK’s 6.9 million smokers react after waking up to 50-70 per cent extra tax on their cigarettes? Some will simply take the financial hit, a difficult ask as hundreds of thousands are losing their job, or shift to cheaper brands. A small number will quit. But many will seek out cheaper alternatives provided by our multi-billion pound illicit market, which according to HMRC has remained stubbornly stable over the past decade.
Some tobacco control researchers make the counterintuitive claim that price only has a minimal impact on the volume of the illicit tobacco trade. But they often base this assertion on cross-sectional studies that are ill-suited for determining causation. For example, it’s sometimes claimed that comparatively low levels of smuggling in countries with expensive cigarettes show that tax hikes don’t boost the illicit market.
Any student of economics should immediately spot the key flaw in this argument – it doesn’t account for confounding factors like national income or levels of corruption. Unsurprisingly, when researchers do control for these variables, they find that tobacco tax hikes significantly boost the size of the illicit market, bringing with it crime, violence and lost tax revenues.
You don’t have to be a die-hard libertarian to admit that a massive increase in the cost of tobacco overnight will cause some serious problems. Our established mechanism for using taxation to try to deter smoking is the Tobacco Duty Escalator, currently a yearly increase of RPI +2 per cent (RPI +6 per cent for rolling tobacco).
This is small fry compared to the planned tariff increase. If the government is, in fact, hell-bent on causing a smuggling boom as we transition out of the customs union, it should do this through established domestic policy channels, rather than burying it in the minutiae of trade policy. Whatever the government’s future intentions, the UKGT rate should be set to zero.
Brexit presents us with a golden opportunity for liberalisation in the field of tobacco harm reduction. We can cement our place as world-leaders in helping smokers to switch to less harmful products like e-cigarettes, heated tobacco and snus. But huge new stealth tariffs on tobacco is the wrong way of trying to improve public health and risks “global Britain” ending up as a haven for cross-border crime.