An economic assessment of the drivers of illicit trade

The report assesses the economic drivers of the illicit trade in cigarettes. Through a literature review of academic and policymaker materials, alongside an economic study of case studies from nine countries (selected to capture a diverse range of geographies, regulatory environments, and tax policy experiences). 

In many jurisdictions, above-inflation increases in cigarette excise duties have become common government policy. While higher excise duties are generally intended to raise tax revenues and reduce tobacco consumption, they may also create an incentive for criminals to avoid the payment of taxes and regulatory compliance costs, enabling them to make sizeable profits whilst selling illicit cigarettes at lower prices than their legal counterparts, appealing to price sensitive consumers. 

These incentives create the conditions for the illicit market in cigarettes to grow, but whether that occurs depends on a wide range of factors including the presence of organised criminal networks, the resourcing and effectiveness of the enforcement authorities, the scale and extent of corruption, and cultural acceptance of consuming illicit goods. However, evidence shows that once illicit trade is endemic in a market, it can often be very difficult to stop.