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Tobacco in China (Part 2): Death And Taxes

October 29th, 2007

More than 1.1 billion people smoke, and China is home to roughly 300 to 340 million of these smokers. The harmful effects are known, and World Health Organization (WHO) estimates that one-third of all Chinese males below the age of thirty today will eventually be killed by tobacco. China will undoubtedly face high economic costs down the road as a result of its high tobacco usage rates.

Tobacco’s origins can be traced to North America, actually, and when Christopher Columbus first saw natives smoking, he noted its addictive properties. In the centuries that followed, European physicians would claim that tobacco cured all sorts of ailments, and in the 17th century doctors would recommend smoking as a way to ward off the plague.

The Chinese took a different approach to tobacco around time time. Aware of its ill effects, the Ming Emperor in 1638 made smoking a crime punishable by decapitation. Today, the attitude is a positive one. One survey conducted revealed 61% of Chinese smokers believe smoking causes “little or no harm”, and a great many believe, quite the opposite, that cigarettes are healthful.

It’s a profitable business, tobacco - margins are much wider than for export-related products. The economy benefits, but the biggest beneficiary of tobacco is by far the government. Cigarettes generate more tax income for China’s central government than any other industry with an estimated 8-12% of national tax revenue coming in from the big leaf. A World Bank data sheet (below) suggests just how far this figure is from world averages.

China’s tobacco industry is a monopoly with one group, China National Tobacco, serving as the largest cigarette manufacturer in the world. It has some 130 cigarette factories producing 400-900 separate brands (the figure depends on who you ask, apparently, or what you call a brand). No trademark has more than 4% market share, and foreign brands together account for only 3% of the market. Cigarettes benefit the central government, but there are many fingers in the pie at the local levels also. Despite the long-term harm it is doing to China, it is not likely anyone in government will be discouraging the nasty habit anytime soon.

Country —– % of Gov’t Revenue From Tobacco Tax

United States — 0.4
Columbia — 0.7
Egypt — 0.8
Zimbabwe — 1.0
Estonia — 1.2
Costa Rica — 1.4
Denmark — 1.7
Finland — 1.7
India — 1.8
Spain — 2.2
Bulgaria — 2.80
United Kingdom — 3.0
Australia — 3.0
Chile — 3.4
Argentina — 4.0
Brazil — 4.9
Nepal — 5.4
Greece — 7.7
China — 9.1

Source: World Bank

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