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Tobacco in China (Part 3): Counterfeiting and Smuggling

October 30th, 2007

China produces a staggering 190 billion counterfeit cigarettes each year. The Chinese government claimed that it dealt with 159,000 cases involving the manufacture and sale of counterfeit cigarettes in the first six months of 2002 alone. And it has destroyed more than 5,000 cigarette-making machines in recent years. Still, the government is at a loss to solve the problems posed by counterfeiting.

Counterfeit cigarettes cause harm in a number of ways. Consumers purchase a product that lacks quality standards:

Health experts in China say that the counterfeit cigarettes contain six times as much lead than legal ones, 160 per cent more tar, 80 per cent more nicotine and dangerously high levels of arsenic.

Also, legitimate workers lose work, and society suffers because profits from counterfeiting often support organized crime. The government naturally misses a fair amount of tax revenue, and one of the greatest harms is that counterfeit cigarettes are sold more cheaply. Cheap cigarettes provide a big incentive for people to smoke.

Counterfeiting in China has had a far-reaching impact with the contraband making its way to Europe, among other destinations. The British have reached out to the Chinese government for help in controlling the outflow of counterfeit cigarettes:

Investigators estimate a third of cigarettes smoked in Britain today are counterfeit — with 80 per cent of them now made in China.

While China has counterfeiting challenges, it also has the burden of dealing with cigarettes that are smuggled into the country. About 3% of all cigarettes sold in China are foreign-branded cigarettes, but 95% of this amount is said to have been brought in illegally.

Foreign tobacco companies have long regarded China as the “ultimate prize” and they have been shown to do whatever it takes to gain market share in the monopoly-controlled market. Big Tobacco’s approach has essentially been to use smuggling as a key marketing tool. Tobacco companies sell their product to agents who find their own ways of bringing the product into China. This is not mere speculation, but facts uncovered in legal actions taken against British American Tobacco. A surprising 25% of all profits at BAT were said to derive from so-called “transit trade” into China.

This is the third out of three posts on tobacco in China.

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