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The tobacco industry continues to be stuck in a perfect storm of over-regulating.
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FCTC wants to decrease the quantity of tobacco grown.
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Illegal cigarettes continue to plague the world, showing that current regulations have backfired.
Five centuries of hypocrisy!
In 1492 Christopher Columbus and his crew returned to Europe from the New World in the Americas with the very first tobacco leaves and seeds ever seen on the European continent. A crew member, Rodrigo de Jerez, after disembarking was seen smoking and immediately imprisoned by the Spanish Inquisition, who believed the smoke coming out of his mouth confirmed that he was possessed by the Devil. The acceleration of regulatory interference and the intensity of negativity, particularly in the last 10 years towards the tobacco industry, make Rodrigo de Jerez’s short stint in prison look like a minor misdemeanor. But, with all the combined forces working against the tobacco industry, these will lead us into the perfect storm with governments around the world imposing ridiculous legislation on the grounds that tobacco consumption is unsafe and therefore they (governments) are free to do what they like.
In fact, it is almost as if they have reached the conclusion that it is their God-demanded duty to mankind to make Planet Earth smoke-free. In this article we examine the key undercurrents at work in the regulatory environment that in the opinion of the writer have all served to undermine the very results of the programs they had been targeting. As this article relates to government initiatives to cease, prohibit, and control, it is worth pointing out the World Health Organization Framework Convention on Tobacco Control (FCTC) adopted by the 56th World Health Assembly held in Geneva, Switzerland on May 21, 2003 and which became the first World Health Organization treaty adopted under article 19 of the WHO constitution.
The treaty came into force on February 27, 2005 and has been signed by 168 countries and is legally binding in 181 ratifying countries. Despite all the loud cries of success at the inception of FCTC, its stunning failure to reach remotely close to any of its stated objectives proves the point that a camel is a horse designed by a collective commit-tee! FCTC turns 20 years of age next year. Happy Birthday, (Failure)!
Curtailing Consumer Rights
Consider this statistic: annual global consumption of cigarettes sits at around 5.4 trillion cigarettes. That would translate into 270 billion pack equivalents of 20 cigarettes consumed on an annual basis, or 740 million packs sold per day worldwide across the planet! That would put cigarettes at the very top-end of fast-moving consumer goods in the world. However, these consumers are increasingly being subjected to continual loss of consumer rights. The rights on where the consumer can smoke are becoming a one-way lost battle. Smoking in public, covered, indoor locations is now a thing of the past and the new focus of governments is to start taking away outdoor spaces.
Recent moves in New York to make Central Park a non-smoking area and the state of California banning smoking on outdoor beaches are just two of the many land grabs on a unilateral basis citing marginal or little scientific evidence in support of their moves targeting the successful reduction in smoking consumption. As early as 1979, an organization that saw the way legislation would deprive smokers of their rights was formed. The group known as FOREST – an acronym for the Freedom Organization for the Right to Enjoy Smoking Tobacco – was established in the United Kingdom by a war veteran who claimed he had the right to smoke his pipe when and where he wished. And the key words in there are ‘the right to enjoy smoking tobacco’. Many smokers choose to smoke because they want to.
Governments and NGOs will argue that smokers are in effect “victims” of savvy marketing campaigns and the “addictiveness” of the product makes cessation pretty much impossible. The case against passive smoking is lost well before it starts. The claims about passive smoking are a calculated deception by anti-smoking groups to scare the population and manipulate weak-minded politicians into enacting legislation that want to ban smoking pretty much everywhere. Unfortunately, the beggar-thy-neighbor momentum means that developing countries will take every opportunity to display their modernity by quickly implementing legislation in their countries if it has been “endorsed” by a leading developed country (EU, US, Asia).
New York’s decision to ban smoking in Central Park may well cause a global stir in that direction and coerce other countries around the world to play catch up. The ‘Central Park Syndrome’ may soon be goodbye outdoor smoking.
Attacking manufacturers rights
This is proving to be center stage with high profile anti-tobacco initiatives com-ing from the US Food and Drug Administration (FDA), the Framework Convention on Tobacco Control (FCTC), and Australia. In 1995 FDA declared cigarettes to be ‘drug delivery devices’ and lobbied hard ever since to be the regulatory body to oversee the industry. In 2011, FDA took full regulatory control of the tobacco industry and from time to time indicates a new legislative requirement will be appearing, more to punish than to allow.
Its Tobacco Products Scientific Advisory Committee (TPSAC) came under increasing criticism for its report on the future of menthol cigarettes and banning of flavored cigarettes. In fact, FDA’s new stance on compliance makes it challenging and burdensome for all cigarette manufacturers in the US but more acutely painful for the smaller manufacturers. FDA’s decision to ban Indonesian kretek cigarettes from the US puts it at loggerheads with the Indonesian government who is seeking remedy via the World Trade Organization (a case now ongoing for over seven years). It is now rumored that FDA wants to make cigarettes taste “bad” and by definition remove all nicotine content in cigarettes. This will definitely affect consumption but could push momentum into other tobacco products that are currently less regulated such as cigars and possibly the return of the pipe!
Let’s return to FCTC. It cites its purpose as a global response to the globalization of the tobacco epidemic. The spread of the tobacco epidemic is facilitated through a variety of complex factors with cross-border effects, including trade liberalization and direct foreign investment. Other factors such as global marketing, transnational tobacco advertising, promotion and sponsorship, and the international movement of contraband and counterfeit cigarettes have also contributed to the explosive increase in tobacco use. As such, its agenda is to get FCTC countries to work towards core tobacco demand reduction. Specifically, it seeks to achieve this via:
- Price and tax measures to reduce the demand for tobacco, and
- Non-price measures to reduce the demand for tobacco, namely:
a. protection from exposure to tobacco smoke;
b. regulation of the contents of tobacco products;
c. regulation of tobacco product disclosures;
d. packaging and labelling of tobacco products;
e. education, communication, training, and public awareness;
f. elimination of tobacco advertising, promotion, and sponsorship;
g. demand reduction measures concerning tobacco dependence and cessation.
In addition, FCTC wants to regulate the tobacco product supply via a more controlled management of illicit trade of tobacco products and to decrease the quantity of tobacco grown via the provision of support to tobacco farmers to pursue economically viable crop alternative activities. Tell this to the tobacco farmers in Zimbabwe and Malawi who do not see an alternative viable crop!
Contraband and counterfeit (C&C)
This, as the evidence will confirm, is the area of most government miscalculation as “a silver bullet that has backfired”. Contraband of cigarettes exists because the economics of selling non-tax-paid product in countries of high taxation are financially rewarding. In fact, a 40-foot TEU container containing 500,000 packs of 20 cigarettes would generate a million dollars after accounting for all costs and payoffs in any European market. It is rumored that 100 such containers enter Turkey monthly. Governments create – and contrabanders applaud as they enrichen themselves beyond their wildest dreams.
Take Germany, a country anchored in genes of strong discipline, where approximately 30% percent of its domestic consumption is contraband, literally sold out of car boots from Polish cross-border travelers. Malaysia, an island nation with no borders other than open sea, has seen contraband exceed 60% of all domestic consumption last year and no solution in sight after it implemented steep price increases.
Even monopoly markets such as Tunisia revealed recently that its contraband problem lies in the region of 35% of domestic consumption. Globally, all illicit cigarettes C&C should be in the region of 15% of global consumption. This should account for an estimated US$200 billion estimated loss in government excise tax worldwide.
And, the Oscar prize for regulation has to go to Australia! It unilaterally declared that all cigarettes sold in Australia as of mid-2012 have to be in plain packaging (olive green with large health warnings and only the brand name, no graphics). While Australia, in terms of market size is of less significance, probably positioned in the second hundred ranking in the world by consumption, the issue of plain packaging is of the highest paramount importance to the industry. And that is because in this industry “brands are the business”.
In fact, to be forthright, cigarettes are essentially a commodity with some form of differentiation in filters and blends but the key sources of differentiation are the brands. As an example, Marlboro launched in 1924 as a women’s cigarette. “Mild as May” was re-crafted around the Marlboro cowboy in 1954 by ad agency Leo Burnett to become, by 1972, the best-selling cigarette in the world. The value of the Marlboro brand equity would place it in the top tier alongside other valuable brands like Apple, Coca-Cola, and McDonald’s.
And, what happened in Australia did gyrate around the world spilling over into many European and Asian countries as they adopted plain packaging. The Australian government argued its case for plain packaging pointing out that the pack and graphics are the last form of advertising remaining in the industry. There is of course no factual evidence to support this theory, nine years later.
The bigger challenge faced now is the substantial number of counterfeiters who are rubbing their hands in glee – it is significantly easier to counterfeit plain packaging than branded products. But the scariest is yet to come. How will government legislators be able to tell the difference between a legally-produced and sold plain packaged product against one that is a counterfeit and smuggled in? This in effect will have the counterfeiters salivating at the prospect of easy duplication. But then this will probably be kicked upstairs to FCTC who is after all attempting to take responsibility for eliminating illegal trade in cigarettes. Self-inflicted pain and a total failure!
Confusion in government rights
Governments are really caught up in a catch-22 situation. Cigarettes have always been a convenient whipping boy. Whenever additional revenues are required, cigarette taxes increase “in the interest of the public health,” never ever referencing the huge contribution excise and other taxes from cigarettes contribute to the national economy. In the current global economic recession caused by Covid-19 and with the Eurozone poised to fall off the cliff and the US mired in a debt decaying situation, will one of the government strategies to address this recession be incremental cigarette tax hikes? Bring it on – the industry has been there for the last three decades. But then, show some remorse and gratitude to smokers and the industry.
Governments must toe international policy lines. While they do want to be seen as a good global citizen by tying up to pacts such as FCTC, they have to walk a double talk when such measures are contra to their own economic interests. Take Indonesia, for instance, which is a signatory to FCTC but never ratified it until 2015 under international pressure to do so. Since then, the country made very minor changes to health warnings and remains an almost fully-liberated advertising zone with TV advertising of cigarettes after 9 pm. Cigarette and tobacco cultivation industries in Indonesia lie at the very core of its economic performance and if it were to start to fully comply with FCTC rulings, it would find itself with huge unemployment and a creeping increase in poverty.
Sometimes, government (and manufacturer) rights are lost before the initiative is formed. Many free trade regional arrangements such as the North American Free Trade Agreement (NAFTA) or the Association of South East Asian Nations (ASEAN) advocated for many years that excisable product – hence cigarettes – were not beneficiaries to these arrangements. However, over the past 5-10 years, tobacco products benefitted from free trade and allowed manufacturers to streamline their manufacturing footprint to source multiple factories from a single country plant located in the trade zone. As an example, BAT sources all of the African COMESA countries from its huge facility in Kenya. Many MNC manufacturers relocated all cigarette production in Poland as a unique source for the EU. A new initiative to form the Trans Pacific Partnership Agreement (TPP) trade pact is under final discussions and will include the US, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. However, the US has already stated that tobacco and alcohol products will not be beneficiary products from free trade on the grounds that ‘removing trade barriers may be a desirable objective when the products traded are beneficial to societies.’ Clearly tobacco provides no benefits!
And the final point is this: like them nor not heat-not-burn products are safer than combustion or vape products. Despite this, governments around the world legislate hard to prevent approval for the use of these products in their countries such as opinion leader, the US, which legislated last year (against IQOS). The space for consumer-manufacturer-government dialogue recedes into the perfect storm.