Lobbyig And Smuggling

These figures may be true, but don't characterise only cigarettes. For instance, there is also substantial smuggling of liquor. There is a policy issue embedded in the smuggling figures, and one which is pertinent because items like consumer electronics, liquor and cigarettes are due to move on to the open general licence (OGL) in April 2001 and import duties on these are still indeterminate. Cars don't belong to the same category, as car smuggling is difficult. Domestic industry prefers high import duties and offers banalities like better policing and enforcement as a counter to smuggling. As the history of gold smuggling has shown, enforcement can never keep up with it and the best response is to reduce the incentives for arbitrage. It is the easing of quantitative restrictions and reductions in duties that brought down gold smuggling.

 

Low import duties are needed for liquor, cigarettes and consumer electronics as a response to smuggling, quite independent of the other arguments that exist for reduced protection. This also needs to be considered against the backdrop of low duties in neighbouring South Asian countries, which encourages arbitrage; no amount of policing of porous borders helps. Further, there is the question of foreign direct investment (FDI). Since there are always transaction costs associated with trade, an appropriate response should remove policy-induced distortions that prevent FDI in these areas. Multiplier effects are greater for FDI than for trade.

Finally, there is the matter of excise duties. High domestic taxes can encourage arbitrage and the primary reason for cigarette smuggling into Britain is high domestic indirect taxes. Of course, the argument for low indirect taxes on liquor and tobacco is not readily accepted as these are perceived to be social bads and are also major sources of government revenue. The negative externalities associated with social bads can be addressed through other means and the issue of enhancing government revenue also has a broader dimension. For example, within the tobacco sector, there are opportunities for broadening the base by taxing sectors that are presently outside the net. The immediate response required for April 2001 is low duties and not meaningless and dysfunctional statements about greater policing.