1. Introduction
The illicit trade in tobacco products is of interest to both governments and public health circles. Governments are concerned because tax revenues suffer from the avoidance and evasion of cigarette taxes. Illicit activities are known to undermine the government’s authority, and money from illicit trade is often reinvested in other criminal activities [
1]. Public health specialists are concerned because by increasing the accessibility and affordability of tobacco products, illicit cigarette sales likely undermine the effectiveness of price and tax measures that aim to reduce consumption. Illicit sales also weaken other public policies, such as regulations on health warnings, packaging, and ingredients, since illicit cigarettes are not likely to follow any of those regulations [
2,
3]. On the other hand, the tobacco industry has consistently claimed that tax increases, graphic health warnings, restrictions on packaging, and regulations of ingredients are all drivers of the illicit cigarette trade [
4]. The use of black-market cigarettes as leverage against the adoption of tobacco control policies [
5] highlights the importance of understanding the scope and characteristics of the illicit trade in cigarettes. Unfortunately, the literature on the magnitude and characteristics of illicit cigarettes is thin [
6,
7,
8], though the lack of research is understandable. The illegal nature of black-market trade activity makes it hard to track and monitor. Even when researchers obtain data on illicit cigarettes, there are challenges to estimating the scope of illicit products because the data are often not representative [
6].
This article quantifies the magnitude of smuggled cigarettes in Vietnam, provides estimates of the amount of government cigarette tax revenue lost to the black market, and characterizes illicit cigarettes in terms of their prices, sources of origin, and points of sale. We surmounted the challenges usually facing researchers by combining several credible and recommended methods of measuring illicitly traded products. We conducted a representative survey of illegal cigarette consumption, the Vietnam Illicit Trade Assessment (VITA), in 12 provinces, in which the identification of illicit packs was based on clear and objective criteria. The problems of validity and underreporting that commonly afflict self-reported data were eliminated through two rounds of examination of the cigarette packs most recently purchased by smokers.
The article makes several contributions to the literature. This paper is the first to provide a comprehensive picture and independent estimate of illicit cigarette consumption in Vietnam. Secondly, as the first independent estimate of the volume of illicitly traded cigarettes in Vietnam, the study serves as a tool to examine whether the tobacco industry has overstated the scope of illicit cigarettes in the country. Previous estimates used for policy development were generated by a group of domestic, state-owned cigarette manufacturers—the Vietnam Tobacco Association (VTA)—which has a vested interest in exaggerating the size of the black market. Third, it provides indirect evidence that taxation has not been a driver of cigarette smuggling in Vietnam. And finally, because our survey was conducted before the establishment of Health Promotion and Tobacco Control Fund and before the regulation of graphic health warnings came into effect in Vietnam, it serves as a baseline benchmark for illicit cigarette use, which could be used together with any later surveys in order to evaluate how the volume and characteristics of the illicit trade in cigarettes have changed over time.
2. Background on Cigarette Taxation and Smuggling
In 2012, the year we conducted our survey, cigarette products in Vietnam were subject to three types of taxes: excise tax, value-added tax (VAT), and an import tax that applies to foreign-made products only. The excise tax was first introduced in 1993 and has gone through several reforms. Prior to 2006, Vietnam applied a complex excise tax system, in which different tax rates applied to cigarettes with different characteristics (see
Appendix A,
Table A1 for details). Since 2006, Vietnam has imposed a single ad valorem (value-based) excise tax rate on the ex-factory price on all cigarettes. The tax rate follows a roadmap set by the Vietnam Ministry of Finance and has slowly increased over time: 55% in 2006, 65% in 2008, 70% in 2016, and 75% in 2019. Although the statutory excise tax rate was 65% of the ex-factory price in 2012, the actual rate on the retail price comes to only approximately 32%.
Other types of taxes on tobacco in Vietnam have not changed over the last several decades. A VAT of 10% of the retail price was introduced in 1993 [
9]. Combined together, the effective tax rate applied on a typical pack of domestic cigarettes in Vietnam in 2012 amounted to 41% of the retail price, well below both the global average share of tax (52%) and the WHO’s recommended rate (excise tax of 75% of the retail price) [
10].
Cigarette smuggling has been a concern of the Vietnamese government for many years. Prior to 2006, sales of foreign-made cigarettes were banned in the country. Cigarette smuggling circumvented this obstacle and became a source of foreign-made cigarettes for domestic consumers. In 2006, Vietnam joined the World Trade Organization and consequently opened its market to foreign cigarette manufacturers. However, the import of foreign-manufactured cigarettes has faced quota restrictions and is subject to an import tax rate of 135% of the CIF (cost, insurance, and freight) price prior to the excise and VAT taxes.
The only estimates of the quantity of cigarettes smuggled into Vietnam have been coming from the Vietnam Tobacco Association (VTA), a group of domestic tobacco manufacturers. This group also funds governmental enforcement efforts against smuggling. According to the VTA’s report, smuggled cigarettes accounted for approximately 22% of the total cigarette market in 2012. The report contended that the black market was driven partially by increased excise taxes, and that the illicit trade would even grow larger if regulations on graphic health warnings were applied [
11]. There has been no independent research on either the magnitude or the distribution channels of smuggled cigarettes in Vietnam. The government’s enforcement efforts against the smuggling of tobacco, including the Border Army, have normally monitored and seized illicitly traded cigarettes along the border between Vietnam and other countries [
10].
5. Discussion
This study uses a primary dataset from VITA 2012 to examine the magnitude and characteristics of illicit cigarettes in Vietnam. The results indicate that 20.7% of packs purchased were illegal, and between 724 and 731 million illicit cigarette packs circulated in the Vietnamese market in 2012. The most popular illicit brands were Jet and Hero, which made up almost 90% of the illicit market. According to the Vietnam Ministry of Industry and Trade, these two brands originated in Indonesia, were legally imported by Cambodia, and were then smuggled into Vietnam [
11]. Singapore has been known as a transit point for other smuggled cigarettes in the region [
18]. Convenience stores were the main channel through which the illicit products reached smokers, followed by street vendors and coffee shops. The evidence also indicates that illicit cigarettes were 51% more expensive than legal cigarettes.
Our estimate of illicit cigarette consumption is approximately 20% lower than the industry’s estimate of the illicit trade, which was 900 million packs, in the same year. The results suggest that this illicit trade prevented the collection of between
$223 and
$295 million USD in government revenue in 2012. These estimates of government revenue loss are 10% to 30% lower than the estimated loss calculated by the VTA [
11], which was used for tax policy development in Vietnam. These findings support the observation that the tobacco industry tends to exaggerate the illicit trade problem in order to advocate against public policies such as tax increases and graphic health warnings.
It is important to note that among the three main sources of illicit cigarettes (convenience/grocery stores, tea stalls/street vendors, and coffee houses), convenience/grocery stores and coffee houses have fixed locations and are legal economic enterprises. The government reviews their activities and grants them sale permits every year. Tea stalls and street vendors are mobile and thus more difficult to monitor [
19]. Unlike the situation that has been documented for many other countries, no survey respondents bought illegal cigarettes from duty-free shops or from abroad. Smuggled cigarettes were probably so easy to find that smokers did not need to count on other sophisticated methods to obtain them. This finding suggests an important policy implication for Vietnamese law enforcement: inspection of cigarette retailers, especially convenience stores and coffee shops, is likely to be a cost-effective measure to detect illicitly traded cigarettes. The fact that three out of every twenty packs purchased from convenience stores were sold illegally, so this suggests a particular target for law enforcement efforts.
Last but not least, our results suggest that Vietnamese smokers do not choose to smoke illicit cigarettes because of lower cost. Quite the opposite, our survey indicates that illicit cigarettes are higher priced than licit cigarettes in every region and even within the same brand, and illicit cigarettes are more likely to be consumed by better-off smokers. This stands in contrasts to the Vietnamese tobacco industry’s claim that the illicit trade was caused by the high price of legal cigarettes [
11].
One potential explanation is that the driver of illicit cigarette trade in Vietnam is determined by both demand and supply factors. From the demand side, Vietnamese consumers usually perceive that foreign-made products are of superior quality to the locally made products [
20]. The same perception applies to cigarettes. Smuggled cigarettes are considered better in quality, safer, or “cooler” by smokers and therefore can command higher prices. The 555-brand cigarettes that were smuggled into the country were 75% more expensive and considered to be of higher quality than the 555 that were produced in Vietnam [
21]. A parallel case may be found in Iran [
22]; Heydari et al. (2010) has noted that illegal cigarettes in Tehran were higher in price because smokers believed that the illegal products were of higher quality. However, whether this perception is accurate is open to question. Of the illicit cigarette packs collected in the survey, 88.5% did not display information about their ingredients, the location, or country of manufacture. Thus, it is impossible to know whether they follow any quality control procedure and safety standard. Besides, none of the illicit packs carried any health warnings in Vietnamese, which prevented consumers from being aware of the toxic contents and health risks of smoking. The inherent perception of foreign-made products’ superior quality is enhanced by transnational tobacco companies. From the supply side, transnational tobacco companies carefully developed a price structure to ensure that the smuggled cigarettes were perceived as top-quality products. That pricing strategy lies among a set of marketing and business strategies employed by the industry to maximize their total profits from both licit and illicit markets [
5,
18].
Using the tax structure current in 2012, a back-of-the-envelope calculation suggests that the excise tax rate could have been raised from the 2012 rate of 65% of the factory price to 85% without causing the average price of legal cigarettes to exceed that of illicit cigarettes; and therefore, the excise tax increases from 65% to 70% of the factory price in 2016 which should not make an average legal cigarette pack more costly than an average illicit cigarette pack.
The study was subject to limitations. First, the estimation of illicit cigarettes at the national level is conducted based on the assumption that the distribution of illicit cigarette consumption is similar countrywide as in the 12 surveyed provinces. However, the comparison of the shares of illicit cigarette consumption estimated from VITA and GATS data supports this assumption. Second, the information about the cigarette packs at the last purchase is assumed to reflect characteristics of usual packs consumed by the respondents. Although this assumption is standard, the packs at the last purchase might not be exactly the same as the packs consumed throughout the year by the respondents. However, we expect departures from the last pack sampled and the cigarette brand regularly chosen by the smoker to be random across all respondents. Thirdly, the policy implications of these results regarding the effect of raising tobacco taxes on illicit cigarette consumption are constrained by the fact that only cross-sectional data are available. It would be useful if another later survey with the same design were conducted and combined with VITA to create a panel data to provide estimates of the effects of recent tobacco-related policies in Vietnam, such as raising taxes and implementing graphic health warnings, on illicit cigarette consumption. In spite of the limitations noted, the study makes an important contribution to the literature and to policy making by providing a comprehensive characterization of the illicit cigarette market and an independent estimate of illicit cigarette consumption in Vietnam.
In summary, the results of our survey cast doubt on previous estimates of illicit cigarette consumption, as well as on the resulting estimates of government losses, that have been offered by the Vietnam Tobacco Association and used for policy development by the government. Our study also indicates that Vietnamese smokers do not choose to smoke illicit cigarettes because of lower prices given that they were willing to pay much higher prices for illicit products. In addition, the fact that most illegal cigarettes were purchased from neighborhood convenience stores suggests that weak law enforcement could be the main reason for the high market share of illicit cigarettes in Vietnam.