Smuggling of goods

Definition and impact of smuggling of goods

The smuggling of goods constitutes one of the most neglected aspects of illicit trade in academia, and refers to a form of illicit trade that displaces “normally licit” goods (WCO) and more genuinely to the “contraband trade in excise goods” (Lallerstedt, 2016). For instance, a high luxury Louis Vuitton bag is counterfeited if it is illegally produced and resold by someone who does not own the mark. It would be considered smuggling if it was an authentic Louis Vuitton bag bought in a low-tax country and illegally resold in a country with higher prices. 

Although the prevalence and exact scale of the smuggling of goods remain unknown, the consequences are widespread. An obvious impact is that once these products are smuggled at low prices into the market, the same product sold at the original price is ultimately less attractive, generating large losses in revenues for both law-abiding companies and governments. It has come so far as robbing governments of tax revenue, fueling corruption and terrorism, and subsidizing other forms of illicit trade such as drugs, arms and human trafficking (TRACIT). 

Drivers and impact of smuggling of goods

According to the World Health Organization (WHO), the main causes of the smuggling of goods are as follows:

In this regard, the custom police and administrators are of paramount importance, as they are one of the most responsible actors in the collection of revenues across the globe. Many additional challenges arise as criminal groups increase their efforts in finding sophisticated methods to avoid taxes, including “deliberate under-valuation, misuse of origin to attract preferential rates, drawback fraud, mis-description and straightforward smuggling of excise goods” (WCO). Excise taxes are imposed when purchases are made on a specific good, often with the aim of reducing the consumption of such goods or protecting local markets (IMF). Non-compliance consequently results in weak global supply chains and losses in funding public services.

Typology of popular smuggled goods

A report led by the Royal United Services Institute for Defence and Security Studies indicated that the three main areas of smuggling of goods - tobacco, alcohol, and pharmaceuticals - are becoming increasingly linked to organized crime. An additional area concerned is that of trafficking in cultural goods.

• Tobacco: The illicit trade in tobacco products is perhaps the most well-documented sector in the shadow economy (OECD). The term refers to “any practice or conduct prohibited by law which relates to shipment, receipt, possession, distribution, sale, or purchase of tobacco products including any practice or conduct intended to facilitate such activity” (U.S. Department of State). It costs an average of USD 40.5 billion in tax revenue (Joossens et al., 2009).

• Alcohol: The illicit trade in alcohol represents a significant percentage of worldwide consumption with a sharp 25.5% of total world consumption in the form of unrecorded alcohol that is said to increase by 2% in 2020, generating over USD 19.4 billions in sales (WHO). It is not typically contained within one single definition and is rather categorized as contraband alcohol, [...], illicit artisanal alcohol, tax leakage alcohol and non-conforming alcohol. (To know more about the illicit trade of alcohol, visit: OECD)

• Pharmaceuticals: The illicit trade in pharmaceuticals includes “substandard, [...], unregistered and unlicensed drugs as well as their theft, fraud, illicit diversion, smuggling and trafficking” (TRACIT). Its worldwide sales are said to amount between USD 75 to 200 billion each year (WHO). The WHO categorized the illicit trade in pharmaceuticals as substandard (or "out of specification"), unregistered or unlicensed pharmaceuticals. (To know more about the illicit trade in pharmaceuticals, visit TRACIT).

• Cultural goods: The trafficking in cultural goods, which refers to the “illicit import, export and transfer of ownership of cultural property, (i.e. items being of importance for archeology, prehistory, history, literature, art or science). Often this is the result of the impoverishment of the cultural heritage of the country of origin of such property (European Commission). According to the UNODC, it represents between USD 3.4 and 6.3 billion of illicit trade every year.

The smuggling of goods is said to have a large economic impact on the global economy, generating large losses in tax revenue worldwide. They “reduce governments’ revenues, and undermine the rule of law, jeopardise the economic sustainability of private companies in the alcohol sector and its supply chain and disadvantage the population in general through the loss of jobs and deterioration of the environment” (OECD). 

References

Ellis, C. (2017). On Tap Europe. Organised Crime and Illicit Trade in Tobacco, Alcohol and Pharmaceuticals, RUSI Whitehall Report, 2-17.