YELLOW PAD

By Filomeno S. Sta. Ana III

Surprisingly, I received invitations to attend events sponsored by top-tier global intellectual brands, namely Foreign Policy (FP) and Economist Impact (EI).

FP was co-founded by Samuel Huntington, a celebrated conservative academic known for writing the post-Cold War book The Clash of Civilizations. It mainly articulates different political and economic views on US foreign policy. Ultimately, the views found in FP are bound to define US interests.

EI is part of the Economist Group whose flagship is The EconomistThe Economist, founded in 1843 to oppose British trade protectionism, describes itself as “radical center.” Which for some means being “neo-liberal.”

The letter from FP was a request for me to take part in an invitation-only, in-person roundtable titled “Creative Approaches to Raising Revenue and Balancing Budgets.” This event was held on April 13, during the Spring Meetings of the International Monetary Fund and World Bank in Washington DC.

The invitation letter said that the roundtable discussion would “bring together a curated group of 15-20 leaders from government, including Finance Ministers from around the world, as well as private sector leaders and civil society experts.”

The roundtable sought to “explore how countries can tailor their approaches to financing in ways that don’t discourage innovation, what novel approaches to raising revenues are proving effective around the world, and what long-term budgetary risks are posed by taxation structures that inadvertently discourage productivity and growth.” The concept for the roundtable was well thought out.

More recent is an official invitation, a “VIP invite event,” from EI. This is about its Global Anti-Illicit Trade Summit, South-East Asia, taking place on May 18 in Manila.

The invitation letter states that the event “will unite leaders from business, government, law-enforcement agencies and civil society to examine what actions can be taken to combat illicit trade in South-East Asia.” The topics cover the scale of illicit trade in the region, the effects of counterfeit trade, consumer awareness and protection, and cross-border, cross-sector solutions.

The events of FP and EI, though done separately, are intertwined. An approach to FP’s “raising revenue and balancing budgets” is through minimizing illicit trade, which in turn enhances revenue collection. Meantime, EI says in its note accompanying the invitation letter that to combat illicit trade, “revisions of tax and excise levels… will be essential.”

Despite the relevance and appeal of the topics offered by FP and EI, I sent my regrets to the organizers. The reason: the tobacco industry supports both events.

The letter that FP addressed to me said that the “intimate invitation-only roundtable discussion… is hosted by Foreign Policy and Philip Morris International (PMI).” The EI’s summit is “supported by Japan Tobacco International” or JTI.

I belong to Action for Economic Reforms (AER), which has championed higher taxes on manufactured tobacco and related products like electronic nicotine device systems. AER’s position on tobacco taxes obviously conflicts with the stance of the tobacco industry. PMI in the Philippines and elsewhere has consistently opposed higher tobacco taxes. In a similar vein, the concept for the summit being supported by JTI supports “revisions of tax and excise levels.” That is clever language, which means lowering the excise taxes of, say, tobacco products to fight illicit trade.

Declining the invitations from FP and EI to attend events supported by PMI and JTI is an expression of my and AER’s support to the WHO (World Health Organization) Framework Convention on Tobacco Control (FCTC). The Philippines is a signatory to the WHO FCTC.

Article 6 of the WHO FCTC is about the “price and tax measures to reduce the demand for tobacco.”

Further, Article 5.3 states: “In setting and implementing their public health policies with respect to tobacco control, Parties shall act to protect these policies from commercial and other vested interests of the tobacco industry in accordance with national law.” The guidelines for the implementation of Article 5.3 recommend measures that “limit interaction with the tobacco industry.”

Nonetheless, the legally established tobacco corporations are concerned over tobacco illicit trade. Illicit trade hurts their bottom line.

Still, we make an important caveat. Citing the literature, Norman Maldonado-Vargas writes that “there is a historical involvement of the tobacco industry in the illicit trade as well as ongoing complicity.” (See “Health Taxes and Illicit Trade: Evidence and Courses of Action” from Health Taxes: Policy and Practice, edited by Jeremy A. Lauer et al., 2023.)

In the Philippines, the case of Mighty Corp. exemplified illicit trade being committed by the tobacco industry. In 2017, Mighty Corp. was caught using fake tax stamps, which led to tax evasion charges filed against it. It ultimately closed and was sold to JTI.

The tobacco industry, whose market share and profits are threatened by illicit trade, is pushing a bill that amends the Anti-Agricultural Smuggling Act of 2016. This is House Bill (HB) No. 3917, which the House of Representatives passed in December 2022. The bill has been transmitted to the Senate.

This initiative of the local players to have a tougher anti-smuggling bill that covers tobacco products ties in neatly with the global tobacco industry’s thrust of supporting the activities of high-profile intellectual hubs like FP and EI on raising revenue and combatting illicit trade.

One can posit that a segment of the tobacco industry, the government, and even the tobacco-control advocates have a common ground, despite their fundamental contradictions. Combating illicit trade is good for everyone, regardless of intentions of the different actors.

We can grant that the House bill against tobacco smuggling has good intentions for society as well. Rampant smuggling of tobacco products results in reduced tax revenues. It means access to cheaper and unregulated cigarette brands, thus undermining the health of people.

It seems bizarre though that the tobacco industry has agreed to the passage of a weak House bill on illicit trade. One would think that with its huge resources, it could have produced a well-designed bill.

Here are the major weaknesses of the House Bill (HB) No. 3917.

First, HB No. 3917 treats large-scale smuggling of “tobacco, whether manufactured or unmanufactured, including finished products such as cigars, cigarettes, or heated tobacco products” as part of the Anti-Agricultural Smuggling Act. To make manufactured goods like cigarettes or electronic cigarettes become an agricultural product is unbelievable. Smart people are incredulous that politicians contort the definition of what constitutes an agricultural good. Defining the smuggling of manufactured goods as part of anti-agricultural smuggling is subject to a legal challenge.

Second, HB No. 3917 has a narrow scope. The smuggling of tobacco products is but a subset of illicit trade. Smuggling in criminal law pertains to the clandestine movement of goods and people in and out of the country that the law forbids, such as evading taxes, duties, or foreign trade restrictions. Illicit trade is broader because it covers the activities prohibited by law that are done within the country’s borders.

As pointed out by the study of Austria and Villanueva (2021): “The decline in cigarette smuggling in the country implies that illicit trade is domestic in nature or sourced from within the country.”

Third, HB No. 3917 punishes equally all offenders, regardless of the gravity of participation or level of complicity in the smuggling of tobacco products. The bill targets persons that are identified with ownership or lease of assets or instruments used to smuggle goods. But some of these offenders who enable the smuggling may not necessarily be the principal culprit or main beneficiary.

The correct approach is to marginally differentiate the punishment or fines based on the gravity of various types of offenses. Penalties must be proportionate in their severity. Accomplices are light offenders and need not be punished as heavily as the principal actor or mastermind behind the crime. The bill must distinguish between the principal and the agent. And not all agents have a substantial role in committing the crime.

This is a way of preventing further collusion among those caught for perpetrating the crime.

Fourth, HB No. 3917 limits itself to increasing the fines and punishment but is not attentive to the role of enforcement.

The bill is silent about how to treat government authorities and enforcers involved in the crime. Those enforcers demanding harassment bribes must be punished severely.

Moreover, the bill’s approach is confined to increasing the penalty of imprisonment and fine. This is inadequate especially in the Philippine context of a weak State, where the probability of an offender (or a smuggler) getting caught and punished is low.

The standard economic thinking to explain the above goes this way: So long as the gains are greater than the costs linked to illicit trade, the perpetration of the crime (smuggling) will continue.

This is expressed in this equation: G (gains from illicit trade) > p (probability of enforcing punishment) x P (punishment or penalty expressed in monetary terms).

What the government wants to happen is to increase p and P so that the costs from doing illicit trade will be greater than the gains. Thus: G < pP.

The conventional approach is to focus on increasing P, like what HB No. 3917 is proposing. Raising p, on the other hand, is about improving the quality of enforcement, governance, and institutions. It is more complex than the simple act of increasing P.

But note that if the probability of getting caught (p) is zero or close to zero, even an increase in the punishment (P) will not deter the acts of illicit trade.

Further, P has an upper limit. For instance, the upper legal limit can be capital punishment. But to quote the American Civil Liberties Union, among evidence-based sources, “the death penalty has no deterrent effect on crime.”

A P that is too excessive is non-enforceable, apart from the fact that the law provides limited liabilities. Further, an excessive, arbitrary P can have the perverse result of lowering p, for it makes bribery or corruption more tempting.

Thus, for the Philippines, even if there is room for P to increase, more attention must be given to increasing the probability of enforcing the punishment or fine.

The matter of enforcement is what our rules, including legislation, must focus on. The government has a grasp of the enforcement measures to combat illicit trade. The government agencies have a menu of instruments.

Further, the papers of Austria and Villanueva (2021) and Jo-Ann Diosana and Filomeno Sta. Ana III (The Philippines: Case Study in Illicit Trade, 2020), among others, can provide illumination.

The discussion here can also guide entities like FP and EI when tackling revenues and illicit trade. But a more enriching, more nuanced, and more inclusive discussion can happen if the likes of FP and EI would avoid conflict-of-interest issues. This means being more sensitive to the FCTC, including the protocols in dealing with tobacco industry interference.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.