BOOTLEG WHEEZE THAT'S COSTING THE EXCHEQUER A PACKET

There could be lessons to be learned from Canada's experience of combating
the cigarette smugglers, reports John Ivison in North America

A NUMBER of years ago, I interviewed for a job at a newspaper in Cornwall,
Ontario, a sleepy town mid-way between Montreal and Toronto.

Nothing much ever happens there, but the town was woken from its somnolence
just before I arrived. Someone had taken a pot-shot at the mayor after - in
an unguarded moment - he made public his opposition to the local cigarette
smuggling trade.

This was particularly ill-judged because smuggling provided the staple
income of the restless, and heavily-armed, native Indian reservation.

My reason for bringing this up is to give some indication of how serious a
business cigarette smuggling was in Canada in the early nineties. The reason
it was particularly acute was because Canada had pioneered a policy of
punitive taxation on smokers which saw the cost of a packet of 25 wheezers
double to around $$6.50 (Canadian) in Ontario (prices varied in different
provinces).

Despite the subsequent failure of this policy, it has surfaced again in
official circles as the panacea to cut global tobacco consumption. Late last
month the World Bank released a report arguing that increasing cigarette
taxes was a good way to cut smoking.

Defying its customary line of opposition to government intervention in the
marketplace, it said that there was a solid case for tobacco taxes as an
instrument of health policy and that price increases were highly effective
in reducing demand. It estimated that a 10 per cent price increase worldwide
would cause 40 million smokers to quit and prevent at least 10 million
tobacco-related deaths.

Loath as I am to align myself with the angels of death in the tobacco
industry - it is a bit like saying Peter Sutcliffe was nice to his mum - the
Canadian experience with cigarette smuggling does not support the World
Bank's case. The increasingly violent smuggling trade, centred on Cornwall,
saw millions of dollars of cigarettes shipped over the border from the
United States without any duty being paid. The success of the smuggling
operation was in no small part due to the connivance and, in many cases,
actual participation of the tobacco industry.

Cases now making their way through courts in Canada and the US reveal that
the major tobacco companies sponsored the business and knowingly supplied
the smugglers. RJR Macdonald, a subsidiary of RJR Nabisco, admitted in
December that it smuggled more than US $$600 million worth of cigarettes
into Canada.

The company paid a $$10 million forfeiture and a $$5.2 million fine.

Don Brown, chairman of Imperial Tobacco, part of the Imasco conglomerate,
told a court that after years of fighting against high taxes the company
decided that if you can't beat the smugglers you might as well join them.

The government, faced with lax tax evasion laws and a police force often
unwilling to act against heavily-armed smugglers, was forced to repeal much
of its tax legislation and the price of a packet fell back to around the $$3
(Canadian) level. Overnight, the smuggling issue was resolved and smugglers
are now more involved with liquor.

Anti-smoking policy in Canada is currently centred on restricting tobacco
advertising and more modest tax increases. However, the US has decided to
ignore the Canadian model and increase federal cigarette taxes by about $$2
(US) a pack, arguing that it has stronger penalties for smuggling and the
resources to enforce laws.

Larry Summers, the soon-to-be new Treasury secretary, defended the law by
saying that the fact 80 per cent of the Canadian population lives within a
two-hour drive of the US border made smuggling easier. "The dispersal of the
US population means that a US resident is less likely than a Canadian to be
able to cross the border routinely for casual cigarette smuggling," he said.

The US may be able to hermetically seal itself from the rest of the world,
but the explosion of cross-Channel traffic suggests that the UK cannot.

Tobacco companies sifting through the litter on football terraces have
discoveredthat one in five discarded packs was a bootleg import - a figure
which, if extrapolated, would cost the exchequer UKP1.5 billion a year in
lost excise.

Small wonder when the average cost for a pack is UKP3.90 in Britain, but
only UKP1.70 on the Continent.

The smugglers in this case may be toting nothingmore deadly than a Yorkie
barbut the effect on thenational coffers is the same.