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Thank you for the opportunity to comment on this proposed rule. We are writing today to offer the Food and Drug Administration what we have learned about the inbound international smuggling of combustible cigarettes. We would also like to share a few general observations about illicit markets in hopes that the FDA will consider them.
Background and Credentials
As background, the authors are economists who have each dedicated more than two decades to the study of cross-border economic activity. This work has included statistical analyses of the illicit trade in combustible cigarettes, as well as liquor and wine tourism shopping and the impact of right-to-work laws in counties that are directly adjacent to counties in states without such protections.
We have also contributed to the book, “For Your Own Good: Taxes, Paternalism and Fiscal Discrimination and the Twenty-First Century.” Our own chapters in the book addressed de facto cigarette prohibition (LaFaive) and product quality substitution (Nesbit), two subjects that bear on the proposed rule and its unintended consequences.
On pages 219-222 of the proposed product standard, the FDA takes pains to argue that should an illicit market develop or expand in response to the standard, it will not be a problem. This is based in large part on the belief that moving illicit product across international borders is a greater challenge than moving legal product state-to-state. Specifically, the FDA:
requests comments, including supporting data and research, regarding whether and to what extent this proposed rule would result in an increase in illicit trade in NNC cigarettes and certain other combusted tobacco products covered by the proposed nicotine product standard and how any such increase could impact public health. Data or other reliable information that do not rely on estimates of current, interstate tax-evading illicit trade would be particularly relevant.
We appreciate the opportunity to ask the FDA’s assistance in obtaining data necessary to make such estimates.
The statistical model we use annually to measure the illicit trade among states contains variables for the Mexican and Canadian borders. We have previously informed the FDA that, given existing data limitations regarding ports of entry and bonded warehouses, our model misattributes cross-border smuggling activity to the Mexican border. It is likely, though, that much of the measured cigarette smuggling along the Southwestern United States arrives through official ports of entry and is diverted as it proceeds through related bonded warehouses. We have attempted to resolve this data shortcoming for years, but our best attempts to do so with assistance from customs have failed.
Background on Research Data
In June of 2021, I (LaFaive) successfully spoke by phone to the Director of Cargo Security and Controls at U.S. Customs and Border Protection. My goal was to obtain data on combustible cigarettes passing into the United States. I also sought data on cigarettes imported into the United States and slated to be exported elsewhere still. I even offered specific tariff codes.
To my delight the director told me that that data were available. He further told me to submit a formal Freedom of Information Act request to Customs and Border Protection, as any such request would land on his desk. I did as he instructed but received what I viewed as non-responsive responses. I tried to follow up with the director of cargo security via phone afterward, but he did not respond.
This is where the Food and Drug Administration can assist. We ask the FDA to use its intergovernmental influence to obtain the data we originally sought, and perhaps even more. If the director of cargo security is correct that such data exist, making this information available could open the door to a wide range of new scholarship that would benefit decision makers at the FDA and elsewhere.
We wish to emphasize that we are not making the request for our exclusive benefit. Rather, we recommend that such data – perhaps expanded to include menthol- and vape-specific categories – be made available to the public on an annual basis. This would allow scholars of every stripe new, rich and robust sets of data on which to investigate policy questions of great importance.
The first use of such information seems obvious to us: to create a baseline estimate of internationally smuggled smokes and perhaps other tobacco products. If the proposed rule is adopted, the FDA and others may see in subsequent years empirical evidence to support their contention that “establishing and maintaining illicit markets in relevant tobacco products will be challenging, and to the extent that they emerge, it is unlikely they will be significant enough to outweigh the benefits of the product standard.”
We will post below the Freedom of Information Act request we submitted to U.S. Customs and Border Protection in 2021. We are willing to work with the FDA to create a more expansive dataset request to aid in scholarly research on this vital topic, and perhaps others.
We also would like to share with the FDA several observations and valuable context.
First, there is no explicit mention in the proposed product rule about the era of actual alcohol Prohibition. Liquor was a far heavier and more difficult product to traffic into the United States than tobacco products, and yet Canadian whisky simply flooded into the United States. Moving cigarettes or other tobacco (and vaping) products over U.S. borders will be much easier.
In his book, “Last Call,” Daniel Okrent reports that within the first seven months of Prohibition, “900,000 cases of liquor found their way from Canadian distilleries to the border city of Windsor, Ontario. This worked out to 215 bottles of booze for every man, woman, and child in the area.” Clearly the booze wasn’t meant only for consumption there. Instead, much of it was to be exported to the United States. And it came across the border in creative ways.
The following is a description of how bootleg alcohol arrived from an appendix in our 2008 study on cigarette taxes and smuggling:
Alcohol from Canada arrived in Michigan by every means imaginable — not just planes, trains, automobiles, trucks and boats, but also underwater sleds (Graphic 25) and at least one funeral hearse. During the summer, every sort of marine craft worked the mile of river separating Michigan and Ontario, either hauling whisky from Canada or trying to prevent it. During the winter, ice skiffs (essentially sailboats mounted on long running blades) plied the frozen portions of the Detroit River.
Will a de facto prohibition of combustible cigarettes — as the FDA proposes — result in a massive increase in illicit trade? We believe so. Historical, theoretical, and statistical evidence suggests there would be a large increase in an illicit market for cigarettes should the proposed rule be adopted.
There are more modern-day experiences on which to draw for additional insight. In 2022, California imposed an effective ban on menthol and other characterizing flavors in combustible cigarettes and other tobacco products. To gauge the impact of the law, a tobacco industry participant financed a 2023 study of discarded cigarette packages and other tobacco products in that state.
The study, conducted by the WSPM group, found that of the 15,000 packs recovered in cities across the Golden State, 27.6% were not intended for the U.S. marketplace or from foreign countries.
In 2017 the General Accountability Office wrote an entire report about the abuse of duty-free stores by cigarette buyers who would then illegally divert the cigarettes. Buyers included transnational crime syndicates, including Mexican drug cartels.
Despite a ban on menthol smokes and competition from neighboring U.S. states, 4,138 cigarette packs that were collected in California came from outside the country. Of those, 19% were menthol.
It is worth noting that other federal agencies have supplemented the 2017 GAO study of transnational crime related to cigarette smuggling. The U.S. State Department published in 2015 a study titled, “A Global Illicit Trade in Tobacco: A Threat to National Security.”
If two government agencies have warned about the illicit international trade, perhaps a third, the Food and Drug Administration, should weigh their warnings more carefully than it seems to have done thus far in the proposed rulemaking process.
We share the FDA’s interest in obtaining the very best data and scholarship available on the impact of reducing the nicotine content, particularly as it relates to illicit markets. To that end, we ask your help in obtaining data from United States Custom and Border Protection. Their data may be the best available in measuring the volume of combustible cigarettes that flow into the United States. We hope such data will be made available to all scholars, not just us.
While the proposed rule appropriately raises the fear of illicit markets and seeks more data and insight, we believe that it also too quickly dismisses the threat of large-scale smuggling. The history of international smuggling, the powerful incentives to engage in it, economic theory and supporting statistical evidence all suggest that the FDA incorrectly minimizes the threats from illicit trade that would result from a ban on flavored tobacco and vaping products.
We believe that there will be a massive uptick in smuggled smokes and other related products as well as other unintended consequences from the FDA’s proposed rule. We would be happy to prove ourselves wrong, but that requires high quality import and other data that perhaps only the FDA could help us obtain.
Very sincerely yours,
Michael LaFaive
Senior Director of Fiscal Policy
Mackinac Center for Public Policy
Todd Nesbit, PhD
Assistant Professor of Economics
Ball State University
Attachment: 2021 FOIA
Attn: FOIA Officer
June 17, 2021
I spoke to James Swanson, director of Cargo Security and Controls at US Customs and Border Protection two weeks ago and he instructed me to start my request by filing this FOIA. I will copy him under a separate email.
Pursuant to the Freedom of Information Act (5 U.S.C. §552), I am making the following request:
1. A list of all bonded warehouses and foreign trade zones (“FTZs”) and their physical addresses under your jurisdiction through which cigarettes pass in 2019. Please note that not all bonded warehouses or FTZs may process cigarettes.
2. The total volume and dollar value of all products that pass through each respective bonded warehouse or FTZs that handle cigarette traffic as tracked by CBP in 2019.
4. The information described in items 1-3 above for each respective bonded warehouse or FTZ, but for only the information relating to cigarettes that are received from foreign sources into bonded warehouses or FTZs with the declared intention of being exported to countries other than the United States in 2019.
To aid in your search, note that under the “Harmonized Tariff Schedule” Heading/Subheading (tariff code) 2402.20 covers “Cigarettes containing tobacco” and includes tariff codes 2402.20.80 00, 2402.20.90 00 and 2402.90.00 00. In addition to these codes I would like to request the same data for Heading/subheading/tariff code 2403, excluding the subheading 2403.11.00 00.
If possible, I would like the data broken out by these specific tariff codes so I can determine how many cigarettes enter the United States through bonded warehouses and FTZs.
I ask that the materials be provided to me electronically and, if possible, in an excel spreadsheet format. My email is lafaive@mackinac.org. If you have any questions for me, or would like me to clarify any portion of this request to make your search easier, you can contact me at that address or call my cell at 989.430.8669.
This information will be used for educational purposes only. The Mackinac Center for Public Policy is a private, nonpartisan, independent, nonprofit research and educational organization recognized under Internal Revenue Code as a 501(c)(3) organization. Please enclose a bill, if necessary, for any charges pursuant to your office’s rules for nonprofit organizations.
Thank you for your consideration of this request.
Sincerely,
Michael LaFaive
