Central America's now has to fight against drug traffickers' contraband of cigarettes.

BY MATTHEW OSTER
Euromonitor International

As Central America's long drug war shows no signs of waning, the region's governments are facing a spillover crisis, as narcotraffickers are further diversifying into contraband cigarettes. By doing so, gangs are, ironically, taking advantage of successful public health laws that aim to cut smoking prevalence in these countries. But governments are looking to fight back with anti-contraband laws and cross-border coordination that look to raise awareness and curtail these illegal products.

Contraband cigarettes take the same form throughout Central America: products that have avoided customs duties and other taxes, allowing them to be sold at much lower prices than legal alternatives and undercutting legal cigarette producers in the region in the process. It has been estimated that cigarettes represent around 50 percent of all confiscated contraband in Guatemala, with other countries in the region reporting similarly high levels of illicitly traded cigarettes.

The success of illicit cigarette sales has caused at least one major cigarette producer to severely cut back on its operations in the region. In October 2012, Philip Morris announced that it was going to leave Guatemala after almost 50 years in the market through its subsidiary Tabacalera Centroamericana SA, citing the region's inexhaustible supply of illicit cigarettes. According to Euromonitor International, in Guatemala, contraband sales in volume terms represent almost 30 percent of the total sales of cigarettes.

The allure of illegal cigarettes has ramped up in recent years as Central American countries have passed, and more strictly enforced, anti-tobacco legislation. In May 2012, Costa Rica approved a wide-ranging law that, among other things, placed upward price pressure on legal cigarettes in the form of increased taxes on all cigarette sales and higher production costs from the inclusion of graphic photos on all packs.

Without correspondingly strong anti-contraband enforcement, it is expected that such legislation will result in a jump in illicit sales. A dramatic increase in cigarette taxes in the Dominican Republic in 2007, for example, caused a one-year jump in illicit cigarette sales by almost 350 percent in volume terms, according to Euromonitor International. The market for illegal cigarettes in Costa Rica also spiked in 2012 after the law was passed, growing by 19 percent over the year in volume terms, with strong growth expected over the five-year forecast window. As many Central American cigarette consumers are quite price-conscious and familiar with where and how to buy illicit goods, laws intended to make cigarettes more expensive for the consumer have had the paradoxical effect of stimulating the contraband market.

However, rather than accepting this unpleasant dichotomy, the region's governments have recently begun to take a hard stance on combating contraband directly. Guatemala formed a national commission to draft initiatives to prevent and combat contraband and reformed its customs laws to include increasing funds for border enforcement, more personnel on major cross-border routes popular among traffickers, and more economic development for border areas to make citizens of these regions less susceptible to bribery and payments from organised criminals.

For its part, Costa Rica is experimenting with including bar codes on packs of cigarettes to be able to track merchandise more effectively and protect against lapses in customs enforcement. Such codes would be linked through a national system, where enforcement agents could scan packs throughout the country and recognise immediately whether the products entered the country illegally. In addition, the country is currently ramping up penalties for contraband cigarettes, as mandated in the May 2012 anti-tobacco law.

At the same time, the countries of Central America are coordinating at a regional level to harmonise each country's individual efforts and ensure that gangs are not taking advantage of areas of weak enforcement to infiltrate the region as a whole. SICA (Sistema de la Integración Centroamericana), the principal economic and political body for the region, is drafting the plans for further legal and enforcement collaboration and is expected to release its recommendations in early 2013.

It remains to be seen what effect such plans will have on the flourishing illegal trade of cigarettes. The lessons of the failed war on drugs are still vivid, but at the very least cigarette producers in the region are encouraged by their governments' increased resolve on this issue and are hopeful that through a more comprehensive effort, they can compete on a more level playing field.

Matthew Oster is a Latin America research analyst at Euromonitor International.  This article was written for Latinvex.

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