Driven by the urge to earn more non-oil revenue, the temptation to strengthen excise and custom tax collections invariably provides the lure for smuggling, reports Franklin Alli.

The temptation to strengthen excise and custom tax collections has been identified as strong factors aiding smuggling in a given economy.

This was the submission at a workshop on 'Economic Costs of Illicit Trade and Trade Concession,' organized by Initiative for Public Policy Analysis (IPPA), and Commerce and Industry Correspondents Association (CICAN), recently in Lagos.

According to one of the speakers, Mr. Martin Oluba, the President/CEO of Fronteira Limited, smuggling in many instances may not look good because it is breaking of the law, yet it may simply be necessary and inevitable because some market participants who feel cheated by policy makers' neglect of vital market information.

Driven by the urge to earn more non-oil revenue, the temptation to strengthen excise and custom tax collections invariably provides the lure for smuggling. Thus, the attraction, he opined, is that the higher the size of import duties that can be avoided, this meant big profits for those who could get the products into the country without paying excise, as they could sell them cheaper than those who paid it.

Oluba, while giving a peep into the international perspective, noted that excise and customs duties are just one aspect of the barriers to global trade which invariably hurt overall development. "Tariffs hold the ace to the promotion of both the crime of smuggling as well as the promotion of economic prosperity through enhanced trade. Market controls generally produces same effect. When prices are forcefully prevented from adjusting freely to the forces of demand and supply it leads to alternative (parallel) markets which is some approximation of the smuggling business: underground markets," he said.

The Executive Director, IPPA Nigeria, Mr. Thompson Ayodele, posited that effective trade either with our neighboring countries or outside the continent still remains a critical way to reposition Nigeria in terms of creating wealth and achieving economic prosperity. He further observed that trade becomes illicit when some people subvert the legal process in other to make profit. Trade, in this sense becomes counter productive and all stakeholders are affected.

Just as smuggling is detrimental to any meaningful development, trade concession that benefit few individuals will obviously distort the price of local products and becomes a political weapon to reward lackeys and punish opponents. Aside from that, those who are privileged to get those concessions may tend to use it to import items that do not contribute any meaningful development.

At best it will be another drainpipe on the economy.

He further asserted that smuggling is not only detrimental to the national growth but also constitutes a health hazard particularly when goods involved are consumables such as essential medicines, wine and spirits, software and household items. In many respects, smuggling undermined intellectual property and consequently discouraged innovation.

The economic impact of smuggling, he said, is huge. Local industries suffer huge economic loss as they lose a tremendous percentage of market shares to smuggled products. Government also suffers because smugglers naturally evade tax. Border security competes for financial allocation with other social services. Workers face job loss and legitimate manufacturers face huge economic disincentives.

A lot of substandard pharmaceutical products are smuggled. Many of them find their way into the market and ultimately to patients. Many household items also find their ways into several homes with huge health consequences. Many pirated copies of software find themselves into the market with huge financial loss on the innovators. What is most striking is that smugglers do not conform to local regulations, standards and health warnings and deprive others the fruits of their labor.

For instance, before 2004 in Nigeria, the incidence of counterfeit cigarettes was over 50 per cent. Smugglers largely served the local market. With combined efforts of local manufacturers, regulators and enforcement of standards, smuggling in the industry has been reduced to 10 per cent. That is why the current campaign to disrupt the activities of local manufacturers would end up reversing the gains already made in reducing smuggled cigarettes and ultimately allow smugglers to fill the vacuum that will be left.

Smuggling is a big business. Yes it is because it is driven by policies that make it difficult for people to set up business, the ever higher taxes, particularly when taxes and prices in neighboring countries are much lower. Weak criminal penalties, poor border controls, low arrest rates and corruption are reasons smuggling thrives. It is important that governments harmonise the exiting tax regimes and embark on economic policies that do not create conditions for illicit trade to thrive.

A corollary of this is arbitrary concessions that have done damages to local manufacturing sector. Between 2003 and 2007 about $2.2 billion was lost as a result of arbitrary granting of concessions to certain individuals and companies. It is noteworthy that the concessions were used to import items which did not contribute to economic development. Sadly, most of the items imported through concessions and waivers contributed little or nothing to Nigeria economic development. In actual fact, it created a disincentive to local manufacturers and government was short changed in the whole deal.

While we agree that concerted effort is needed to address illicit trade, eliminating what give incentive to smugglers is a sure way to start with. Smuggling survives on negative incentives created by prohibitive tariffs and unfavorable business environment which kill industries. Efforts made by regulatory agencies will achieve little if the business climate still stifles genuine manufacturers.

Acting General Manager, Nigerian Export Promotion Council, Mrs. Omowunmi Osibo, in her submission, noted that apart from undermining revenue accruable to the affected countries, and negatively affecting their economy and industrialization, smuggling dents the image of the country and is also capable of funding organized crime and terrorist organisations.

Using smuggling of counterfeit tobacco, for instance, Osibo observed: "when one compares the fact that even the tobacco that is produced by duly recognized bodies under current Good manufacturing practices coupled with current good laboratory practices in terms of pronouncing quality of such cigarettes still pose health hazard, the danger will be worse if duly recognized tobacco companies are off the scene as standard and more dangerous tobacco may increase in circulation again."

"It was estimated that 80 per cent of tobacco sold in Nigeria prior to the establishment of the British American Tobacco Company in Nigeria in 2001 was illicit. This could have translated to loss or revenue to government as well as having circulation of such products outside the radar of regulatory authorities," Osibo remarked.

Director General , Standards Organisation of Nigeria , Dr. John Akanya, in his presentation tagged 'Impact of Illicit Trade on the New Tobacco Standard,' pointed out that counterfeit and pirated products are being produced and consumed in virtually all economies worldwide with Asia emerging as the single largest producing region.

In recent years, there has been an alarming broadening of the types of products being pirated from luxury items (such as expensive watches and designer clothing) to items which impact on personal health and safety, such as pharmaceutical products, food and drink, personal care items, toys, cigarettes, and automotive parts.

Illicit trade in these products undermines the revenue base of original producers. It also sows the seed for irrationality in trade policy by creating resentment on the part of domestic producers against imports, thus strengthening the lobby for protection.

A new dimension in illicit trade, he disclosed, has been the use of free trade zones as a platform for expanding counterfeiting and piracy operations. Passing merchandise through zones it is said provides opportunities for parties to manufacture and repackage counterfeit items and to "sanitize" shipping documents in ways that disguise their original point of manufacture.

They also allow parties to essentially establish distribution centres for smuggle goods. In addition, the Internet is providing smugglers with a powerful new tool to sell their products, via auction sites, stand - alone e-commerce sites and e - mail solicitations."

On the adverse effect of illicit trade, Akanya noted for instance, that activities of smugglers steal market share from legitimate businesses and undermine innovation, which is key to economic growth.

Continuing, the SON DG said that the economic gains that some consumers seek to experience by knowingly purchasing lower priced smuggled products when considered in a broader context, showed that many consumers do not actually experience such gains, as they are usually worse off in the long run.

"Governments are also directly affected as tax revenues from such trade are lost and huge costs are incurred in combating the practices by the relevant authorities," Akanya said.

Giving an insight into the environmental implication, he noted "First, the growing volume of seized goods raises environmental issues since destruction of the goods can be a costly process that creates considerable waste. Secondly, substandard counterfeit products can have environmentally damaging consequences including pollution. A case in point is the chemical industry, which has many documented cases where the use of counterfeit fertilizers caused serious damage to the environment."

The health of consumers, he further stated, is also at risk, noting that the industries where health and safety effects tend to occur include: automotive, electrical components, food and drink, chemicals, toiletry and household products, pharmaceuticals and tobacco products. It should be noted that while consumers who knowingly purchase such items have little recourse as warranties and money back guarantees are not generally offered for smuggled products, especially counterfeited ones.

The Nigerian Customers Service, PRO Mr. Wale Adeniyi, who spoke on 'Economic Gains of a Secure Border,' has a massive land borders totaling 4,047 surrounded by Benin Republic, Cameroon, Chad, and Gulf of Guinea. Out of this figure, the nation has only 67 approved border stations established for the purpose of conducting export and import items into the country.

Most of the borders, he said are very porous, and very difficult terrains make effective search challenging, stressing " in US/ Mexico border , for instance, aircrafts patrol the border and report to law enforcement agents on the ground."

At the end of the one day forum, stakeholders concluded that smuggling thrives because of high import duties and protective concession granted to some industrialists by government, ban and high cost of doing business. The gainers are the smugglers who evaded duties and thereby fleecing government of revenue that runs into billions of Naira.