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December 1st, 2017

5 Years of Plain Packaging – 5 Years of Failure

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Five years ago today, plain packaging for tobacco was introduced in Australia. Since then, many countries have followed, but perhaps it is better to take a look at the consequences it had in Australia – the results are rather abysmal, as this paper by W. Scott Thurlow, a lawyer from Ottawa, shows:

The Australian plain packaging legislation was implemented in December 2012. Since then, branding on tobacco packaging has been banned. Trademarks, logos, non-prescribed colors and graphics have been removed from packs, and only the use of a brand name in a prescribed font and size is allowed.

The tobacco control lobby claims that plain packaging is likely to lead to improvements in public health at no cost to anyone but the tobacco industry. But:

  • There is no evidence that plain packaging has achieved (or is likely to achieve) any public health benefits;
  • It is disproportionate, unjustified and unnecessary;
  • It has widespread negative consequences; and
  • It risks breaching legal rights as protected by various laws and treaties.

Consumers do not choose to smoke based on branded cigarette packaging, but consumers do use branding to identify differences between products, including between legal and illegal brands.

Does plain packaging work?

Simply put, it does not.

The Australian government collects data on national smoking behaviour every three years as part of its National Drug Strategy Household Survey (NDSHS). The most recent batch of data is from 2016, and reports no statistically significant decline in the overall daily smoking rate between 2013 (12.8%) and 2016 (12.2%). This is the first instance of no decline in 23 years. How can plain packaging be said to work when the smoking rate has not declined following its introduction?

The market share of illegal tobacco increased by nearly 30% within the first two years of plain packaging being implemented in Australia in 2012. Today, the market share of illegal tobacco remains over 20% higher than pre-2012, representing 13.9% of tobacco consumed in Australia and representing approximately $1.6 billion AUD in lost tax revenue to the Australian Government according to the KPMG Report – Illicit Tobacco in Australia – Full Year 2016.

When all packs look alike, consumers become less aware of brand differences. This is known as ‘commoditisation’, which often results in consumers prioritising price over other quality concerns. This plays directly into the hands of the illegal tobacco trade, which does not pay taxes or maintain quality standards, and can thus charge significantly lower prices for cigarettes.

The growth of the illegal tobacco market undermines public health, as its cheaper products encourage initiation and consumption, while its sellers do not restrict their sales to adult consumers. By fostering an unregulated, untaxed marketplace, plain packaging also results in significant impacts on tax revenue, the business climate, and public security.

An increase in illegal tobacco benefits criminals, who are often sophisticated, organised, and connected with other nefarious forms of trafficking, corruption, and illicit activity.

The experts agree and just a few examples will prove the point. Her Majesty’s Revenue & Customs (HMRC) from the United Kingdom states:

The smuggling of cigarettes and hand-rolling tobacco is also a key business for organized criminal gangs who use the proceeds of this crime to fund the smuggling of drugs, weapons and also human beings.

Meanwhile, the European Commission:

Illicit tobacco trade is not only an economic issue. In addition to significant damage to national… revenues, the illicit trade fuels the shadow economy. In fact, it is almost exclusively the domain of organised criminal groups operating across borders.

The illegal tobacco trade can copy plain-packaged cigarettes with much more ease than they can copy branded packs. Without worrying about trademarked colours, fonts, and images, illegal tobacco manufacturers have a significantly easier task in manufacturing products that look and feel like their legal counterparts. Plain packaging regimes provide a government produced blueprint from which criminals can replicate a generic, brand-free package.

The case of Australia is a clear example of a failed policy with serious negative consequences, as it is the illegal tobacco trade, for which no one takes responsibility. Senator Eric Abetz, who sits on a parliamentary committee running an inquiry into illegal tobacco, stated that “When you try to pin down a department or group they tend to be able to slip out of your grasp and go ‘that’s somebody else’s fault’.”

A government that regulates tobacco appropriately – implementing evidence-based laws that benefit public health while allowing legal industries to compete fairly – protects both the health of its citizens and of its economy. Branding protects our legal economy and tax revenues from criminals.

Plain packaging prevents consumers from differentiating between legal and illegal products, which results in a sharp increase in illegal tobacco and a sharp decline in tax revenues.

Globally, illicit tobacco deprives governments of $40 billion per year.

Branding rights are also an essential component of a fair and competitive free market economy. Plain packaging deprives legal businesses of the ability to compete fairly and deprives consumers of the ability to make informed choices.

These abilities are pillars of a robust free market economy, and maximise economic output for consumers, industry, and taxpayers.

Plain Packaging sets a negative precedent for the country on the protection of intellectual property rights.

This creates doubt about a country’s commitment to this important intellectual property principles, and in turn, its reliability from an investment perspective.

There are several implications on trade, such as:

  • Australian plain packaging legislation is being challenged by a number of countries at the WTO.
  • These countries have sought redress as they believe it breaches WTO rules.
  • The WTO dispute settlement process, including the final decision of the Dispute Settlement Body and a likely appeal to the WTO Appellate Body, is yet to be completed.

The economic contributions of tobacco in the meantime are immense:

  • $328 Billion in annual global tobacco tax revenues.
  • 15 million farmers and 1.6 million manufacturing jobs: $260 billion total global productionvalue.
  • 14 million retail outlets: $792 billion in annual global sales.

A Better Way to Reduce Tobacco Use

If Governments are serious about reducing tobacco consumption then it is time to consider alternative evidenced-based measures available to achieve the same public policy objectives, which are less restrictive, more targeted and proportionate.

Globally, harm reduced products, such e-cigarettes and tobacco heating products are offering consumers a safer option. Jurisdictions, such as the United Kingdom, have taken a progressive approach to regulation and reaping the benefit of enabling consumer choice for alternative harm- reduced products.

Unlike Australia where there is a ban on e-cigarettes and which has pursued punitive policies such as plain packaging, the United Kingdom has encouraged smokers to transition to harm-reduced products. The result could not be starker. Since e-cigarettes became mainstream in 2012, the adult smoking rate went into sharp decline (after a period of it barely moving), falling from 20.4% to 15.8% in 2016. A drop of 4.3% in four years. In comparison, there has been Australia no statistically meaningful decline in its smoking rates since the introduction of plain packaging. The first time in over twenty years.

To date, an oft repeated mantra is that the domino effect will see such brand restrictions spread from tobacco products to other industries.

Speaking to the International Trademark Association (INTA) on the Australian experience, Corrs Chambers Westgarth’s Stephen Stern noted that “health experts are now advocating a similar approach be taken in other industries, specifically on alcoholic products and sugar intensive foods.”

He warned that, based on the tobacco experience, industries that come under attack in this way cannot assume that the law will help them fight back, noting that the anti-tobacco backlash had seen legal challenges to Australia’s plain packaging brushed aside.

“We should have won on the legal arguments, but I didn’t really think we had a chance. If it was any other industry we would have.”

Stern also lamented that other companies remained quiet when the issue was being debated, for fear of being associated with tobacco. “As a result of not getting any assistance in their lobbying, tobacco companies were on their own and they lost.” However, many of those other companies could now face the spectre of plain packaging.

Stern advised that industries not seek to make concessions in a bid to ward off legislation: “The tobacco industry has been under attack for decades and has made concessions but it has been a salami effect, whereby it is sliced and sliced until not much remains. Appeasement just doesn’t work.”

Stern issued a rallying cry for brands to “take a stand now”. It may be too late for tobacco companies, but should plain packaging spread to sugar-based foods and alcoholic products, he warned; “It won’t stop there.”

W. Scott Thurlow is a lawyer from Ottawa, Canada.

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The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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