Confronting illicit trade to boost legitimate commerce

International trade is key to mutual prosperity among nations across the globe. Through the steady exchange of goods, services, knowledge, and capital, trade stimulates economic growth and development, creates job opportunities, increases productivity, and encourages innovation.

As no single country possesses all the resources in the world, international trade enables countries to capitalize on their comparative advantages, allowing the efficient production of specific goods or services. It is a two-way street that offers a wide range of economic, social, and political advantages to participating economies.

Illicit trade, however, undermines the expected benefits gained from international trade. Illicit trade, which involves smuggling and counterfeiting, poses enormous challenges as it leads to revenue losses for governments, undermines legitimate markets and results in job losses, poses health and safety risks to the public, and erodes confidence and trust — not just in brands but also in institutions’ efforts to combat corruption. Worse, as the geopolitical landscape changes, illicit trade can lead to other illegal activities like money laundering and organized crime.

During the COVID-19 pandemic, consumers and regular businesses that turned to e-commerce because of its broadened market reach were confronted with increased challenges regarding which products were genuine and which sellers were legitimate. Indeed, counterfeit and substandard goods do not only compromise the health and safety of consumers. They also damage the reputation of legitimate businesses.

A 2019 report by the Organization for Economic Co-operation and Development (OECD) and the European Union’s Intellectual Property Office highlighted that trade in counterfeit and pirated goods has been continuously increasing and, in fact, accounted for 3.3% of global trade. That figure is enormous in absolute terms.

The products that are the most susceptible to illicit trade are those with high demand and can be easily transported and concealed, such as tobacco products, alcohol, luxury goods, and medicines. Goods that are subject to high taxes are also vulnerable to illicit trade as some consumers may opt to turn to the black market in search of cheaper alternatives.

The Philippines is no stranger to this kind of unlawful act.

The Bureau of Customs (BoC) reported that its anti-smuggling operations during the first half of 2023 led to 603 seizures worth P23.851 billion. Specifically, counterfeit products, agricultural products, tobacco products, illegal drugs, and general merchandise were the top commodities seized.

In May, Bureau of Internal Revenue (BIR) Commissioner Romeo Lumagui, Jr. also stated that tobacco products are regarded as a major category of smuggled goods in the country. He added that due to the huge revenue losses for tobacco, the BIR has not been able to attain its collection target for excise taxes. Mr. Lumagui noted that for the first four months 2023, the BIR registered a 20% shortfall in the collection of excise tax, a large part of which is attributable to tobacco.

In this case, the tobacco industry is an important sector in the Philippines as it provides employment opportunities for Filipinos, particularly farmers in rural areas where agriculture is a vital source of livelihood. Moreover, as the sector generates jobs and livelihood opportunities, it can contribute to providing income security and enabling business growth.

However, as a result of the elusive nature of illicit trade, it is equally challenging to determine its actual extent in terms of volume and value, as well as the exact tax revenues evaded from government. In the end, those at the losing end are governments, legitimate businesses, and consumers alike.

Jesus L. Arranza, who chairs the groups Fight Illicit Trade and Federation of Philippine Industries, noted in 2022 that “smuggling is creating unfair competition for locally produced goods because it erodes the local market [with] cheaper, no value-added tax or undervalued and substandard imported goods displacing the locally produced commodities.”

This worsening situation calls for persistent efforts by all stakeholders involved — from governments and international organizations to businesses and civil society organizations — in effectively enforcing the law, strengthening legal and regulatory frameworks, and promoting public awareness. At the end of the day, the main objective is to protect the welfare of both consumers and legitimate businesses from unlawful and unfair economic activities.

However, the imposition of higher taxes on goods and services, which is the conventional route of the government, does not by itself automatically solve the persistent problem and may, in fact, even intensify the growth of illicit trade in the country as prices go higher. Taxation is formula-driven but confronting the problem of illicit trade may depend more heavily on law enforcement.

By effectively formulating, implementing, and improving measures to address illicit trade while promoting legitimate trade, countries can harness the full potential of their inherent strengths for the benefit not only of their constituents, but also the global economy as a whole.

Trade remains a vital driver of economic growth and development that in turn provides legitimate opportunities for employment, poverty reduction, food security, and innovation. To protect trade, the government and the general public need to be vigilant about the sinister forces operating behind the shadows of corruption, smuggling, counterfeiting, and other underground transactions. These activities undermine our efforts toward good governance. Our collective future depends on how effectively the government and the people jointly keep a watchful eye on, and curb, illicit trade.

Venice Isabelle Rañosa is a research manager at Stratbase ADR Institute.