Taming illicit trade to save economy, protect local manufacturers

These were some of the submissions of participants at a roundtable in Lagos to discuss factors responsible for illicit trade and the associated dangers.They admonished the Federal Government to move against the anti-business act to boost its revenue, save investments and protect local firms against unhealthy competition.

The event themed ‘Business Environment: Maximising Economic Opportunities through Effective Anti-Illicit Trade Enforcement’ was organized by Initiative for Public Policy Analysis (IPPA) in Ikeja, and attended by government officials, private business operators and experts across professions.In his presentation titled: “Business Environment and Illicit Trade: Linkages and Evidence”, Dr. Olajide Damilola, of the University of Aberdeen (U.K) dwelt extensively on how certain government policies, conditions within local market and weak enforcement of the relevant law drive local producers underground, giving rise to illegal trade.

“Illicit trade is a threat to global economy. It is estimated to account for 8 percent – 15 percent of global Gross Domestic Products (GDP), and reaching $12 trillion in 2014 (World Economic Forum 2015).It cuts across a wide range of consumer goods and brands, including electronics, apparel and alcoholic drinks, vehicles and auto parts, drugs, arms, pharmaceuticals, cigarettes, counterfeit currency as well as humans, impacting virtually every product, industry, and country,” he said. Olajide told the forum that actors of illicit trade could be individuals, industry or governments, citing China as a major source of counterfeit goods and North Korea as indulging in illicit trade involving drugs, arms, and counterfeit currency.

On what drives illicit trade, the researcher said they could be grouped into consumer preferences, business environment and regulatory framework. “It revolves around consumers, producers and the government. It thrives mostly because consumers want lower priced goods, have limited knowledge about the products and socially accept them. “In the business environment, the menace is driven by high excise taxes, among others. Failure on the part of relevant government agencies to effectively check activities of smugglers and other saboteurs make the crime to flourish to the detriment of national economic development.”

On the effects of the illegal trade, the expert said it favoured the perpetrators against national interest.“Illicit manufacturing represents a revenue source for some input suppliers. High profit margins attract some manufacturers to it while consumers encourage the illegality because it makes them to have access to lower prices and greater brand variety. More illicit activity sometimes translates into lower unemployment and less demand on public funds.”

But the affected products “pose serious health risks to consumers, reduce tax revenues, increase instability, reduce market share and capacity of local businesses, just as they damage brand image of licit manufacturers. No matter the volume of transactions, underground economy does not reflect in country’s Gross Domestic Product (GDP).
Olajide, a research fellow with IPPA, who noted that illicit trade may never be eradicated but can be protected against because it is complementary to legal trade, advocated a holistic approach that transcends national borders in dealing with the problem.

Unfortunately, Nigeria may not be benefitting adequately from the information and expert counsel offered by the Global Illicit Trade Environment Index (GITEI) developed by the Economic Intelligence Unit, United Kingdom, because it is yet to be included among the countries in focus.According to Olajide, the GITEI measures the extent to which the environment enables illicit trade that economies create through action and inaction across four main areas: government policy; supply and demand; transparency and trade; and Customs environment.

“GITEI does not score an economy’s performance or effectiveness in combating illicit trade. The index evaluates 84 economies on their structural capability to protect against illicit trade. Nigeria is not yet included.It follows governance approach based on the laws, regulations, systems and their effectiveness in contributing to the regulatory environment.”He explained that government policy measures the availability of policy and legal framework for monitoring and preventing illicit trade; supply and demand measures the domestic environment that encourages or discourages the supply of and demand for such goods; transparency and trade assesses economies on their transparency regarding illicit trade and the degree to which they exercise governance over their free-trade zones (FTZs) and transshipments; while

Customs environment measures how effective an economy’s customs service manages its dual mandate to facilitate licit trade while also preventing the illicit one.‘Each of the 84 economies receives an aggregate index score (%) in and ranked accordingly. High ranked countries are those that have successfully curbed illicit trade in all its ramifications while low ranked countries are those struggling to curb it. The highest ranked are a handful of European countries and three other western countries while 10 lowest ranked economies are a group of developing countries from all regions of the world.

“For highest ranked economies, important contributing categories are customs environment, government policy, and transparency and trade. But for lowest ranked economies, only customs environment is important.”To him, there may be no single framework to tackle the menace, therefore, a case-by-case approach for each product will be more effective. “The problem is global in nature, there is need for international cooperation and harmonization of laws and regulations beyond national borders.”

The Executive Director of IPPA, Thompson Ayodele, took the participants through the business environment in Nigeria with a view to unraveling obstacles to attracting investors into the country and reasons some investments failed, which could also trigger illegal trade. He listed infrastructural inadequacy, policy inconsistencies, corruption, insecurity, bureaucratic bottlenecks, disrespect for rule of law and occasional lack of political will to implement business-friendly policies.

Ayodele, represented by Olusegun Sotola, a research fellow with IPPA, said in such an adverse environment, companies operating legally as net economic contributors deserved government encouragement, and protection of their goods and services from losing commercial viability to perpetrators of illegal trade.

“Recently, there was a duty hike for excisable goods in Nigeria. Agreed that taxation is the primary means of generating government revenue, it is conventional wisdom that it should be stable, predictable and progressive when appropriate to serve as catalyst for achieving government’s socio-economic objectives. However, we have had instances where aggressive taxation without enforcement of the fundamentals created uncertainty in business, making illicit trade to flourish and eroding the very economic objective government set to achieve.”He said it had been adequately established that “unreasonable taxation is the biggest factor” driving illegal production and distribution of compromised goods.

“The case of Belgium where a 40 percent alcohol excise increase resulted in a 20 million Euros revenue decline in 2015, and Greece where 125 percent excise hike for alcohol failed to deliver projected revenue increase, but rather, a 17 million Euros loss in 2015 are instructive. Both brash tax policies performed abysmally, serving as stimulus for cross border smuggling and illicit trade which became aggravated because of poor enforcement.

“Recently in South-Africa, the legal industry was under threat of being wiped out due to the impact of illicit tobacco trade buoyed by an ad-hoc tobacco tax increase by government without strict enforcement of the laws against illicit trade, It is estimated that government has been losing 6 billion Rands ($451m) in revenue year-on-year from 2011.”

The IPPA chief also linked the illegal business to terrorism. “Smuggling of narcotics, weapons and tobacco is a source of revenue for organised criminal groups in Africa and beyond. In some instances, it is also linked to financing terrorism. Fighting illicit trade is therefore key to protecting national security. Illicit trade also exposes the general public to the dangers of sub-standard products known to cause grievous health and security problems.

“Other activities related to illicit trade not only deprive government of revenue, they have the potential to lead to job losses as a result of unfair competition posed by smuggled brands. Illicit trade eliminates jobs and depressed wages in legitimate industries, constitute a health hazard to the public and industries suffer lost sales. Over a long period of time, it undermines trust in government and public institutions, deters human capital development and foreign direct investment.”He called for strict enforcement of the relevant laws against the menace.

Former the Director-General of National Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Dr. John Isemede, said the fundamentals behind Nigeria’s trade policy were faulty and should urgently be restructured.He lamented that Nigeria had become a dumping ground for all forms of sub-standard products partly due to failure of relevant government agencies to effectively check influx of such goods through the borders.

The United Nations Industrial Development Organisation (UNIDO) consultant admonished Nigeria to adequately engage the organized private sector in every economic agreement it signs because the operators are the drivers of the economy who know whether or not such pact will serve national interest. Isemede, who spoke on ‘Maximising Economic Opportunities in Export and Trade’ advised the Federal Government to put the private sector in the forefront and be sure Nigeria had many things to put on the table before signing the Africa free trade agreement.