The Government’s Tobacco Monopoly

The China National Tobacco Monopoly largely holds a monopoly over tobacco sales throughout China generating about seven to ten percent of government revenue. In terms of the global market, China Tobacco is the largest tobacco company manufacturing a total of 2.5 trillion cigarettes in 2013 compared to their closest rival Phillips Morris international who only made 880 billion cigarettes. Yet, constant smokers will notice that China Tobacco’s brand of cigarettes are rarely found outside of China (Malboro is actually the most popular brand in the world) so China Tobacco relies mainly on domestic sales than international sales. Not surprising due to the size of China and, as Hessler describes, the importance of cigarettes as a social status symbol so China tobacco owns a steady and constant demand. Yet, this monopoly and immense revenue generated by China tobacco means the government will do what they can to maintain this revenue flow.

To prevent any rivals from appearing inside China, the government created laws making importation of Western cigarettes very difficult. Provisional governments set up literal “ring fences” in order to prevent cross-province tobacco sales creating a smaller local monopoly on certain cigarettes though today Chinese Tobacco has essentially merged 123 cigarette manufacturers to 30 total. These thirty factories are under control of The State Tobacco Monopoly Administration, who runs regulations and puts cigarette quotas on factories. Although “separate” entities, the administration and China Tobacco work very closely with each other even having the headquarters in the same location.

This monopoly will inevitable create conflict far past the tobacco market. Black markets appear to sell other brands regulated and difficult to obtain. Smuggling across province and country lines constantly occur. In 2015, the Chinese government arrested 41 people under the suspicion of an illegal underground cigarette market. The Wor
ld Health Organization has begun pressuring China to implement anti-smoking measures due to the amount the Chinese smoke per year; one in three cigarettes smoked is in China.

Many obvious problems could appear for China’s tobacco market. Already, we can see the monopoly having averse affects on the tobacco market itself causing an entire black market to appear. China’s tobacco also has almost no global presence whatsoever. Will it be worth it for the government to lose out on this massive source of revenue for them? In addition, what reasons do they have to cave into international pressure to curb smoking in China?

Sources:

https://www.bloomberg.com/news/articles/2014-12-12/the-chinese-government-is-getting-rich-selling-cigarettes

http://www.scmp.com/news/china/policies-politics/article/1887465/china-police-nab-41-suspects-illegal-cigarette-racket

http://www.bbc.com/news/world-asia-34483448

http://www.tobaccoatlas.org/topic/cigarette-use-globally/

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9 Responses to The Government’s Tobacco Monopoly

  1. hendersonn17 says:

    I wonder why the government wants to have a monopoly on this purely-domestic industry. It seems as if they could get rid of the black market and still generate revenue by implementing tariffs on imported cigarettes. I do think that you make a good point by pointing out that China Tobacco’s revenues are destined to taper off since there is only a finite number of customers they can target in China.

    It seems like the government faces a conflict of interest — on one hand they want people to continue buying cigarettes, but on the other, the government should work towards creating a healthier society, thus dissuading the use of cigarettes.

    • Alden Schade says:

      I agree that it seems strange that the government wants to maintain a monopoly instead of generating revenue from tariffs on imports, but I think by maintaining domestic producers, they can keep costs of cigarettes lower than imported brands, in turn making smoking cheaper and more likely to continue to spread. Increased cost of the product from smoking could be a major deterrent, reducing revenue.

  2. feldsteinp18 says:

    It makes perfect sense economically why a black market would appear. When there are market inefficiencies and artificially high prices, it is a well documented microeconomic phenomena that black markets will appear. Eventually, China’s only solution to ridding themselves of this problem is to allow for greater competition or tax at a lower rate. I also think it makes sense for China to begin to monitor the health effects of cigarettes and the potential harm of their citizens. They are beginning to invest in water purification and green energy, so public health may be next.

  3. sackettm18 says:

    I don’t understand why the Chinese don’t see the benefit of releasing this monopoly, allowing it to divide and competition to arise. They could still prevent the import of foreign cigarettes, if that is their main concern. It seems that for better or for worse, smoking is very popular in China and basic economic principles would say they could certainly garner more revenue from a division in production, competition of pricing, multiple tiers of cigarette quality, etc… Then again, making this point is essentially arguing against the entire premise of China’s centrally controlled economy, so it is a futile argument in the end.

    • Charlie says:

      There is much to be said for power of tradition and entrenched institutions everywhere, but particularly in China. I suspect the tobacco administrators likely have a great deal of influence over Party affairs, especially considering the popularity and social status of smoking in the country.

      Another factor I can imagine having influence over their refusal to allow for private competition are worries about tax evasion and/or offshoring of wealth. Once the government allows private ownership of tobacco firms, the risk of their revenue stream being reduced by illicit activity would likely rise greatly.

  4. zhengm18 says:

    The health effects of cigarettes are certainly well documented in world affairs, but I think among the average Chinese, this consciousness just simply does not exist yet. Health consequences is usually associated with negative externality effects in standard economics, which in turn has a negative influence on the population/economy. As with America, it is first for the people to realize the negative effects of smoking and then that will in turn force the companies (or in China’s case, government) to refocus their priorities. In my opinion, that will be hard in the near future as smoking cigarettes is also another form of “guanxi” at the very top, with the social aspect of smoking adding value to its appeal. Who knows.

  5. gristt18 says:

    It is interesting to look at this from the health perspective we discussed in class this past week. The population is aging in China, as we know, and the adverse health effects of smoking are becoming increasingly well-known. Will younger Chinese have similar smoking habits as their parents, or are trends changing? If they are changing, and demand for cigarettes decreases dramatically, this monopoly could be really harmed, since they are making an assumption of inelastic demand in their production of cigarettes.

  6. bonesc18 says:

    My dad actually works in the tobacco industry. His company is an independent contractor that works closely with Phillip Morris in addition to many of the big smokeless producers. According to him anyway, these companies, particularly Phillip Morris, are waiting on the cue to move into the Asian markets. Again, according to dinner table conversation in the Bones household, so take it or leave it, Chinese cigarettes are poorly constructed and are made of low quality tobacco. They often fall apart before they are finished due to sloppy construction. When given the choice, Chinese citizens much prefer the American alternative, but they rarely have the choice. Going off the hypothesis that Chinese cigarettes are objectively worse than the American variety, this further explains the black market phenomenon. If they were physically nearly identical, it would just be a pricing issue, but this appears to be both pricing and quality.

  7. Christopher Tyler says:

    I noticed Marlboro sold in Shanghai this past summer. Oftentimes, they were more expensive that low-quality Chinese brands, but far more affordable than ‘high-end’ Chinese brands. Perhaps Shanghai is an exception, as it is China’s financial capital and relatively more capitalist than the rest of the country. The foreigners rarely smoked American brand cigarettes: the allure surrounding Chinese tobacco is very real. In terms of tapping into the international market, I am on the same page as the rest of you. It seems naive of China to maintain the domesticity of its cigarette production. Perhaps their are strict policy barriers to overcome, but if China churns out more than double the amount of cigarettes as Philip Morris, it seems that Chinese cigarettes could make their way to international markets soon.

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