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Tobacco's Impact on the Economy

A Discussion Paper
San Francisco Tobacco Free Coalition and the San Francisco Tobacco Free Project
June 30th, 1997

United States | Global

The Tobacco Industry and its allies use economic analysis to argue against tobacco control policies by stating that they will create havoc on jobs, tax revenues, tobacco farmers and the economy in general. These same arguments are used around the world to promote tobacco production and industry in countries that could put their resources to more humane and health promoting uses.

The Economics of Tobacco in the U.S.

The bulk of jobs generated by the Tobacco Industry in the U.S. are in manufacturing (48,800 employed at 114 tobacco factories in 21 states) and farming (136,000 employed in 23 states).(1) Over the past decade and a half, however, even as cigarette production rose, both manufacturing and farming jobs have been lost. For example, the number of tobacco farms declined by 23% between 1985 and 1992.(2)

The major contributors to job loss are not decreases in the number of smokers nor are they due to government mandated health measures. Rather, the major tobacco companies have been the major contributors to job loss by increasing mechanization, increasing their use of imported tobacco (from countries like Brazil, Mexico and Malawi) and moving manufacturing overseas. As such, farmers in traditional tobacco growing states have begun to call for government spending to help them diversify in their regions. Research indicates that reduced tobacco sales might even boost employment in non-tobacco regions.(3)

Finally, two-thirds (or 1.6 million) of the jobs which the Tobacco Institute says are dependent on tobacco are not actually in the tobacco industry. Tobacco Industry figures here include jobs of those who sell materials to the industry and those at the retail level for whom only a fraction of their business depends on tobacco.(2)

According to researchers Kenneth E. Warner & George A. Fulton at the University of Michigan "the amount of economic activity associated with tobacco product sales would not disappear if consumers decrease their spending on tobacco products. Rather, it would be redistributed as consumers use the same money to purchase alternative goods and services. Just like spending on tobacco, this alternative spending would generate employment and tax revenues associated with the production, distribution and sale of purchased goods and services".(5)

Even though the Tobacco Industry spends up to $6 billion a year on advertising and promotion, large tobacco companies can deduct up to 100% of the cost from a their tax bill in the U.S. Meanwhile, congress provides $40 million a year in tobacco tax subsidies and spends $250 million a year to counter tobacco advertising with anti-tobacco programs.

In addition the Centers for Disease Control and the University of California estimated that in 1993 the health care cost of tobacco related disease was at least $50 billion, or $2.06 per pack, which exceeded the 56 cents tax revenue per pack earned as income in the U.S.(4) So, in the U.S. even though the Tobacco Industry is responsible for raising $11 billion in tax funds it still doesn't come close to paying for the government Medicare payments to cover tobacco-related illnesses which cost taxpayers $16 billion.(1)


The Economics of Tobacco Trade and the Impact on the Global Economy

In a paper about the global economic burden of tobacco, Howard Barnum, World Bank Senior Economist, factors in benefits of tobacco consumption to producers and consumers, costs of morbidity & mortality and indirect costs and concludes that the world tobacco market produces an annual global net loss of US$ 200 billion. He goes on to encourage developing countries to act now on tobacco control policies such as countering tobacco industry advertising and promotion activities and raising retail tobacco prices through excise taxes. A World Bank policy adopted in 1991 states, "The Bank does not lend for tobacco production, processing, imports, or marketing, whether for domestic consumption or for export."(6) He goes on to conclude, "this, then is the simple message. Tobacco consumption provides a net economic loss, and anti-tobacco policies are a cost-effective way to save lives and benefit the economy. I hope you are convinced and will convey this message to your ministers of finance."(6)

Even though almost every country in the world has regions or sectors within it which rely on the tobacco industry as an economic activity, most are categorized as non-tobacco countries, in that growing, manufacture, and export do not make up significant economic activities.

The international tobacco industry uses economic analysis to persuade policy makers around the world to encourage "expansion or development of tobacco industry activity or, at a minimum, to avoid adopting policy measures that would discourage tobacco consumption."(7) Profits from selling foreign tobacco do not benefit the developing world but are instead returned to the shareholders in the West. The introduction of foreign cigarettes can cause loss of foreign exchange.(8)

Tobacco Industry economic analyses are flawed in that they fail to account for activity such as health care costs to treat tobacco related illness and more importantly they consider resources devoted to tobacco production and distribution as disappearing if tobacco-related economic activity declines. According to Warner and Fulton, these analysis fail to consider that "if resources were not devoted to tobacco, they would be employed in other productive economic activities, themselves generating employment and tax revenues."(7)

Furthermore, depending on a country's level of tobacco dependence, shifting spending from tobacco to other goods and services would either improve, maintain or have a "net economic impact" that would "be dramatically smaller than that suggested by the tobacco industry's estimates."(7)

Until recently the U.S. Trade Representative used trade policy to force other countries to open their markets and remove bans on tobacco advertising and promotion. Mechanisms like these and other trade agreements such as the WTO, GATT, and NAFTA agreements have proven among the most effective tools used by the tobacco industry to globalize tobacco and are among the greatest threats to the health and economies of countries around the world.


Footnotes

1. Center for Ethics and Economic Policy, and the California Medical Association, Ron Stief.

2. "The Economic Impact of the Tobacco Industry on the U.S. Economy", Price Waterhouse, 1992

3. Warner, KE etal. "Employment Implications of Declining Tobacco Product Sales for the Regional Economies of the United States," Journal of the American Medical Association, 24 April 1996; 275:16, pp.1241-1246

4. Scientific American, May, 1995

5. New York Times, 3/8/94, Herbert, Bob, In America

6. Barnum, Howard, "The Economic Burden of the Global Trade in Tobacco", Tobacco Control, 1994; 3: 358-361

7. Warner, Kenneth and Fulton, George, "Importance of tobacco to a country's economy: an appraisal of the tobacco industry's economic argument", Tobacco Control, 1995; 4:180-183

8. Mackay, Judith, "US Tobacco Export to Third World: Third World War", Journal of the National Cancer Institute Monographs, No.12, 1992