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The World Economic Forum (WEF) estimates that over US$2.2 trillion (3% of global GDP) will be lost due to illicit trade leakages in 2020. The Coronavirus (COVID-19) pandemic has already caused an increase in illicit trade activities across a multitude of industries such as pharmaceuticals, tobacco, alcoholic drinks, PPE products, home and personal sanitising products, luxury goods, beauty and personal care products. COVID-19 is boosting the drivers of illicit trade (consumers, businesses and regulation), in addition to those caused by the global economic recession and the government’s lack of enforcement capacity.
Consumers are driven to buying in the illicit market because they are seeking goods that fit their needs. They might be unknowingly purchasing contraband or any other type of illicit goods or knowingly seeking status and recognition by buying fake well-known brands at cheaper prices. This hurts businesses as illicit players seek to evade regulation, pay taxes, access liquidity and overcome supply chain disruptions. Meanwhile, regulation is adapted to inhibit illicit trade in given local conditions.
Within consumer-based drivers, the overarching theme that has emerged during COVID-19 is the need for affordable quality products; something that holds equal value to consumer actions and behaviour in legal and illicit markets. Brand selection, purchase frequency and price tolerance are still the main drivers of purchasing decisions. However, the opportunity to buy goods far below market price or goods banned by the governing body, sometimes push consumers towards illicit purchases, maybe without their knowledge.
In normal economic times, illicit trade is common across a wide variety of goods, from premium-luxury products that are either smuggled or counterfeited, to basic needs like apparel, packaged foods and medicines. As a result of the pandemic, consumers are prioritising spend on essentials such as food, housing and medicine. According to Euromonitor International’s macro-economic forecasts, global real GDP is expected to have declined by 3.8% in 2020.
The scarcity of goods through formal and legal channels, due to lockdowns and disruptions in the supply chain, is favouring social acceptance for purchasing illicit goods, due to the “need to survive” mantra found during the pandemic.
Inefficient sourcing of raw materials and trade is another key driver boosting the illicit market during COVID-19. In normal times this means trade disruptions might be driven by goods being stolen, borders being closed or supply sources running out. During the pandemic, closed borders and lockdown restrictions put in place by governments have been the main source of material disruption.
Using Euromonitor International’s Supply Chain Sensitivity Index we can verify which industries are most at risk to disruptions from closed borders and supply chain disruptions, and as such, more vulnerable to illicit players smuggling and counterfeiting their goods; for example, pharmaceuticals and medical equipment, agriculture, automotive and hi-tech goods.
Unintended negative consequences have been seen in countries where governments during COVID-19 have implemented and enforced policies related to:
• Restrictive access to raw materials
• Temporary ban of legal goods being sold
• Control over which channels products are sold in
• Higher excise taxes on goods
As they have a direct impact on selling prices of legitimate goods, these actions incentivise consumers to seek lower priced goods within the illicit market, where options are readily available at large discounts below market price due to tax and regulatory evasion.
Alcoholic drinks and tobacco have seen disruption and migration towards illicit trade. These industries have the largest distortions caused by excise taxes, artificial channelling and increases in the price of raw materials. Governments of Panama, Sri Lanka, and South Africa implemented bans as a method to fight COVID-19.
Recovery from this global recession is dependent on how long the pandemic will last. A new normal way of life, travel and living will evolve over the medium to long term. Businesses need to re-learn their own industry dynamics, consumer behaviour and preferences, market conditions and competitive landscape. All strategies need to be re-assessed, re-aligned and re-shaped.
Illicit trade can no longer be considered of less priority, a shadow economy that co-exists without causing major disruptions to legitimate business. The uncertain future scenario demands immediate and effective action to avoid further gains from illicit players, as they continue to leverage favourable current conditions. Private and public partnership dialogue on illicit trade among all relevant stakeholders needs to continue, as illicit trade matters to all. Governments resources and actions will need to be finely balanced in dealing with COVID-19 implications and paying attention to control illicit trade activities. Governments globally will still need to be aware of the negative effects of the virus and illicit trade, as they are tightly intertwined.
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