FDA Doesn’t Understand Black Markets

Carl V. Phillips | Contributor

The FDA wants to ban vapor product flavors (and potentially the whole category) and proper cigarettes (by taking out the nicotine), in addition to the many tobacco products that are already restricted. In theory, the Tobacco Control Act has always required that the FDA consider “illicit trade” (which basically means black markets, including the supply chain for banned products, not just the trade itself). However, FDA has ostentatiously ignored this requirement, usually failing to even admit that a policy would create illicit trade when it obviously would. When they acknowledged the possibility, they just brushed it off as a minor bug that would be fixed. The FDA has finally issued a draft discussion paper on illicit trade. (There is a docket for commenting on the discussion paper for anyone who is interested in doing so.) But while they are finally trying to obey the law and take this topic more seriously, it appears FDA have no clue what they are facing.

The paper appears substantive at first glance. But a careful reading suggests that FDA simply does not understand the nature of the black markets that result when governments try to keep a lot of people from consuming something they really like. The paper tries to gloss over this fundamental fact, that the proposed policies are not technical restrictions like most FDA rules. The policies are designed to lower the quality of popular products to the point that it is effectively prohibition. The paper uses Orwellian phrases like “affect the user’s experience,” while gratuitously heaping praise on the policies in a rather sickening display of state propaganda. The FDA seems to not understand this is more like drug prohibition than the minor bans and simple enforcement they are familiar with.

The first substantive section is about acquisition and production of tobacco leaf. The focus is clearly denicotinized cigarettes, not flavors or vapor products, but even then this focus on leaf supply is misguided. A few people will grow tobacco to make roll-your-own cigarettes. A few already do simply because of high taxes. But this is basically a personal hobby, not a basis for an extensive market. The authors of the paper seem to think a major enforcement lever will be controlling the supply of proper leaf (i.e., not the patented low-nicotine version that the FDA is, suspiciously, trying to gift with a monopoly). The similarity to the failed attempts to control coca and opium poppy cultivation is difficult to ignore. The paper wanders through discussion of how it would still be legal to grow proper leaf in the US because it could still be used for smokeless tobacco or extracted nicotine (apparently not realizing that growing for the latter is quite different). They suggest this, along with legal production for export, opens the door for an illicit domestic cigarette industry.

With this, they are missing the key point: Little of the black market for proper cigarettes would come from domestic leaf being surreptitiously mass-produced in domestic facilities. As with alcohol Prohibition, the banned products will be legally produced, consumed, and shipped everywhere else in the world. Micro-scale local production will also happen, as with Prohibition, and the medium-scale production that exists (mostly on Native American reservations) will probably expand. But no one is going to try to hide a “Big Tobacco”-level production chain from FDA. They do not need to. Diversion of legal international product to US ports does not involve the domestic leaf supply.

Nevertheless, the paper then moves to discuss domestic production. It basically concedes that there will be an explosion in RYO production, amusingly offering the shocking warning that instructions for how to roll a cigarette are available on the internet (for those who somehow cannot figure it out). The authors seem to realize that RYO will remain a niche despite the expected growth. However, they do not seem to understand why that niche already exists.

Here and throughout, they overlook that high taxes are already a sufficient reason to avoid the legal market for cigarettes, as well as for e-liquid in a few jurisdictions. In a market where cigarettes were not subject to high taxes (which would also mean lower net margins for the manufacturers, further lowering the price), effectively banning the product would dramatically increase the cost to consumers, driving many from the market. But with prices as they are, the black market could face costs that were more than double those of legal manufacturers (mostly greater distribution costs, since the production process would remain unchanged), sell for cheaper than the current legal market, and still leave plenty of margin for high profits. the FDA is seemingly oblivious to the fact that grey markets (i.e., markets for otherwise legal products that merely avoid taxes) already exist, providing a pre-existing infrastructure, and the reason they exist is synergistic with the demand created for full-on black markets following a ban.

The FDA’s understanding of the implications of banning e-liquid flavors is even more absurd. They claim that in contrast with RYO cigarettes, “it may be difficult for average consumers to construct certain classes of products on their own, such as…liquids commonly used in electronic nicotine delivery systems (ENDS) that require complex chemical interactions.” Mixing nicotine, propylene glycol, glycerine, and flavors is not exactly complex. So long as any e-liquid remains legal, making banned flavors will be trivial. Working from scratch under a hypothetical total ban is not all that difficult. Forcing consumers or a cottage black market to mix-their-own creates a bit of risk of overexposure to nicotine that is absent from RYO cigarettes, but MYO is generally less inconvenient than RYO.

The paper then goes on to address legal products that could be used to “evade” bans. The word choice is telling: The FDA has authority to ban sales of particular tobacco products, but not personal possession or consumption. So long as e-liquid is legal, it will be perfectly legal (barring an unthinkable new criminalization law) for a smoker to use it to add nicotine back to their denicotinized cigarettes. But the FDA suggests they plan to target such “evasion,” once again hinting that if they succeed in denicotinizing cigarettes, they will use that as an excuse for banning e-liquid, as was previously reported. Interestingly, the use of legal products to MYO nonconforming e-liquid is not even mentioned. Presumably the authors realized that trying to suggest any hope of stopping that would cost them all credibility. Trying to restrict sales of food flavoring, propylene glycol, and nicotine (and somehow enforcing the latter despite the tiny volumes involved) would make Drug War policies like restricting Sudafed purchases look libertarian in comparison.

Perhaps most indicative of the naivety of this paper is the section about consumers finding out about the existence of illicit markets, implying that this is not trivial and inevitable. This suggests a lack of awareness of the market for illicit drugs. The explanation seems to be that the FDA’s mindset is based on their experience with illicit markets like raw milk products and pharmaceuticals that are approved in other countries. These are niche markets where there is limited demand and or even awareness. By contrast, most Americans who buy no illicit drugs could comfortably manage to score some weed before the end of the day if presented with the challenge. A few million smokers already buy their product from the back of a truck or some equivalent. Most open-system vapers either already know how to MYO or how to find instructions and suppliers for the inputs in about five minutes. This is not going to be a repeat of FDA’s war on raw cheese or Canadian pharmacies.

Yet as with past policy documents, the new discussion paper give no hint that stopping the illicit trade is beyond the capabilities of FDA, let alone that stopping it would actually require a serious ramping-up of Drug War enforcement, with all the harms it causes. They are so confident they actually write, “there is no indication that FDA enforcement authorities are insufficient to address it.” Such are the famous last words of people who have no idea what they are about to step into.

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Carl V. Phillips



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