Every economist knows that people respond to incentives. Change the incentive for buying a product - by making it more expensive, for example - and people will change their behaviour by buying less of it.
China would benefit greatly if its consumers bought less tobacco. Yet the country's rapid growth has made cigarettes ever more affordable. In 2000, buying 100 packs of the cheapest tobacco required the average Chinese smoker to spend about 14 per cent of his or her annual income. Today, it's only three per cent. This trend of rising affordability requires a strong policy response: higher taxes on tobacco products.
China taxes tobacco at one of the lowest rates in the world. The World Health Organization (WHO) recommends that taxes account for about 70 per cent of the retail price of cigarettes; in China, they represent around 40 per cent. This means that, with the exception of a few luxury brands, most cigarettes in China are cheap. Consumers typically pay about five yuan (US$0.80) per pack, much less than in other countries. According to the Tobacco Atlas, Singaporean smokers pay US$9.29 a pack; Australians US$12.14 a pack. New Zealand, whose government aims to make that country smoke-free by 2025 and where taxes already make up more than 70 per cent of the price of the most popular brand, is implementing a 40 per cent tax increase that will raise the cost of cigarettes to around US$15 a pack by 2016.
There is no reason why China cannot learn from the experience of these and other countries which have raised tobacco taxes and reduced tobacco consumption, without any negative impact on their economies.
Tobacco tax increases can save lives, but only if the tax increase results in higher retail prices for consumers and not a minor reduction in profit for the tobacco industry, as occurred in China in 2009 (when tobacco taxes were increased, but tobacco companies simply absorbed the cost in order to avoid driving customers away).
Taxing tobacco is a win-win for governments. By reducing tobacco use, a tax lowers public health care costs, while at the same time generating additional revenue that can be invested into public health or other social priorities. In China, the benefits are undeniable: raising cigarette prices by just 0.94 yuan a pack could increase government revenue by more than one-third, while cutting annual tobacco consumption by nearly 20 per cent.
Such a tax need not be regressive. Because lower-income smokers are more price sensitive, they are more likely to quit or smoke less as a result of higher tobacco prices. By spending less on tobacco, they will enjoy both higher disposable household income and better health.
The world's top risk factor for preventable death, tobacco use kills six million people each year including one million Chinese. If China's current rate of tobacco use remains unchanged, the death toll will eventually triple, reaching three million deaths a year by 2050. Given China's aging population and its need for a healthy workforce to support the growing proportion of retirees, it is not hard to imagine the potentially catastrophic effects that smoking could have on public health and the overall economy in the future.
China must raise taxes on tobacco in order meet the ambitious goals for reducing tobacco use it has set for itself. By next year, the China National Tobacco Control Plan aims to reduce the adult smoking rate by 10 per cent and the smoking rate among young people by 35 per cent from their respective levels in 2010.
China is to be commended for setting such ambitious targets. To meet them, it must enact strong policies that reduce the demand for tobacco. Raising tobacco taxes - and and prices - would have the single biggest impact on reducing tobacco consumption in the short term, thereby helping the government achieve its own goals and creating significant health and economic benefits for China.
Dr. Bernhard Schwartlander is the World Health Organization's Representative in China.