Thank You for Smoking! How Loopholes Between the EU and Switzerland Create Big Rents for Big Tobacco

While loopholes are ubiquitous in many industrial sectors, estimating their economy effects is challenging. Using an example from the tobacco industry, this paper illustrates how loopholes are exploited, and quantifies their economic effects. After 2004, the EU effectively bans the production of cigarettes exceeding maximum yield limits of 10 mg tar, 1 mg nicotine, and 10 mg carbon monoxide, whereas Switzerland still allows the production of stronger cigarettes for the export market. I identify the effect of this loophole by carefully constructing various comparison groups, and quantify it by implementing a difference-in-difference estimator. I show that the loophole creates big rents in the form of additional foreign sales for Big Tobacco (i.e., the world's five biggest tobacco companies). In the decade from 2004 to 2014, Big Tobacco's foreign sales were between $1.5 billion and $2.5 billion higher than they would have been without the loophole. Acknowledgement : I thank Reto Foellmi, Stefan Legge, Anne Wunderlich and Josef Zweim ller for valuable comments.