Norwegian-Swedish cross-border trade in alcoholic beverages

Transcription

1 RESEARCH REPORT INGEBORG LUND & BJÖRN TROLLDAL & TRYGVE UGLAND Norwegian-Swedish cross-border trade in alcoholic beverages In order to reduce the total alcohol consumption, and thereby also the level of individual and social alcohol-related damages, Norwegian alcohol control policy is based on a system in which high alcohol excise taxes constitute a key element. The excise taxes on alcoholic beverages therefore serve other purposes than representing sources of revenue to the state coffers, and must in consequence be viewed from a public health and social policy perspective. However, this policy may also have other effects that do not appear in the official alcohol sales statistics. These effects, which may include legal and illegal home production, legal tourist import in compliance with the existing rules and quota regulations, and illegal import in the form of smuggling, may contribute to undercut the effect of high alcohol excise taxes as a public health and social policy strategy to limit alcohol-related damages. If the legal and illegal home production and import reach a certain level, the legitimacy of the Norwegian alcohol control policy may be weakened. In this paper, the extent to which Norwegians purchase alcoholic beverages in Sweden will be regarded as an indirect effect of the high excise tax level in Norway. The continuing debate around this theme has intensified during the 1990s, mainly as a result of the fact that Norwegian prices on alcoholic beverages during this period have risen compared with the Swedish prices. The aim of this paper is to analyse how the cross-border trade with alcoholic beverages between Norway and Sweden has been affected by the changes in prices, taxes, and exchange rates during the 1990s. This issue will be addressed by analysing the changes in cross-border trade in different subperiods. In addition, the overall volume of cross-border trade with alcoholic beverages between the two countries will be estimated. This paper is based on a longer report (see Lund, Trolldal, and Ugland 1999), for which support was granted by the National Institute for Alcohol and Drug Research (SIFA) and the Nordic Council for Alcohol and Drug Research (NAD). 78

2 Norwegian-Swedish cross-border trade; national, Nordic, and European priorities The cross border trade in alcoholic beverages between Norway and Sweden touches on the dynamics and frictions arising from the interaction and interplay between priorities and policies on the national, the Nordic, and the European level. The prices of alcoholic beverages in Denmark, Finland, Iceland, Norway, and Sweden have traditionally been very high compared to European standards (Holder et al. 1998). The Nordic tax and price strategy has relied on some kind of mutuality at the national level, since changes in one country easily could lead to disruptions in another. The alcohol excise taxes were first cut in Denmark in the early 1990s, in order to curb the cross-border trading leak to Germany (Bygvrå 1994). Although in the aftermath of the accession of Finland and Sweden to the European Union (EU) in 1995, the pressure to reduce alcohol excise taxes has increased also in the remaining Nordic countries. Important factors here are the discussions on cross-border trade in alcoholic beverages, and also the adaptation to EU regulations concerning traveller s import within the single market. Price convergence is regarded as important for the functioning of the single market, and several initiatives have been taken in order to approximate and harmonise the rates of excise duties and indirect taxes in the EU. The forces of the free market have been singled out to do the job by liberalising the regulations concerning travellers imports, and thus stimulate cross-border trade. This indirect approach has been viewed in light of the unsuccessful attempts at achieving tax and price harmonisation through the enactment of common EU legislation (Tigerstedt 1990; Ugland 2000). The increase in cross-border trade in beer between the southern part of Sweden and Denmark has received much attention (Trolldal 1998). In Finland, focus has been put on the private import of alcoholic beverages bought tax-free as well as bought within Estonia and Russia (Österberg & Pehkonen 1996). The political authorities of both Sweden and Finland have reduced the excise taxes on alcoholic beverages in order to reduce cross-border trade. In Sweden, the excise taxes on strong beer (that is beer containing more than 3,5 % alc. per volume) were cut down by 39 per cent as from 1 January As a result of this, the price to the customer was reduced by about 20 per cent (Trolldal 2000). In preparation for the adaptation to the EU regulations concerning private import of alcoholic beverages, the Finnish excise taxes on wine were reduced as from 1 January This resulted in a price reduction of about 10 per cent (Holder et al. 1998). Signals of further reductions in the alcohol excise taxes have been given from the political authorities in both Finland and Sweden. This must be viewed in light of the forthcoming increases in the legal private import quotas for alcoholic beverages. The pressure on the Norwegian authorities to reduce the tax level has also increased. This pressure was a contributing factor for the decision by the Norwegian parliament, Stortinget, to reduce the excise taxes on wine and spirits by 2 per cent as of 1 January This reduction represented a break with the Norwegian post-war convention of incremental tax increases. As a result of discussions between Swedish political authorities and representatives from the EU in the beginning of year 2000, it became clear that Sweden will have to adopt the same levels for travellers import as the rest of the EU from 1 January Sweden is gradually going to increase the quotas for private import during the period. This study takes its departure in these developments, and the aim is to take a closer look at the relationship between changes in relative prices on alcoholic beverages and changes in cross border trade. 79

3 Data and methods In this paper, cross-border trade is defined as the purchase by private individuals of alcoholic beverages in neighbouring countries for domestic consumption. This trade consists of purchases in foreign shops, but also purchases made in connection with the actual crossing of the border. No distinction is made between legal and illegal import, or between tax-free and taxed products. Norway and Sweden share the longest common border between any two European states (1,619 km), and the border is controlled through a system that is based on a combination of permanent and mobile checkpoints. In 1996, about 0.17 per cent of all vehicles crossing the Norwegian border were checked. Most of the border regions are sparsely populated, but there are important regional differences. The highest population concentration is found in the southern regions. It is assumed that price differences are a very important incentive for individuals to engage in cross-border trade in alcoholic beverages between Norway and Sweden. Crossborder trade is therefore assumed to take place along a belt on both sides of the Norwegian-Swedish border, where the transaction costs, in the form of travel costs and opportunity costs of time, will be lowest. For persons who live outside this belt, the transaction costs associated with engaging in cross-border trade are assumed to outweigh the potential profits and benefits due to the differences in alcohol prices. Based on these assumptions, Figure 1. Map over the base and border regions in Norway and Sweden Norway BASE TRONDHEIM ÅRE-ÖST NORTH 1 CENTRE SOUTH SOUTH NORTH 2 BASE NORTH NORTH NORTH Sweden The shaded areas represent regions which do not belong to the base region nor any of the border regions. More information on the different regions is presented in Table 1. Norway and Sweden have in this study been divided into what have been called base and border regions (Table 1). The sales statistics from the Norwegian state alcohol monopoly (Vinmonopolet) and the Swedish state alcohol monopoly (Systembolaget) are used to represent the registered con- Table 1. Norwegian and Swedish base and border regions Norwegian regions Swedish regions Name Population (1993) Name Population (1994) Base Base Border-South Border-South Border-North Border-Centre Border-Trondheim Border-ÅreÖst Border-North Border-North (3)

4 sumption of alcoholic beverages in Norway and Sweden respectively. Vinmonopolet and Systembolaget have monopoly on the retail sale of strong beer, wine, and spirits. However, strong beer has not been included in the Norwegian data, as sale of this beverage type became monopolised in the middle of our research period (March 1993). Since 1994, strong beer has only accounted for about 2 per cent of the total beer market in Norway, in terms of litres. The main assumption is that the registered alcohol consumption in the base region and the border regions will follow the same developmental curve in a situation in which crossborder trade remains unchanged. This developmental curve is defined in terms of growth in per cent in order to avoid methodological problems arising from regional differences related to geographical characteristics and population size. Given a situation of unchanged cross-border trade, it is therefore assumed that the growth in per cent in alcohol sales in the base region and the border regions will be the same. The growth in the base region will therefore be used to estimate the expected sales levels in the border regions. The difference between the actual and expected sales levels in these regions is assumed to represent the change in cross-border trade in a given period. The equation may be written: G = (1 + α) P 0 g P 1 g + e Where α = Rate of growth in the base region from year 0 to year1 g P 0 = Total sale in monopoly shops in border region in year 0 g P 1 = Total sale in monopoly shops in border region in year 1 G = Change in cross border trade from year 0 to 1 e = Error term (is assumed to be negligible in the model) The expected sales in a given border region are estimated by multiplying the growth in the base region with the sale in the border region the previous year. The change in cross-border trade is calculated as the difference between the expected and actual sales in each border region. In order to minimise the uncertainties that are associated with this method, the changes in cross-border trade are estimated both from the Norwegian and the Swedish side. This implies that base and border regions will be selected both in Norway and Sweden. The growth in sales of Vinmonopolet is used to estimate the changes in cross-border trade in the Norwegian border regions with Sweden, while the growth in sales of Systembolaget is used to estimate the changes in cross-border trade in the Swedish border regions with Norway. The two estimations will therefore correct one another. In situations in which the Norwegian and Swedish estimates move in the same direction, the probability that our results reflect real tendencies increases. If developments in the cross-border trade based on Vinmonopolet and Systembolaget sales go in the opposite directions, the credibility of our results will be weakened. Changes in Norwegian and Swedish prices on alcoholic beverages The relative price of alcoholic beverages in Norway and Sweden is determined by three different factors: the Norwegian alcohol prices; the Swedish alcohol prices; and the exchange rate between the two countries. The development in the relative prices of wine and spirits in the period from 1981 until 1997 is presented in Figure 2. A falling curve indicates that prices in Norway, prices in Sweden and/ or the exchange rate have changed in the direction of cheaper Swedish alcoholic beverages relative to Norwegian prices. 81

5 Figure 2. The development in relative prices on wine and spirits between Norway and Sweden per month in the period. Index: mean 1981=100 Table 2. Percentage changes in the relative price on wine and spirits between Norway and Sweden during the 1990s Period Wine Spirits ,6 % -2,8 % ,2 % -6,0 % ,7 % -11,1 % ,2 % +14,4 % ,7 % -7,3 % ,2 % +6,6 % ,4 % -9,8 % ,9 % -17,2 % Spirits Wine Sources: Systembolaget, Vinmonopolet and Sveriges Riksbank. As shown in Figure 2, the price of Swedish wine and spirits, during the period , was reduced in comparison with the Norwegian prices. The three devaluations of the Swedish currency in 1981, 1982 and 1992 are clearly shown. The declines in the relative prices between 1990 and 1993 were due to the fact that all three determinants mentioned above concurred. Besides the devaluation of the Swedish currency, the Norwegian prices increased while the Swedish prices decreased. The variations during 1995 were due to changes in the exchange rate while the decrease 1996/97 was depending on the changes in the exchange rate as well as on the increase in the Norwegian price. In table 2, the annual changes in the relative prices between are shown. The average relative price for one year is compared to the average relative price for the year after. Altogether, the relative prices of both wine and spirits have fallen during the 1990s. Apart from a small increase in the relative price of wine in , the relative prices of both wine and spirits have increased only on two occasions: in the years , and Based on Table 2, three different periods have been selected for the analysis of the changes in cross-border trade in alcoholic beverages between Norway and Sweden. Period 1: : During this period, the relative prices of wine and spirits decreased by 24 and 16 per cent respectively. It is therefore assumed that cross-border trade with Sweden increased in this period. Period 2: : From 1993 to 1994, the relative prices of wine increased by 7.2 per cent, and by 14.4 per cent for spirits. It is thus assumed that cross-border trade in alcoholic beverages by Norwegians decreased in this period. Period 3: : The relative prices of wine and spirits decreased by 11.4 per cent and 9.8 per cent respectively, thus suggesting an increase in Norwegians cross-border trade with Sweden. Results Changes in cross-border trade between Norway and Sweden The changes in cross-border trade are calculated as the differences between the sales growth in the base regions and the border re- 82

6 Table 3. Summary of the results of the changes in cross-border trade in alcoholic beverages between Norway and Sweden, in per cent and litres of pure alcohol Change in relative price of spirits -16,5 % +14,4 % -9,8 % Change in relative price of wine -23,7 % +7,2 % -11,4 % Change in cross-border Norway trade (litres of pure alcohol) Sweden Share of spirits of the total Norway 53 % 41 % 28 % changes in all border regions Sweden 65 % 55 % 43 % Share of wine of the total Norway 47 % 59 % 72 % changes in all border regions Sweden 35 % 40 % 57 % Share of strong beer of the total changes in all Swedish border regions 0 % 5 % 0 % gions in Norway and Sweden, according to sales statistics of Vinmonopolet in Norway and Systembolaget in Sweden. The results for the different periods are presented in Table 3. According to these results, the cross-border trade in alcoholic beverages increased in each of the periods. This is also true for the period, when Swedish alcohol became relatively more expensive for Norwegians. Although the extent of the increases differ, the Norwegian and Swedish estimates go in the same direction for each period, which increases the probability that the results reflect real tendencies. The share of wine in total changes in crossborder trade is increasing for each period. This trend indicates that the trend towards increased wine consumption in Norway during the 1990s (Holder et al. 1998, 130), is reflected in the composition of the cross-border trade. The level of cross-border trade between Norway and Sweden in 1997 So far, the analysis has concentrated on estimating changes in cross-border trade. The actual level can, however, also be estimated by comparing the mean alcohol consumption per capita in the base region with that in the different border regions. In Table 4, an estimate of the total volume of cross-border trade in alcoholic beverages between Norway and Sweden in 1997 is presented. This estimate has been produced by multiplying the difference between the mean alcohol consumption per capita in the base region and the border regions, with the number of inhabitants 15 Table 4. Volume of cross-border trade in alcoholic beverages between Norway and Sweden in 1997 (litres pure alcohol) Swedish regions Alcohol sales per capita 15 years and older Total crossborder trade Total sales Difference between base and border regions Base 3,52 Border-South 6,50 2, Border-Centre 5,61 2, Border-ÅreÖst 4,92 1, Border-North 4,03 0, Sum

7 years and older in each region. The mean alcohol consumption per capita is based on the sales statistics of Systembolaget. According to this method, the cross-border trade in alcoholic beverages with Sweden amounts to about 6 per cent of the total sales of alcoholic beverages at the Norwegian Vinmonopolet in 1997 ( litres of pure alcohol). Using the same method the level of cross-border trade for 1991 was about litres pure alcohol. Although this method gives more uncertain estimates than estimates based on the changes in the cross-border trade, both the level and change estimates point in the same direction. Both findings suggest a strong increase in Norwegians cross-border trade in alcoholic beverages with Sweden from 1990 to Summary and discussions In this study, the relationship between changes in relative prices of alcoholic beverages and changes in cross-border trading between Norway and Sweden has been the main focus of attention. The results clearly suggest that cross-border trade by Norwegians in alcoholic beverages with Sweden has increased during the period. The estimates of the changes in the three different sub-periods as well as the estimates of the total volume for 1991 and 1997 indicate this. The relative prices of alcoholic beverages do not constitute the only variable affecting cross-border trade in these goods, as this trade continued to rise also in the period when the differences in relative prices narrowed. In this connection it has been pointed out that prices of other goods must also be taken into account when explaining the development in cross-border trade in alcoholic beverages. Food prices are assumed to be of major importance in this respect (Lund & Trolldal & Ugland 1999). Since the relationship between the alcohol taxes and the cross-border trade in alcoholic beverages is not as direct and straightforward as often portrayed in various media, the tax level on other goods should be brought in into the discussion of potential strategies to curb the cross-border trade in alcoholic beverages. This becomes especially relevant when viewing the cross-border trade leak from a public health and social policy perspective. The results that have been presented in this paper also indicate that the method that has been used here is not a precise tool, as the changes in cross-border trade differ depending on whether the changes are estimated on the basis of figures for the Norwegian or the Swedish side. The estimates that were based on the Swedish sales statistics (Systembolaget) give lower estimates of the changes in the cross-border trade for each period compared with the estimates based on the Norwegian (Vinmonopolet) sales statistics. This means that the differences in the changes in total sales between the base and border regions were higher in Norway than in Sweden. However, in percentage, the deviations between the two estimates are fairly stable for the sub-periods. In the period the estimated increase in the cross-border trade was about 32 per cent lower when based on Swedish statistics compared with Norwegian. For the and periods the corresponding figures were 36 and 31 per cent. Not only the fact that the deviations are about the same for the different periods, but also that the estimated changes for each period have the same sign strengthen the credibility of the results. The deviations between the Norwegian and Swedish estimates may be attributed to at least three anomalies. First, the assumptions of representative base regions may not be valid. Second, the border regions may be misdefined. Third, there may have been changes in other types of unrecorded consumption. These three types of explanation have been 84

8 discussed more thoroughly elsewhere (Lund & Trolldal & Ugland 1999). In these discussions, the third factor is regarded as particularly important. This factor also illustrates how the Norwegian-Swedish cross-border trade must be viewed in a wider perspective, where both the Nordic and European level must be taken into account. The changes in the cross-border trade between Norway and Sweden are largely concentrated around the southern parts of the two countries (ibid, pp ), and the Norwegian estimates may therefore also be influenced by changes in the cross-border trade in alcoholic beverages with Denmark. There are strong indications that this trade increased in the three sub-periods studied here. The number of passengers on the ferries from the Norwegian border region South to Denmark increased in each period. Therefore, a part of the deviations in the Norwegian and Swedish estimates may be due to increases in Norwegians cross-border trade with Denmark. Hence, the best estimate for the actual changes in the cross-border trade between Norway and Sweden for each sub-period will be located somewhere along the interval between the Norwegian and Swedish estimates. The results of this study are in line with several other studies of recent date which have demonstrated how price differences combined with increased cross-border mobility of alcoholic beverages can contribute to put pressure on high alcohol prices as a national public health instrument (see Österberg & Pehkonen 1996; Trolldal 1998). In the present study, the interplay between the national, Nordic and European level has been highlighted. Due to increased cross-border mobility of alcoholic beverages the countries with the highest prices are currently adjusting their alcohol taxes downwards. REFERENCES Bygvrå, S. (1994): Mere åbne grænser og danskernes indkøb i Tyskland. Nordisk Alkoholtidskrift 11 (4): Holder, H. & Kühlhorn, E. & Nordlund, S. & Österberg, E. & Romelsjö, A. & Ugland, T. (1998): European Integration and Nordic Alcohol Policies: Changes in Alcohol Controls and Consequences in Finland, Norway and Sweden, Hampshire: Ashgate Lund, I. & Trolldal, B. & Ugland, T. (1999): Norsk-svensk grensehandel med alkohol. Sifa-rapport nr. 1/99, Oslo Tigerstedt, C. (ed.) (1990): The European Community and the Alcohol Policy Dimension. Contemporary Drug Problems 17 (1): Trolldal, B. (1998): EU-medlemskapet och gränshandeln med alkohol i södra Sverige. Nordisk alkohol- & narkotikatidskrift 15 (2): Trolldal, B. (2000): Cross-border shopping of alcoholic beverages in the southern part of Sweden after the EU-membership in 1995 and the devaluation of the Swedish currency in In: Holder, H. et al.: Swedish Alcohol Policy and the European Union (forthcoming) Ugland, T. (2000): Impacts of Europeanisation on Nordic Alcohol Control Policies: A Discussion of Processes and National Differences. Journal of European Social Policy 10 (1): Österberg, E. & Pehkonen, J. (1996): Travellers Imports of Alcohol into Finland. Changes Caused by Finnish EU Membership. Nordisk Alkoholtidskrift 13, English Supplement: