A landmark study by the EU ASEAN Business Council and Euromonitor International warns that illegal cigarettes and e-vapes now threaten government revenues, public health, and regional investment across six major economies.
Key takeaways
- Southeast Asia’s ASEAN-6 economies lost a combined $13.07 billion in tax revenue over two years to illicit tobacco trade, with the Philippines alone forfeiting $2.46 billion as illicit cigarettes hit 25.3% of the market and illegal e-vapes captured a staggering 85.6% share.
- The crisis is driven by an “affordability trap”, annual excise tax hikes (5% in the Philippines) widen the price gap between legal and illegal products, pushing price-sensitive consumers toward smugglers who operate tax-free and can easily undercut legitimate sellers.
- Neither taxation nor outright bans alone will solve the problem; the report calls for a multi-pronged regional strategy combining smarter excise design, ASEAN-wide customs coordination, digital track-and-trace systems, and stronger enforcement by agencies like the Bureau of Internal Revenue and Bureau of Customs.
Governments across Southeast Asia forfeited a combined $13.07 billion in tax revenues over the past two years as the illicit tobacco trade continued its relentless expansion through the region, according to a major new study released Monday by the EU ASEAN Business Council (EU ABC) and Euromonitor International.
The 43-page report, covering the Philippines, Indonesia, Malaysia, Singapore, Thailand, and Vietnam, collectively known as the ASEAN 6, paints a stark picture of a shadow market growing faster than governments can contain it. Illegal cigarettes, counterfeit products, contraband, so-called “illicit whites,” and unregulated e-vapor devices are displacing legitimate sales, eroding fiscal bases, and fuelling criminal networks across one of the world’s most economically dynamic regions.
“The continued rise in illicit tobacco trade in ASEAN and the broader Asia Pacific region signals displacement of the legitimate market, while amplifying challenges for regulation, enforcement, and diminishing fiscal contribution,” the EU ABC said in the report.
A Region Under Strain
The scale of the problem differs sharply across the bloc, but no country in the study is spared. Indonesia and Malaysia top the list of national revenue losses, with the Philippines ranking third, having shed an estimated $2.46 billion in potential tax receipts between 2024 and 2025. Of that, roughly $2.06 billion was attributable to illicit cigarettes and $400 million to illegal e-vapor products.
The Philippines presents perhaps the most acute case study in the report. Illicit cigarettes accounted for 25.3% of total cigarette sales in the country in 2025, up from 23.8% in 2024, significantly above the ASEAN 6 average of 16.1%. The report projects that figure could climb further to 28.9% by 2028 if current trends continue.
Even more alarming is the situation in the e-vape sector. An estimated 85.6% of e-vapor products sold in the Philippines last year were illicit, the highest incidence among ASEAN markets where e-vapes are legal. Illegal operators across the country are estimated to have reaped approximately $2.21 billion in revenues from this trade during the two year period.
The Philippines, Thailand, and Vietnam have been designated “elevated risk” markets by Euromonitor’s analysts, who cited a convergence of price-sensitive consumers, entrenched regional smuggling routes, and persistent enforcement challenges as key factors.
“The archipelagic composition of the Philippines is expected to render border enforcement challenging in the market, making it particularly susceptible to the inflow of illicit cigarettes,” the report noted.
The Affordability Trap
Researchers point to a structural paradox at the heart of the crisis: tax policy designed to discourage smoking is simultaneously making illicit products more commercially attractive.
Firdaus Muhamad, Euromonitor’s head of consulting for the Asia Pacific region, identified what he termed the “affordability trap” as the dominant driver of illicit market growth.
“The common trap in this story that we’re telling is affordability pressures,” he told reporters at a briefing tied to the report’s release. “Annual tax increases and the legal illicit price gap create room for some illicit products to compete.”
In the Philippines, cigarette excise taxes are mandated to increase by 5% annually under existing law. Muhamad noted that illicit operators, freed from tax obligations, can absorb price increases while still undercutting legal alternatives, preserving or even expanding their profit margins over time.
This dynamic, the study suggests, is not unique to the Philippines. Across the ASEAN 6, the widening gap between the cost of legal and illegal tobacco products is steadily shifting price-sensitive consumers toward the shadow market.
The Wider Economic Damage
EU ABC Executive Director Chris Humphrey argued that the consequences extend far beyond lost excise revenue.
“Here in the Philippines, the National Calamity Fund could easily be funded if we could stop the illicit trade in tobacco and collect the proper taxes from it,” he said.
Humphrey stressed that widespread illicit trade also distorts competitive dynamics and deters broader foreign investment. “It diminishes the region’s attractiveness for investments not just in tobacco, but in other sectors as well,” he said.
The report estimates that the ASEAN 6 illicit tobacco market will continue to expand, with the regional illicit trade incidence projected to rise from 23.6% in 2025 to 27.8% by 2028. Researchers warn that the consequences span multiple dimensions: weakening public finances, undermining legitimate businesses, stimulating criminal activity, and exposing consumers to unregulated products with unknown health profiles.
A Call for Regional Action
To arrest the trend, Humphrey called for strengthened cooperation among ASEAN member states, particularly those sharing porous land borders, and for accelerated investment in digital track and trace systems capable of monitoring tobacco flows across borders.
Analysts and civil society observers echoed the call for coordinated enforcement. Filomeno Sta. Ana III, coordinator of the advocacy group Action for Economic Reforms, pointed to execution as the decisive variable.
“The key measure is good enforcement,” he said, noting that the Bureau of Internal Revenue, the Bureau of Customs, and local governments must intensify anti-smuggling operations to make a meaningful dent in illicit supply chains.
The report also addressed the debate over outright bans on e-cigarettes and vapor products, concluding that prohibition alone has not eliminated illicit trade in jurisdictions where such restrictions are in force. Humphrey warned that banning vapes without robust enforcement would likely drive consumers underground rather than eliminating demand.
Outlook
The EU ABC Euromonitor study arrives at a critical juncture for regional policymakers. ASEAN governments face the dual challenge of maintaining tobacco taxation as a public health tool while preventing the tax structure from inadvertently subsidising a criminal shadow economy.
The report’s findings suggest that neither taxation nor enforcement alone will be sufficient. Researchers point toward a multi-pronged strategy, combining smarter excise design, regional customs coordination, stronger digital monitoring infrastructure, and sustained political will, as the most credible path to reclaiming lost ground.
Without such action, the study warns, the illicit tobacco market in Southeast Asia is set to grow deeper, more organised and more costly, both for governments counting on excise revenues, and for the communities that depend on the public services those revenues are meant to fund.
