The Prohibition Premium: When Restriction Builds the Market Around It

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Australia’s tobacco market and North Korea’s sanctions evasion networks appear to belong to entirely different worlds.

One is a public health policy problem. The other is a national security challenge.

Yet both reveal the same underlying dynamic.

When governments make a legal market sufficiently expensive, inaccessible, or restricted, demand does not necessarily disappear. Instead, the premium created by restriction attracts suppliers willing to operate outside the law. Over time, those suppliers become organised, adaptive, and difficult to remove. The intervention designed to suppress a market can end up professionalising the underground version of it.

Australia’s tobacco regime has helped create one of the world’s most profitable illicit tobacco markets. Three decades of sanctions have helped turn North Korea into a sophisticated operator in sanctions evasion, illicit finance, and black-market logistics.

The connection is not that Australia is funding North Korea. The connection is structural.

Both systems increasingly rely on the same types of intermediaries, transit hubs, shipping routes, and criminal networks. What appears to be a public health issue in one context and a sanctions issue in another may, underneath, be part of the same global infrastructure.

This article examines how two very different policy interventions produced a remarkably similar outcome — and why the problem may lie not in the intention behind restriction, but in the design assumptions that underpin it.

There is a standard theory of regulatory intervention. Make a harmful product expensive enough, and consumption falls. Restrict access tightly enough, and the market shrinks. Signal disapproval loudly enough, and social norms shift. The theory is not wrong — as far as it goes. The problem is what it leaves out.

Strong prohibition creates a price premium. That premium attracts suppliers willing to operate outside the law — suppliers who, once established, are harder to monitor, harder to prosecute, and harder to dislodge than the industry that preceded them. The intervention that was meant to suppress a market ends up professionalising the underground version of it.

This is not an argument against regulation or sanctions. It is an argument that restriction, without the enforcement ecosystem to match it, can generate secondary markets powerful enough to reshape the problem it was designed to solve.

Australia’s tobacco control regime is the most ambitious in the world. The 2012 plain packaging law stripped cigarettes of all branding — replacing company designs with olive-brown packaging and graphic health warnings. The goal was to make smoking unglamorous, not just unhealthy.

Price did the rest. By 2025, a pack of 25 cigarettes cost approximately A$50 — the most expensive legal cigarette market on earth, and more than ten times the price of an equivalent pack in China. The 2024 vaping reforms closed what remained: recreational vaping, already restricted, was subjected to tighter enforcement as disposable vapes flooded the market.

Each intervention was defensible on its own terms. Together, they produced three outcomes nobody planned for.

Legal tobacco consumption fell. But total consumption did not fall by the same amount. Much of it simply moved underground.

In 2012, illicit tobacco accounted for roughly 12 per cent of the Australian market. By 2025, that share had reached approximately 50 per cent. The legal market had not shrunk the overall market — it had handed half of it to suppliers who pay no tax, follow no packaging rules, and answer to no regulator.

The fiscal damage is significant. Tobacco excise revenue peaked at more than A$16 billion in 2019–20. By 2025 it had fallen to roughly A$7.4 billion. In the 2024–25 financial year alone, the Australian Border Force seized 2.53 billion cigarette sticks — a 320 per cent increase on four years earlier — representing an estimated A$4.36 billion in evaded duties. The enforcement effort was growing fast. So was the market it was chasing.

The economics explain why. A container of counterfeit cigarettes costs roughly A$70,000 to produce and sells for several million. At that margin, the risk of getting caught is a business cost, not a deterrent.

The harder outcome to accept is this one. The policy was designed above all to protect young people. That is where it has struggled most.

Adult smoking rates continued their long decline. But among 18 to 24-year-olds — the cohort most exposed to vaping — the story reversed. After tighter vaping restrictions took effect in mid-2024, the share of that age group smoking or vaping rose from 25 per cent to 28 per cent by mid-2025, the highest of any age group. A 2025 study in the Medical Journal of Australia found that the decline in adolescent smoking had slowed significantly since vaping emerged in 2010. When vaping was suppressed, the substitute that emerged was not abstinence.

The lesson is not complicated. When a less harmful substitute is banned alongside the original product, people do not simply stop. They find an unregulated version, or go back to the original. Australia did both at once.

The least visible outcome is the most consequential for daily life.

The price premium created by excise policy did not just attract small-time smugglers. It attracted organised crime. The Australian Criminal Intelligence Commission has confirmed that illicit tobacco is now a primary revenue source for criminal networks in Australia — money that flows into drug trafficking, money laundering, and extortion.

The consequences are visible on the street: arson attacks on tobacconists, gang violence over distribution territory, standover tactics against retailers. A 2025 Four Corners investigation described a tobacco war playing out across suburban Australia.

This is not incidental. The excise regime created margins large enough to fund lawyers, logistics, and violence. Those networks now have every incentive to keep legal prices high and legal supply constrained. The policy and the crime have become mutually reinforcing.

None of this means Australia’s tobacco controls failed in every respect. Long-term smoking prevalence has declined substantially over decades, and the associated public health benefits are real. The problem is narrower, but still significant: some of the strongest interventions appear to have produced unintended substitution effects and criminal incentives large enough to undermine part of the original policy objective.

The policy promised higher revenue, healthier young people, and a shrinking market. Instead, the treasury collects half what it once did, youth nicotine use has rebounded, and a criminal ecosystem has grown up around the gap between legal prices and what people are actually willing to pay. Three outcomes, one common cause: the assumption that making a legal market smaller is the same as making demand smaller. In Australia, it was not.

The logic of sanctioning North Korea is straightforward. Cut off the regime’s access to foreign currency, and it cannot fund its weapons programme. UN Security Council resolutions in 2016 and 2017 banned exports of coal, iron ore, seafood, and textiles — together representing the bulk of North Korea’s legal foreign earnings. The intent was to squeeze Pyongyang until the cost of its nuclear ambitions became unsustainable.

The theory, again, is not wrong as far as it goes.

Tobacco does not appear in North Korea’s official export figures. It was never meant to. What sanctions are designed to disrupt is precisely what gets recorded — and what moves through black markets does not. Tobacco’s significance to the regime lies not in its share of official trade, but in its invisibility to the architecture designed to intercept it: high margin, low volume, and entirely off the books.

North Korea has been running illicit tobacco operations since at least 1992. The scale is significant. Production capacity for counterfeit cigarettes alone is estimated to exceed two billion packs a year, according to the US Department of Justice. The regime earns as much as $20 for every $1 spent — margins that make conventional exports look trivial by comparison. A substantial portion of that revenue flows directly to the regime, its military, and its weapons programme.

The operation works through layers. North Korean factories produce cigarettes — some counterfeit, bearing well-known foreign brand names, others manufactured under commercial arrangements with Chinese partners — and move them through networks of front companies, intermediaries, and transit hubs across Southeast Asia. By the time the product reaches end markets, its origin is untraceable. The criminal infrastructure that handles distribution is not incidental to the trade. It is the trade.

The illicit tobacco trade around North Korea does not only attract criminal networks. It attracts legitimate ones too.

In 2023, British American Tobacco and its Singapore subsidiary agreed to pay more than $629 million to resolve charges that they had sold cigarettes to North Korea between 2007 and 2017 — the largest North Korea sanctions violation settlement in US Justice Department history. BAT’s Singapore operation had continued supplying a Pyongyang joint venture long after the company officially divested from it. The arrangement persisted across a decade of tightening international pressure.

The case is instructive not because it reveals exceptional corporate misconduct, but because it reveals something structural. Sanctions had made North Korea simultaneously off-limits and commercially attractive. That combination drew not just criminal networks operating in the shadows, but a FTSE 100 company with compliance departments and legal counsel operating in the light. The premium was large enough to change the calculation either way.

As sanctions tightened around visible trade routes, the network adapted rather than collapsed. Russian-linked entities, Hong Kong trading firms, and Southeast Asian intermediaries absorbed traffic that earlier channels could no longer move cleanly.

The point is structural: closing one route did not eliminate the incentive. It simply increased demand for alternative logistics. North Korea’s economy grew by an estimated 3.7 per cent in 2024, with deepening ties to Russia playing a significant role. The regime that sanctions were designed to weaken had spent three decades building the logistics, the relationships, and the legal camouflage to survive them.

Sanctions on North Korea have imposed real costs and constrained legitimate trade. But they have not achieved their central objective. By eliminating legal revenue streams, they pushed North Korea toward illicit ones — ones that turned out to be more lucrative, harder to monitor, and more difficult to disrupt than the trade they replaced.

The regime emerged from three decades of pressure as a specialised operator in global black markets: experienced, adaptable, and largely unbothered by the legal architecture designed to contain it. That is not a failure of intent. It is a consequence of design.

The Australian Border Force publishes data on where seized products come from before they arrive. In the 2024–25 financial year, the primary transit points for illicit tobacco entering Australia were China, Hong Kong, Singapore, and the UAE. These are not random waypoints. They are the same nodes that appear repeatedly in documented North Korean tobacco smuggling networks — the front companies, the freight forwarders, the trading entities that move product across jurisdictions without leaving a clear trail of origin.

This does not mean there is a direct connection. But it indicates something worth examining.

In March 2023, Australian federal police arrested Jin Guanghua at Melbourne Airport as he attempted to board a flight to China. Jin, a Chinese national who had been living in Australia, was subsequently extradited to the United States to face charges related to a multi-year scheme to facilitate North Korea’s illicit tobacco trade. Between 2009 and 2019, Jin and his co-conspirators — including a North Korean banker and two other Chinese nationals — had used front companies and false documentation to process approximately $74 million through US financial institutions on behalf of North Korean entities, in violation of sanctions.

Jin’s network was not a simple bilateral operation. It ran through companies registered in the United Kingdom, New Zealand, the UAE, and China. It used Hong Kong as a financial transit point. It processed transactions through US correspondent banks without their knowledge. And its key operator had been living quietly in Melbourne.

The case does not prove that Australian illicit tobacco consumers were buying North Korean product. What it proves is that the infrastructure supporting North Korea’s tobacco sanctions evasion had a physical presence in Australia — and that the same city hosting one of the world’s most aggressive illicit tobacco markets was also home to a central node in Pyongyang’s smuggling network.

The connection between Australia’s illicit tobacco market and North Korea’s sanctions evasion network is not a straight line. It is a shared ecosystem.

Both operate through the same transit hubs. Both rely on Chinese intermediaries and front companies to obscure origin and ownership. Both use container shipping through Southeast Asian ports to move product across jurisdictions. Both depend on the same gap between official price and black market price — a gap that, in Australia’s case, was created by regulation, and in North Korea’s case, was created by sanctions.

The organised crime networks that distribute illicit tobacco across suburban Australia are not ideological actors. They source from wherever the margin is best and the risk is lowest. The networks that move North Korean tobacco through Southeast Asia are not geopolitically motivated. They are commercial. Where those two sets of commercial interests intersect — in a shipping container, in a front company, in a transit hub — the distinction between a public health failure and a national security problem begins to dissolve.

It would be an overstatement to say that Australia’s tobacco excise policy is directly funding North Korea’s nuclear programme. The evidence does not support that conclusion, and this article does not make it.

What the evidence does support is more structural. Australia’s regulatory regime created a market large enough and profitable enough to attract the same class of international criminal networks that service North Korea’s sanctions evasion operations. It would be surprising if entirely separate illicit logistics ecosystems were operating through the same transit hubs, intermediaries, and shipping routes without at least some degree of overlap.

That overlap does not appear in parliamentary inquiries into tobacco excise policy. It does not appear in UN Panel of Experts reports on North Korean sanctions evasion. Each looks only at its own problem. The underlying infrastructure is likely more interconnected than the policy frameworks examining it.

Australia’s tobacco regime and the international sanctions architecture around North Korea were built by different institutions, for different purposes, in response to different problems. They share one feature: both assumed that restricting a legal market was equivalent to suppressing the underlying demand or motivation. In both cases, that assumption was wrong.

The pattern is consistent enough to suggest a structural problem rather than a series of policy mistakes. When a regulated market is made sufficiently expensive or inaccessible, it does not disappear. It migrates — to suppliers willing to absorb the legal risk in exchange for the premium that restriction creates. Those suppliers, once established, are harder to dislodge than the industries they replaced. They are more adaptable, less visible, and have stronger incentives to preserve the conditions that make them profitable.

Australia now faces a tobacco market in which half of all consumption is untaxed, a generation of young people is accessing nicotine through unregulated channels, and the criminal networks that supply them are entrenched enough to use arson and violence to protect their margins. The policy instruments that created this situation remain largely intact. Reversing them carries its own costs. Maintaining them sustains the market they inadvertently built.

North Korea presents a harder version of the same dilemma. Three decades of sanctions have not halted its nuclear programme. They have, however, produced a regime with sophisticated capabilities in sanctions evasion, black market logistics, and illicit finance — capabilities that now serve as a revenue stream in their own right. Easing sanctions risks rewarding that programme. Maintaining them sustains the evasion infrastructure they inadvertently funded.

Neither dilemma has a clean resolution. That is precisely the point. The question that both cases raise is not whether regulation and sanctions are legitimate tools — they are — but whether the enforcement ecosystems built around them are adequate to close the gaps that restriction inevitably creates. In some cases, restriction without viable legal substitutes may widen those gaps faster than enforcement can close them.

Tobacco is a minor commodity in the global economy. Its appearance at the intersection of a public health policy failure and a national security challenge is, in that sense, almost incidental. But the underlying structure will remain familiar: a restriction large enough to create a premium, and a premium large enough to sustain the infrastructure built to evade it.

Originally published at https://policycrossroads.substack.com.