Consider this sequence of events.

During the Cold War, the Cuban government becomes communist and aligns with the Soviet Union, and many of that country’s productive citizens flee to the United States where property rights are more secure and government is more constrained. Cuba’s economy predictably fails and is kept afloat for years by foreign aid provided mostly by the Soviets. Meanwhile, Cuban businesses first take root, then flourish in the US, particularly in Miami, including a cigar industry based in Little Havana.

“The FDA’s policies — fascist in the sense that they allow for private ownership but government control — mean that, at the end of the day, the portion of the US cigar industry that escaped Cuba simply traded one repressive regime for another.”

Ironically, many of these cigar manufacturers succeed due to government intervention in the form of the Cuban trade embargo, enforced by the US government. Meanwhile, American demand for Cuban-grown and rolled cigars remains high, and many purchase them in extra-legal markets or on trips abroad — often when “abroad” translates to Mexico or Canada. I once met a man who smoked a Cuban cigar in the 1980s. It was such a profoundly pleasurable experience that he vowed to never smoke another cigar again.

So it went until the Cuban embargo was lifted by the US government last year and questions arose about whether Miami-based cigar manufacturers would survive competition from los cigarros cubanos. Unfortunately, a threat bigger than competition emerged in the form of new rules for cigar manufacturers announced last week by the Food and Drug Administration.

[Read the full story here, at Mises Wire]

Based on the “duty to protect public health,” the FDA is requiring cigar manufacturers to comply with rules drawn up last year for the electronic cigarette market. These include the requirement of so-called “pre-authorization” applications and fees before being allowed to sell their product. These aren’t one-time tariffs either, as any decision to change tobacco blends in the future — a common practice in a premium cigar market responsive to consumer tastes and preferences — requires FDA permission involving new rounds of applications and fees.

The costs are enormous and they especially affect the small business, as explained in a recent Miami Herald article:

“I mean I get it — you have to do what Uncle Sam says,” said Sandy Cobas, owner of El Titan, one of the 119 Miami businesses that Miami Mayor Tomás Regalado says depend on hand-rolled cigars. “But how are we going to be able to afford this?”

She isn’t alone, say industry experts like Marvin Shanken, founder, editor and publisher of Cigar Aficionado magazine.

“Miami, and South Florida in general, is the heart of the cigar industry,” Shanken said. “The impact will be most visible there, without a doubt.”

The FDA estimates that small businesses like El Titan, which produces 250,000 to 300,000 cigars per year, will pay $278,000 to $397,000 in application fees and other costs during the initial compliance period. While El Titan will be able to pass some of those fees on to the companies that hire it to make private-label smokes, it will still need to raise prices.

The new rules will have the greatest impact on companies less than a decade old, which will be required to apply for pre-market approval at an average cost of $6,560 per application, according to FDA estimates.

Fourth generation cigar roller, Jose Blanco, who opened Los Cumbres Tabaco in Doral in 2014, figures he will have to submit between 25 and 30 applications, which likely will cost more than $100,000. “For companies starting off in this business, you’re lucky to be breaking even like we are,” Blanco said.

Cigars sold prior to Feb. 15, 2007 — an estimated 60 percent of all cigars sold in the U.S., according to the FDA — are grandfathered in.

Though Tamarac-based Gurkha Cigars was incorporated in 1989 (the brand was first established in 1887), the company estimates it will pay $500,000 in legal costs on top of fees for 800 individual applications.

It’s a lot of money that harms small manufacturers to benefit large ones. In fact, it’s likely the large ones championed the FDA rules to provide them with more market power in a post-embargo world. It also reflects the first rule of government regulation of business, that regulation always causes secondary effects that are sometimes anticipated, and sometimes not. Read the rest of this entry »