Op-Ed: Impacts of the Double Duty Drawback
Blake Brown
Hugh C. Kiger Professor Emeritus
June 9, 2025
Executive Summary
The double duty drawback incentivizes US cigarette manufacturers to import cigarettes manufactured outside the US and export cigarettes manufactured in the US to avoid federal excises paid on cigarettes sold in the US. Since a court ruling in 2021 formalized this policy cigarette imports and exports have increased rapidly. This places over $11 billion in federal excise taxes at jeopardy as all cigarette manufactures move to adopt this practice. The impact on US tobacco farmers depends on the US tobacco content of imported and exported cigarettes. The potential negative impact of this practice on US tobacco farmers can be mitigated by a domestic content law for inclusion of US tobacco in cigarettes sold and manufactured in the US.
The Double Duty Drawback
Double duty drawback is a mechanism in US trade that allows the importer of a product to be refunded any duties and taxes if the importer then exports a similar product. This is in addition to the widely used and known duty drawback where a company importing product receives a refund of any tariffs paid on the imported product if the company then exports a like kind product. The implications of the double duty drawback are especially important for tobacco products. If a company imports cigarettes then the cigarettes are subject to the federal excise tax of $1.01 per pack if they are to be sold in the US. In the case of the double duty drawback, the company will receive a rebate of the excise tax if they export cigarettes. Imported cigarettes may be placed in a bonded warehouse where no excise tax is paid until they are removed to be sold in the US. If the importer exports an interchangeable product while the imported product is in the bonded warehouse no excise tax will be paid on the imported cigarettes until they come out of the bonded warehouse even though the company receives the excise tax rebate when interchangeable cigarettes are exported. In essence, this means a company manufacturing cigarettes for exports will pay zero excise tax on cigarettes it imports and sells in the US. Allowing rebate of tariffs on imported goods which are then exported dates back to the Tariff Act of 1789. However the ability to substitute exported cigarettes for imported cigarettes in terms of avoiding payment of excise taxes came about through legislation passed in 2015 and was only formalized in with regard to tobacco in a 2021 court ruling.
The Double Duty Drawback Impact
This system incentivizes domestic manufacturers of products subject to excise taxes to import interchangeable products for sale in the US and manufacture similar products in the US for export in order to avoid excise taxes. The impact of this unintended consequence has caused much controversy between domestic wine producers and importers of wine. The Journal Record reported in May 2025 that the double duty drawback had resulted in losses of excise taxes of $2.2 billion for eligible products which includes alcoholic beverages and tobacco products.
International cigarette manufacturers can utilize this mechanism to avoid excise taxes by importing cigarettes for sale in the US while exporting an offsetting quantity of substitutable cigarettes. In theory the policy could result in all cigarettes sold in the US to be imported and be excise tax free. While this may be an exaggeration, cigarette imports and exports have grown rapidly in recent years. An increasing share of major brands like Camel and Lucky Strike are being made in Mexico and imported into the US. In 2024 the US exported 423 million packs of cigarettes up from 34 million packs in 2021. The number of packs exported is the upper limit on the double duty drawback since the rebate can only be claimed if an interchangeable product is exported. The excise tax rebate on 2024 product potentially could be $427 million (Table 1). At the current rate of increase cigarettes eligible for the excise tax rebate will grow to 625 million packs by 2026 resulting in an annual loss of excise taxes of up to $631 million. This estimate is very conservative since now that this mechanism is well understood, cigarettes eligible for the rebate will grow even faster.
This mechanism effectively lowers the cost of selling imported cigarettes in the US by the amount of the excise tax. At some point all cigarette manufacturers will have to follow this practice to remain competitive in the US market. Excise taxes from tobacco products, totaled $11.3 billion in 2022. To the extent that some of the cost reduction is passed on to smokers, the policy will lead to an increase in US cigarette consumption.
Impact on Tobacco Farmers
Under the current double duty drawback Imported cigarettes will displace cigarettes manufactured in the US for sale in the US. But cigarettes manufactured for export must increase to match the quantity imported. The impact of the double duty drawback on US tobacco growers is uncertain. If the combined quantity of US tobacco in both imported and exported cigarettes is less than the quantity included in cigarettes manufactured in the US now, then the impact will be negative. Cigarettes manufactured for export and imported cigarettes are generally thought to have lower US tobacco content than cigarettes manufactured in the US for sale in the US.
If the current regulations for double duty drawbacks persist and use of US grown tobacco falls, what policies could mitigate this decline? The most effective policy measure would be a domestic content requirement as was implemented in 1994. The 1994 legislation required that 75% of tobacco content in US cigarettes be US grown tobacco. This content law was ruled inconsistent with the World Trade Organization’s then GATT agreement and was converted to a tariff rate quota that has become irrelevant over the last 20 years. However under the current trade environment a domestic inclusion regulation may be possible to protect US farmers from the unintended consequences of the double duty drawback. Table 1 shows the potential impact of various domestic inclusion levels.
Conclusions
The double duty drawback will result in rapidly increasing cigarette imports and exports as cigarette manufacturers use the policy to avoid excise taxes. To remain competitive all cigarette manufacturers will be forced to adopt this practice. This places $11.3 billion in excise taxes from cigarettes in jeopardy. The impact on US tobacco farmers depends on the content of US tobacco in the cigarettes manufactured for export and import. A domestic content requirement for use of US tobacco in manufacture and sale of cigarette in the US is the most effective policy to protect US farmers from the unintended consequences of this policy.
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