Cigarettes are around 40 percent cheaper in Gibraltar than in Spain due to lower taxes and Madrid blames the British territory for a surge in cigarette smuggling to the Spanish mainland.
Spain in August introduced stringent border checks at its border with Gibraltar, leading to lengthy queues for motorists, in what it said was a move aimed at clamping down on cigarette smuggling.
But Gibraltar argues the stepped up border controls are in retaliation for the installation of an artificial reef in its waters that has prevented Spanish boats from fishing there.
In a New Year message broadcast on Gibraltar public television, Chief Minister Fabian Picardo said the British outpost "would not tolerate unsightly illicit tobacco activity on our beaches or near the frontier".
"I have already given additional powers to customs and Royal Gibraltar Police officers to move people from these areas. More is now being done which will include changes to our Tobacco Act and the setting up of new areas to search people and vehicles trying to exit Gibraltar," he said.
"Because the Gibraltarians are known to be a law-abiding people and we will not allow anyone to come from outside to tarnish our image internationally, however desperate their circumstances," he added.
Gibraltar does not currently inspect vehicles or pedestrians crossing into Spain.
In a letter sent to Britain in November the European Commission recommended improved measures to fight smuggling at Gibraltar's border with Spain. The letter was sent after its inspectors visited the border.
The Commission said at the time that it would review the situation at the border in six months.
Governments on both sides of the border have imposed limits on the amount of tobacco that can be purchased in Gibraltar.
But many people in the Spanish border town of La Linea, where unemployment has reached 40 percent, make a living by selling cigarettes they smuggle in from the British territory.
Spain ceded Gibraltar to Britain in 1713 but has long argued that it should be returned to Spanish sovereignty. London says it will not do so against the wishes of Gibraltarians, who are staunchly pro-British.