Evading tariffs: Misrepresenting differentiated product prices

Beata Javorcik and Gaia Narciso’s paper on “Differentiated Products and Evasion of Import Tariffs” is forthcoming in the Journal of International Economics. Here’s the abstract from an older, ungated version:

An emerging literature has demonstrated some unique characteristics of trade in
differentiated products. This paper contributes to the literature by postulating that
differentiated products may be subject to greater tariff evasion due to the difficulties associated
with assessing their quality and price. Using product-level data on trade between Germany and
10 Eastern European countries during 1992-2003, we find empirical support for this hypothesis.
We show that the trade gap, defined as the discrepancy between the value of exports reported
by Germany and the value of imports from Germany reported by the importing country, is
positively related to the level of tariff in 8 out of 10 countries. Further, we show that the
responsiveness of the trade gap to the tariff level is greater for differentiated products than for
homogenous goods. A one-percentage-point increase in the tariff rate is associated with a 0.6%
increase in the trade gap in the case of homogenous products and a 2.1% increase in the case of
differentiated products. Finally, the data indicate that greater tariff evasion observed for
differentiated products tends to take place through misrepresentation of the import prices.

The most well-known use of double-reporting in international trade to detect tax evasion is Ray Fisman and Shang-Jin Wei’s paper on “missing” trade between China and Hong Kong.