DP6078 Outsourcing Tariff Evasion: A New Explanation for Entrep˘t Trade

Author(s): Raymond Fisman, Peter Moustakerski, Shang-Jin Wei
Publication Date: February 2007
Keyword(s): corruption, middleman, tax evasion
JEL(s): F1, H2
Programme Areas: International Trade and Regional Economics, Development Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6078

Traditional explanations for indirect trade through an entrep├┤t have focused on savings in transport costs and on the role of specialized agents in processing and distribution. We provide an alternative perspective based on the possibility that entrep├┤ts may facilitate tariff evasion. Using data on direct exports to mainland China and indirect exports via Hong Kong SAR, we find that the indirect export rate rises with the Chinese tariff rate, even though there is no legal tax advantage to sending goods via Hong Kong SAR. We undertake a number of extensions to rule out plausible alternative hypotheses based on existing explanations for entrep├┤t trade.