part 1: how does domestic institutions affect trade, capital flows, and government policies? 1. how...
TRANSCRIPT
Part 1: How does domestic institutions affect trade, capital flows, and government policies?
• 1. “How taxing is corruption on international investors?”Review of Econ and Statistics
• 2. “Corruption and FDI: Firm-level Evidence’’• 3. “Transparency and international portfolio positions”
Journal of Finance• 4. “Monetary policies for developing countries: The role of
corruption” R&R with J of Int’l Econ• 5. “Does Insider trading raise stock market volatility?”
Economic Journal• 6. “Domestic crony capitalism and International fickle
capital: Is there a connection” International Finance
• 7. “Offshoring tariff evasion” working paper
Part 2: Explaining institutional quality
• 1. “Natural openness and good government”
• 2. “Do externally imposed reforms work?”
• 3. “Tax rates and tax evasion: evidence from ‘missing trade’ in China”
Journal of Political Economy
Outsourcing Tariff Evasion:Evidence From Hong Kong
As Entrepôt Trader
Raymond Fisman
Peter Moustakerski
and
Shang-Jin Wei
Outsourcing Corruption
• Hong Kong & Entrepôt Trade
• Data
• Results
• Conclusions
Hong Kong as Entrepot: Direct vs. Indirect Imports
USA
HK
China
80%
20%
Indirect trade is prominent in world commerce
• 30+ countries do a significant amt of indirect trade including:
• HK, Macao, Cyprus, Fiji, Senegal, Jordan, Armenia, Seychelles, Honduras, Benin, Montserrat, St. Lucia, and Singapore
Why Indirect Trade?
• Middlemen have a comparative advantage in matching buyers and sellers.
• What is the nature of the comparative advantage?– Better information– Better contract enforcement
• Our alternative explanation – outsourcing evasion
HK: Anecdotal evidence
• “Using unofficial channels, to bring in a 40 foot container of imported fresh fruit from Hong Kong to one of the cities in the Pearl River Delta costs approximately $4,000 to $6,000. ... This amount is usually much less than the price paid when using official channels.” (USDA, 1997)
Fisman and Wei (JPE 2004)
• Use reporting gap to measure tax evasion– Report gap = evasion + noise
• Study the responsiveness of evasion to tax rate
• Finiding: one percentage point rise in tax rate -> 3% increase in evasion
Do Tariffs Affect Evasion?
‘Gap’i = i + *(Tax Rate)i + I
Basic Finding: > 0
Current Paper’s Framework
1. Assume: (a) evasion can only occur by going thro HK(b) Traders are risk-neutral
2. Benefit = τiV
Cost = C + γ(τiV) +ηi
3. Assume ηi is iid and has a cdf of F(.), then Indirect trade ratio = F( (1-γ)τiV-C )
4. If F is uniform, then
Indirect trade ratio = α+βτi + ei
Data – sources
• Tariffs (tariffiy): WITS/UNCTAD
• Direct Exports (TRAINS): dir_exiyc
• Indirect Exports (Smartal): re_exiyc
• Additional Data– Information on tax exempt status of goods (Chinese Customs
statistics, only for 1998)
– Data on Singapore re-exports
Data Coverage
• Years = 1996 – 2001
Indirect Export Ratios and Tariff Rates, by year, 1996-2001 (in percent)
Year Hong Kong Tariff SingaporeRatio Rate Ratio
1996 26 23.6
1997 22.9 22.1
1998 23.9 17.5
1999 22.5 17.1 5.2
2000 21.8 16.9 5.3
2001 20.2 15.8 4.9
Total 22.9 18.8 5.1
List of Exporting Countries
Country Annual Observations
Argentina 356Australia 1,250Austria 1,789Canada 1,089Czech Republic 645Denmark 797Finland 961France 2,209Germany 2,890Great Britain 2,246Greece 204Hungary 290Indonesia 1,292Ireland 448Italy 2,418
Country Annual Observations
Japan 3,649Korea 3,363Mexico 257Netherlands 1,453New Zealand 426Norway 564Poland 107Portugal 335Slovenia 135Spain 1,279Sweden 1,390Switzerland 1,791Turkey 467United States 3,569
Basic Specification
iyiyiy
Cciyciyc
Cciyc
tariffexdirexre
exre
*)()__(
_
reexport_ratioiy
Basic Specification(Dependent Variable = Indirect-export_ratio)
Tariff 0.250 0.286 0.113
(0.027) (0.044) (0.040)
Time fixed effects Yes Yes YesExporter fixed effects Yes Yes YesIndustry fixed effects No 3-digit 6-digitObservations 27577 27577 27577R-squared 0.02 0.17 0.71
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0 10 20 30 40 50 60 70
1998 Tariff
19
98
Re
-ex
po
rt R
ate
Magnitude of the effect:
• Increase in tariff from 0% to 18% (mean tariff rate) results in higher indirect trade ratio of 5% (relative to the mean of 12%, sd of 0.23)
• Amount of evasion facilitated through re-exports:Evasion = Σ0.25*Tariff*Re-exports
• Deflating by total imports:Evasion Rate ≈ 0.02
Can we rule out plausible alternatives?
1. Does it survive a differenced specification?
2. Does it hold for homogeneous products?
3. Does it hold better for non-exempted products than exempted ones?
4. Does it hold better for HK than for Singapore?
Extensions and Robustness Checks(Dependent Variable = Indirect-export_ratio)
Tariff 0.705(0.100)
∆Tariff 0.169(0.047)
Tariff 2 -0.616(0.134)
Time Fixed Effects Yes YesIndustry Fixed Effects 3-digit HS
Observations 4411 27577R-squared 0.00 0.17
Coincidence of Product Characteristics
• H1: Indirect trade is driven by product characteristics, not by evasion. In particularly, there may be a coincidental correlation b/n product characteristics that render them to be intermediated and their tariff rates.
• H2: Indirect trade is driven by evasion
Test 1: product fixed effectsTest 2: first differenceTest 3: separate homogeneous vs differentiated products
Differentiated vs. Homogeneous Products
Homogeneous Differentiated All ProductsProducts Products
Tariff 0.173 0.280 0.182
(0.084) (0.096) (0.064)
Differentiated 0.087 *Tariff (0.073)
Fixed Effects Year-Industry (3-digit HS)
Observations 6375 12605 18980R-squared 0.21 0.19 0.18
Tariff-driven legal avoidance
• Ha: HK middlemen may be good at obtaining legal tariff exemptions, not illegal tariff evasion
• Test: Separate products into a highly-exempted group vs a non-exempted group
Effect of Exemptions
Exemption Exemption Exemption Exemption
<5% <10% >90% >95%
Tariff 0.384 0.440 -0.174 -0.279(0.198) (0.147) (0.220) (0.296)
Fixed Effects Year-Industry (3-digit HS)
Observations 1262 2526 2526 1262R-squared 0.48 0.38 0.36 0.42
Indirect Exports
Singapore vs. Hong Kong via Singapore via Hong Kong
Tariff 0.003 -0.008 0.276 0.268 0.276 0.270
(0.011) (0.028) (0.057) (0.085) (0.057) (0.084)
SGP Indirect_export_ratio 0.259 0.226 (0.042) (0.047)
Observations 14828 5994 14828 5994 14828 5994R-squared 0.09 0.18 0.22 0.25 0.22 0.26
Conclusion
• Tariff evasion is an important motivation for indirect trade in world commerce
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
-40 -30 -20 -10 0 10 20 30
Change in Tariff, 1996-2001
Ch
an
ge
Re
-ex
po
rt R
ate
, 19
96
-20
01