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Part 1: How does domestic institutions affect trade, capital flows, and government policies? 1. How taxing is corruption on international investors? Review.

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Presentation on theme: "Part 1: How does domestic institutions affect trade, capital flows, and government policies? 1. How taxing is corruption on international investors? Review."— Presentation transcript:

1 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 corruptionR&R with J of Intl 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 evasionworking paper

2 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

3 Outsourcing Tariff Evasion: Evidence From Hong Kong As Entrepôt Trader Raymond Fisman Peter Moustakerski and Shang-Jin Wei

4 Outsourcing Corruption Hong Kong & Entrepôt Trade Data Results Conclusions

5 Hong Kong as Entrepot: Direct vs. Indirect Imports USA HK China 80% 20%

6 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

7 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

8 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)

9 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

10 Do Tariffs Affect Evasion? Gap i = i + *(Tax Rate) i + I Basic Finding: > 0

11 Current Papers Framework 1. Assume: (a) evasion can only occur by going thro HK (b) Traders are risk-neutral 2. Benefit = τ i V Cost = C + γ(τ i V) +η i 3. Assume η i is iid and has a cdf of F(.), then Indirect trade ratio = F( (1-γ)τ i V-C ) 4. If F is uniform, then Indirect trade ratio = α + βτ i + e i

12 Data – sources Tariffs (tariff iy ): WITS/UNCTAD Direct Exports (TRAINS): dir_ex iyc Indirect Exports (Smartal): re_ex iyc Additional Data –Information on tax exempt status of goods (Chinese Customs statistics, only for 1998) –Data on Singapore re-exports

13 Data Coverage Years = 1996 – 2001

14 Indirect Export Ratios and Tariff Rates, by year, 1996-2001 (in percent) YearHong Kong TariffSingapore Ratio RateRatio 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

15 List of Exporting Countries CountryAnnual Observations Argentina356 Australia1,250 Austria1,789 Canada1,089 Czech Republic645 Denmark797 Finland961 France2,209 Germany2,890 Great Britain2,246 Greece204 Hungary290 Indonesia1,292 Ireland448 Italy2,418 CountryAnnual Observations Japan3,649 Korea3,363 Mexico257 Netherlands1,453 New Zealand426 Norway564 Poland107 Portugal335 Slovenia135 Spain1,279 Sweden1,390 Switzerland1,791 Turkey467 United States3,569

16 Basic Specification reexport_ratio iy

17 Basic Specification (Dependent Variable = Indirect-export_ratio) Tariff0.2500.2860.113 (0.027)(0.044)(0.040) Time fixed effectsYesYesYes Exporter fixed effectsYesYesYes Industry fixed effectsNo3-digit6-digit Observations275772757727577 R-squared0.020.170.71


19 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

20 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?

21 Extensions and Robustness Checks (Dependent Variable = Indirect-export_ratio) Tariff0.705 (0.100) Tariff0.169 (0.047) Tariff 2 -0.616 (0.134) Time Fixed Effects YesYes Industry Fixed Effects3-digit HS Observations441127577 R-squared0.000.17

22 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 effects Test 2: first difference Test 3: separate homogeneous vs differentiated products

23 Differentiated vs. Homogeneous Products Homogeneous Differentiated All ProductsProducts Tariff0.1730.2800.182 (0.084)(0.096)(0.064) Differentiated0.087 *Tariff (0.073) Fixed EffectsYear-Industry (3-digit HS) Observations63751260518980 R-squared0.210.190.18

24 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

25 Effect of Exemptions Exemption Exemption 90% >95% Tariff0.3840.440-0.174-0.279 (0.198)(0.147)(0.220)(0.296) Fixed EffectsYear-Industry (3-digit HS) Observations1262252625261262 R-squared0.480.380.360.42

26 Indirect Exports Singapore vs. Hong Kong via Singaporevia Hong Kong Tariff0.003-0.0080.2760.2680.2760.270 (0.011)(0.028)(0.057)(0.085)(0.057)(0.084) SGP Indirect_export_ratio0.2590.226 (0.042)(0.047) Observations148285994148285994148285994 R-squared0.

27 Conclusion Tariff evasion is an important motivation for indirect trade in world commerce


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