Abnormal pricing in international commodity trade: Empirical evidence from Switzerland

Rahul Mehrotra,Gilles Carbonnier

doi:10.1016/j.resourpol.2021.102352

Rahul Mehrotra, Gilles Carbonnier

Open Access

https://doi.org/10.1016/j.resourpol.2021.102352

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Abstract

Mispricing of international trade in natural resources poses a significant risk for tax base erosion from resource-rich, developing countries, while also contributing to regulatory and financial risks for commodity trading hubs. This paper presents a novel empirical approach which combines statistical price-filter analysis methods with commodity market research to provide evidence on the magnitude of abnormally priced Swiss commodity imports. Our analysis compares transaction-level import prices to an arm's length price range representing fair market value and defined using contemporaneous benchmark prices from commodity exchanges, adjusted for product-specific factors. We find a significant magnitude of abnormally under-valued unwrought gold doré imports as well as relatively smaller magnitudes of abnormally under-valued cocoa and coffee imports. Next, we contrast our new estimates with traditionally used proxies for trade mispricing based on aggregate mirror trade statistics to highlight the unreliability of widely used methods and data sources. Finally, we discuss the limitations in our analysis even using the best available administrative data which reinforces the urgency to improve the statistical infrastructure used to record international commodity trading in order to promote transparency and improve international trade governance.

Highlights

Mispricing of international trade in natural resources is a global challenge for both developing and advanced countries
Effective revenue generation from the natural resource sector is critically important for meeting domestic revenue mobilization goals in developing countries which comprise 63 of the top 70 mining countries by contribution of the sector to the economy (International Council on Mining and Metals, 2014; Readhead, 2018; Venables, 2016)
We compare the unit values (CHF per kilogram) of transaction-level trade microdata with an appropriate market bench mark calculated using free-market prices adjusted for relevant product and market-specific factors identified by traders and regulators. This methodology is motivated by the World Trade Organization’s Trans action Value methods for customs valuation, and the Comparable Un controlled Price (CUP) method for transfer pricing analysis of trade between related firms (Platform for Collaboration on Tax, 2017; United Nations, 2017).4. These methods recommend the use of quoted, free-market prices as a starting point for identifying arm’s length prices, 3 This paper focuses on Illicit financial flows (IFFs) resulting from business and financial practices of legally established business entities involved in international trade, as opposed to the illegal cross-border activities of criminal groups which may include smuggling and money laundering

Summary

Introduction

Mispricing of international trade in natural resources is a global challenge for both developing and advanced countries Bhagwati and Hansen, 1973; J. N. Bhagwati et al, 1974; Fisman et al, 2008; Fisman and Wei, 2004; Ndikumana et al, 2015; Ndikumana and Sarr, 2019). Resource-rich developing countries generate a significant share of their public revenues from the production and sale of mineral and agricultural commodities. The commodity-trading sector accounts for a significant share of economic activity in leading trade hubs.. The commodity-trading sector accounts for a significant share of economic activity in leading trade hubs.2 These trading hubs face significant risks from illicit financial inflows that expose their trading and financial sectors to legal and financial risks from tax evasion, money laundering and stolen assets, as well as criminal or terrorism financing (Financial Action Task Force, 2016a) The commodity-trading sector accounts for a significant share of economic activity in leading trade hubs. These trading hubs face significant risks from illicit financial inflows that expose their trading and financial sectors to legal and financial risks from tax evasion, money laundering and stolen assets, as well as criminal or terrorism financing (Financial Action Task Force, 2016a)

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