Smuggling and trade policy

Abstract

Publisher Summary This chapter focuses on the smuggling and trade policy. The phenomenon of smuggling in an open economy can be incorporated readily into standard trade-theoretic analysis by treating smuggling as essentially involving a less favorable transformation curve insofar as smuggling involves a real cost. The chapter describes the same analytical device and discusses the extension of Bhagwati–Hansen analysis to a number of other issues traditionally considered in the theory of international trade policy. The same analytical simplifications are that smuggled goods and legal imports are cleared at the same final price and consumers do not discriminate in their purchases between the two sources of supply, changes in social welfare are analyzed by reference to a standard Crusoe type social utility function defined on the current availability of goods and services, goods constituting consumption and directly entering the utility function are smuggled, and not bad, such as, heroin, or assets, such as, gold, and expenditure on enforcement of the tariff is held implicitly constant in comparing the tariff-with-smuggling and tariff-without-smuggling situations and is not explicitly considered, in keeping with the tradition of trade theory, in comparing either with the free-trade situation. The real cost arises insofar as the avoidance of normal trade channels leads to increased costs, for example, more expensive transport and higher f.o.b. price for imports.