Abstract
The effect of tariff evasion on price formations is relevant in understanding the welfare consequence of illicit trades. Previous empirical studies demonstrate that tax evasion reduces the effects of tariffs on equilibrium prices, but admit an alternative explanation: traders bore the incidence. This paper aims to refine the price disparity analysis to allow for that explanation. An application considers the market for imported pork parts in Japan to exploit the variation in tariff rates over time and across products. Using novel data on monthly wholesale prices on narrowly-defined pork products from 2001 through 2012, I find that a widespread evasion nullified safeguard tariffs almost fully. An alternative identification strategy corroborates the evidence on widespread evasion: An upper bound estimate on the total amount of tariffs evaded is 5.5 times as much as the collected revenue. Additionally, the result indicates that a tougher enforcement reduces evasions.
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