WTO accession and tariff evasion

Abstract

This study documents some unintended consequences of the World Trade Organization (WTO) membership by providing evidence on displacement of tariff evasion driven by the WTO accession process. The analysis focuses on the WTO Customs Valuation Agreement (CVA) which limits the discretion of customs officials when it comes to assessing the price of imports. While prior to the WTO accession customs officials are free to use their own judgment or apply minimum or reference prices, after their country joined the WTO they are mandated to accept the invoice price issued by the exporter. If customs officials enjoy discretion with respect to assessing the import price, they may assist importers with tariff evasion in exchange for bribes. Removing such discretion limits their ability to facilitate misrepresentation of import prices. Using data on 15 countries which joined the WTO between 1996 and 2008, we find a positive relationship between underreporting of import prices and the tariff rate, which is expected as the incentive to evade increases with the tariff rate. Importantly, this relationship disappears after a country joins the WTO. This result is consistent with the CVA closing one channel for corrupt behavior. However, we also find that changes to customs valuation procedures induce importers to seek alternative ways of tariff evasion, such as underreporting of quantities and product misclassification. The overall level of evasion remains unchanged.