Michael J. Ferrantino, Xuepeng Liu, and Zhi Wang
Evasion Behaviors of Exporters and Importers: Evidence From the U.S.–China Trade Data Discrepancy Journal of International Economics Vol. 86, Issue 1 (January) 2012, pp.141-157
This study uncovers unobserved tax evasion behaviors using reported U.S.-China eastbound trade statistics. Since the late 1990s, reported U.S. imports from China and Hong Kong have regularly and increasingly exceeded reported exports of China and Hong Kong to the United States, although in theory they should be very similar. Through detailed empirical analysis, the authors find strong statistical evidence of under-reporting exports at the Chinese border to avoid paying value-added tax (VAT). The value of VAT avoided is estimated at $6.5 billion during 2002-2008, and the associated understatements account for approximately two-thirds of the discrepancy. The increasing U.S. trade deficit with China is frequently viewed with alarm in U.S. policy circles. Examining the large trade data reporting discrepancies not only provides policy makers a clearer picture of US-China trade but also helps Customs authorities detect and curb evasion behaviors. In addition, the widespread evasion of VAT by exporting firms suggests that it may be difficult for the Chinese government to obtain very strong results from the present practice of using variations in the VAT rebate as a multi-purpose policy instrument to promote or discourage the exports in certain sectors. This paper shows that the effectiveness of such policies can be undermined by widespread evasion of the VAT.
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