Accession to the World Trade Organization and Tariff Evasion

This study documents some unintended consequences of the WTO membership by providing evidence on displacement of tariff evasion driven by the WTO accession process. We argue that implementation of Article VII of the GATT resulted in limiting discretion of customs officials in terms of assessing unit values of goods. While prior to the WTO accession, officials were free to use minimum or reference prices, after their country joined the WTO they were mandated to accept the invoice issued by the exporter. This limited the scope for negotiation between importers and customs officials and their ability to misrepresent import prices. This institutional reform has effectively shut down one channel of import duty evasion. Dishonest importers have responded by relying more heavily on alternative evasion channels, such as undercounting quantities and product misclassification. We formally test these hypotheses using data on 15 countries which joined the WTO between 1996 and 2008. We calculate the discrepancy in the unit values of imports as reported by the exporter and the importer and find that there is a positive relationship between the tariff rate and misrepresentation of import prices prior to the accession. This relationship disappears after the country joins the WTO. However, at the same time we find that removing the opportunity to underreport unit values has induced importers to underreport quantities. We find that in the post-accession period there is a positive and statistically significant relationship between underreporting of import quantities and the tariff rate. Further, we find that the relationship between the tariff on similar products and underreporting quantities becomes stronger after the accession, which is suggestive of product misclassification becoming more widespread.