BREAD Working Paper No. 115, April 2006

Outsourcing Tariff Evasion: A New Explanation for Entrep(t Trade

Ray Fisman, Peter Moustakerski, Shang-Jin Wei

Abstract

Traditional explanations for indirect trade through an entrep(t have focused on savings in transport costs and on the role of specialized agents in processing and distribution. ?We provide an alternative perspective based on the possibility that entrep(ts may facilitate tariff evasion. Using data on direct exports to mainland China and indirect exports via Hong Kong SAR, we find that the indirect export rate rises with the Chinese tariff rate, even though there is no legal tax advantage to sending goods via Hong Kong SAR. ?We undertake a number of extensions to rule out plausible alternative hypotheses based on existing explanations for entrep(t trade.

Keywords: tax evasion, indirect trade, corruption

JEL classification codes: H2, F1

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