Traditional explanations for high rates of indirect trade have focused on the role of specialized agents in processing and distribution. We provide an alternative explanation based on the differential ability to evade tariffs from some trade entrepôts. Using data on exports to mainland China, we find that the fraction of goods that are routed through Hong Kong (rather than sent directly) is positively correlated with the Chinese tariff rates, both in the cross section and in differences, even though there is no legal tax advantage to sending goods via Hong Kong. Further, this pattern holds for both differentiated and homogeneous products. As a control, we also examine indirect exports to China via Singapore, another entrepôt with less scope for evasion; there is no correlation between indirect export rates and tariff rates in this case.
Fisman, Raymond, Peter Moustakerski, and Shang-Jin Wei. "Offshoring Tariff Evasion: Evidence from Hong Kong as Entrepôt Trader." Columbia Business School, January 2005.
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