Traditional explanations for indirect trade through an entrepot focus on savings in transport costs and the role of specialized agents in processing and distribution. We provide an alternative perspective based on the potential for entrepots to 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, despite the absence of any legal tax advantage to sending goods via Hong Kong SAR. We present several robustness tests to rule out plausible alternative hypotheses based on existing explanations for entrepot trade.
Fisman, Raymond, Peter Moustakerski, and Shang-Jin Wei. "Outsourcing Tariff Evasion: A New Explanation for Entrepôt Trade." The Review of Economics and Statistics 90, no. 3 (August 2008): 587-592.
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