Tariff Evasion and Trade Policies

Governments use tariffs to manage the politics of international economic integration. To navigate competing demands on trade policy, governments can target tariff rates to individual products. But existing theories miss an important aspect of tariffs: they also need to be enforced at border crossings, which for some governments creates substantial challenges. Faced with high tariffs, firms can misclassify their products into categories with lower tariff rates. Pointing to the potential for such tariff evasion, I discuss the difficulties for governments in targeting tariffs for political gain, and I derive implications for trade politics. Constraints on the ability of governments to enforce tariffs, in the form of low bureaucratic capacity, emerge as an institutional determinant of trade policy, discouraging the use of product-specific tariff rates. Disaggregated tariff data provide empirical evidence for this argument. The article identifies an institutional constraint on trade politics, contributes to growing literatures on firm heterogeneity and on illicit cross-border economic activity, and speaks to debates on trade policy and government revenue.