Background

The U.S. lost an estimated $10 billion in tariff revenue in 2020 from efforts to evade U.S. tariffs, according to new research from the Federal Reserve Bank of New York. The findings could prompt lawmakers or others to pressure U.S. Customs and Border Protection to further ramp up its efforts to enforce tariff collections.

According to a blog post from the bank, researchers came to this conclusion after looking at the longstanding discrepancy in U.S. and Chinese statistics on two-way trade. During the decade prior to 2018, the U.S. reported a trade deficit with China that was on average $95 billion larger than the deficit implied by China’s data. However, this statistical gap narrowed significantly after the U.S. imposed Section 301 tariffs on hundreds of billions of dollars’ worth of imports from China starting in 2018, and even reversed in 2020, largely because for the first time ever China’s reported exports to the U.S. had become larger than U.S.-reported imports from China.

The researchers noted that there could be a number of reasons for this shift, including routing trade through third countries to avoid the “made in China” label, misreporting by firms engaging in arms’-length trade, or Chinese firms trying to circumvent Chinese capital controls by inflating export figures.

However, they said misreporting trade to avoid taxes “would appear to be highly relevant” as a primary explanation. For example, with tariff hikes increasing average U.S. tariffs on imports from China from three percent in mid-2018 to 17.5 percent in September 2020, “it seems clear that U.S. importers faced incentives to minimize tariff tax liabilities by finding ways to underreport import values from China, perhaps utilizing low-ball invoices provided by their Chinese suppliers.” The researchers estimated that 17 percent of the decrease in the trade data gap ($55 billion) is due to efforts to evade U.S. tariffs.

In addition, Chinese firms that sell both domestically and externally “have long been known to engage in illicit tax minimization by underreporting exports” to gather rebates of value-added taxes. When China engaged in “four sweeping waves of increases in rebate rates (reductions in export taxes)” in response to the U.S. tariffs, the result “was to incentivize increases in reported export values from China, both through less under-invoicing and through outright over-invoicing.” The researchers estimated that 13 percent of the trade data gap ($12 billion) was due to changes in China’s VAT rebate rates.

The researchers reached two conclusions from their review. One is that the U.S.-China trade war “had a much smaller impact on the U.S. bilateral trade balance with China than first meets the eye when looking at U.S. data.” The second is that an estimated $10 billion of tariff revenue may have been lost to import underreporting in 2020, or about a third of the increased tariff revenues the U.S. saw that year.

Copyright © 2021 Sandler, Travis & Rosenberg, P.A.; WorldTrade Interactive, Inc. All rights reserved.

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