Academic journal article Economic Inquiry

Quota-Hopping In-Bond Diversion

Academic journal article Economic Inquiry

Quota-Hopping In-Bond Diversion

Article excerpt

I. INTRODUCTION

Illegal behavior of firms is widespread in international trade. To avoid corporate taxes, U.S. multinationals engage in transfer pricing (Bernard, Jensen, and Schott 2006) while in Europe entrepot trade is used to evade value-added taxes (Baldwin 2007). To avoid import tariffs in China, Hong Kong exporters under-invoice or misdeclare their shipments (Fisman and Wei 2004). Weapon makers in corrupt countries export to areas of civil conflicts despite arms embargoes (DellaVigna and La Ferrara 2010). More generally, Dutt and Traca (2010) show that when tariffs are high, bribes grease the wheels of commerce.

In this paper we show that the U.S. in-bond system of imports may also be used as a means to avoid trade barriers. The in-bond system is a key component of U.S. commerce. The Government Accountability Office (GAO 2007) estimates that between 30 and 60% of shipments enter the country under this regime at the biggest coastal ports. The system allows merchandise to enter the United States at its port of arrival without duties or quotas being assessed, and be shipped in-bond to another U.S. port for U.S. entry or export. While the system facilitates trade by allowing importers to avoid congestion and delays at U.S. ports, poor data collection and the unusual flexibilities it grants to traders has posed threats to enforcement of trade policies (GAO 1994, 2004, 2007). Among these flexibilities, importers or shipping agents have the ability to initiate and close in-bond transactions, to extend transportation time frames up to 30 days after the opening of the transaction and to change their port of entry (or export) without informing customs officials (GAO 2007).

According to government reports, illicit-minded traders have exploited these loopholes to avoid tariffs and quotas, especially in the highly-protected apparel and textile industry. The practice has been dubbed "in-bond diversion" (GAO 2004); after entering the U.S. territory as in-bond, goods are diverted in transit and never reach their purported port of entry or export but rather enter the U.S. market without being subject to tariffs or quotas. The same report suggests that in many detected cases of illegal in-bond diversion warehouses were used as "black holes" where in-bond shipments would go before getting lost in the U.S. market. A 2003 investigation found that 5,000 containers of apparel, falsely declared as in-bond for Mexico, had illegally entered the United States, avoiding quota restrictions and payment of $63 million in duties (GAO 2004). According to the same report, the ports of Long Beach and El Paso made 120 seizures involving textiles between May and October 2003. A similar scheme involving a custom broker in Laredo (Texas) was uncovered by the U.S. Immigration Customs and Enforcement (ICE) (Laredo Morning Times 2006). A report from CustomsInfo (2012) highlights a major U.S. customs fraud operation was detected whereby over 90 container shipments of clothing from China, cigarettes from India and Germany, and packages of the Mexican cactus dish nopalitos, evaded $10 million in tariffs at the Long Beach Port-of-Entry. The paperwork indicated the goods were not intended for sale in the United States but "en route" to another country.

How could in-bond diversion be so prevalent? Frittelli (2005), in a report to the U.S. Congress on port and maritime security, puts it simply: "The United States has more than 3,700 ports and receives more than 6 million cargo containers per year, but only 2% of them are physically inspected by customs agents." Back in 1984, U.S. authorities tried to tackle this issue by detailing the type of information (e.g., quantity description, net weight and total value of the textile shipment) that customs officers at the port of arrival could use to approve in-bond status for imported textiles (U.S. Customs Service--Department of the Treasury 1984). However, these measures were not able to halt in-bond diversion as the importers could provide such information on a voluntary basis and failing to do so wouldn't necessarily result in denial of the in-bond movement (GAO 2004). …

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