According to Global Financial Integrity (GFI), in 2009, importers and exporters sent $569 billion out of developing countries through trade mispricing. Trade mispricing, in case you’re not already aware, is a process by which individuals can transfer money abroad without detection. By over-invoicing imports and under-invoicing exports, individuals can evade taxes and avert capital controls through routine trade.
Here’s how it works: Suppose a Mexican furniture manufacturer, who wants to send money abroad illegally, imports $100 worth of timber from the United States. Instead of paying $100, the furniture company reports and pays $200. The company’s U.S. trading partner takes $100 for the furniture, reports the $100 on its own invoice, and shifts the extra $100 to a secret Delaware bank account (and maybe keeps an extra few dollars as a transaction fee). Now the furniture company has shifted the $100 to the United States without Mexico’s knowledge.
But the $100 discrepancy is also reflected in the difference between what the United States says it exported to Mexico and what Mexico reports it imported from the United States. So GFI calculates these figures by comparing world trade data. Trade data is bilateral, which means that we can compare what County A says it exported to the world against what the world says it imported from Country A. Of course, these statistics are by no means perfect so some of the observed differences are just the result of statistical errors. But some of the difference is not statistical noise; it’s illicit transfers of wealth. And that’s what GFI tries to measure.
It’s a rather complex exercise, one which involves a lot of really big numbers. Like $569 billion. Most of us (read: human beings) don’t have a way to contextualize numbers that big. Trying to relate to numbers that big is a lot like trying to relate to the size of the solar system (which, according to a recent article in the New York Times, is notoriously difficult for all of us). Actually it’s harder. Pluto is a mere 3.75 billion miles from the sun (you have no idea how far that is do you?). Trade mispricing in 2009 cost developing countries 569 billion dollars. That’s 151 times bigger. See? We might as well be talking in an alien language.
The big numbers are useful for a lot of statistical reasons. They’re helpful for getting people’s attention. They’re helpful for persuading policy makers to sit up and take notice. But they’re not particularly helpful for actually understanding the concept of trade mispricing. Ironically.
The New York Times article I cited earlier suggested, in communicating vastness, to rescale the…ahem…scale, around you. They point to Sagan Planet Walk—those miniature solar systems that allow you to walk from planet to planet in a few minutes—as an example of a rescaling of an immense scale.
One way to do this in trade mispricing is to point out specific examples of items and their mispriced price. People have done this one before, but I’ll still give a couple of ludicrous ones: U.S. companies have imported tweezers from Japan for $4,896 apiece and razor blades from Great Britain for $113 each.
By the way, trade mispricing happens in the other direction (although not as consistently) to avoid import taxes. For example, take the case of 10,000 invoices of luxury cars imported to Thailand from Britain. Officials found the invoices were consistently falsified so that the prices declared were far below the actual value of the vehicles, an attempt to avoid paying full import taxes. Thailand’s Deputy Permanent Secretary for Justice noted that each car should have been taxed upwards of 1 million bhat ($32,642). He calculates a total loss to the government of Thailand was around 60 billion baht, that’s about $1.9 billion.1 Shoot. Now we’re back to those big numbers again.
Trade mispricing also happens over state lines in the U.S., by the way. Federal agents busted cigarette distributors in Kentucky who avoided $2 million in taxes over a decade of business by using fake invoices. According to the agents, the distributor “purchased large amounts of cigarettes in Kentucky but used invoices written by GT Northeast in Missouri, a St. Louis company he owned, to avoid paying the state’s sales tax.” Classy.
In an effort to root out his problem (between countries, at least), the Task Force advocates requiring parties conducting an international transaction to sign a statement in the commercial invoice certifying that no trade mispricing had taken place. It’s a reasonable request. So reasonable, you have to wonder why we don’t already do it. And while it won’t entirely eliminate the problem, it would go a long way to bringing those vast numbers down. Maybe to a scale that we can actually visualize.
Disclaimer: Unless specifically stated to be the views of the Task Force, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Task Force on Financial Integrity & Economic Development.