Pains or gains: Trade war, trade deficit, and tariff evasion

Abstract

This paper reveals that the reduction in the US-China trade deficit during the trade war obscured reporting discrepancies in US imports of Chinese products due to tariff evasion. We empirically examine the effect of the US-China trade war on tariff evasion in US imports of Chinese goods and provide direct evidence that market demand of entry states contributes significantly to tariff evasion. Using the input-output table, we find that a one standard deviation increase in local demand causes a 1.312-fold rise in tariff evasion for affected products post–trade war. This effect mainly works through intermediate goods, and its impact grows as importers' tariff liabilities increase. Further analysis considering local social environments shows that voters' attitudes toward trade protection and the development of labor unions play crucial roles in mediating the influence of market demand on tariff evasion.