high level of corruption in the customs service according to the BEEPS survey mentioned earlier. It is also interesting to note that no statistically significant relationship is found for Slovenia which is the country with the lowest incidence of customs corruption as reported in BEEPS.

In addition to testing the relationship between tariff levels and evasion, we ask what kind of products are more likely to be subject to evasion. We consider Rauch’s (1999) definition of differentiated products and argue that for such products it may be easier to conceal their true value. We confirm our hypothesis by showing that the trade gap is more responsive to the tariff level in the case of differentiated goods than in the case of homogeneous products. This result holds for both a liberal and a conservative definition of differentiated products and is robust to several specifications. The magnitude of the effect is economically meaningful. A one-percentage-point increase in the tariff rate is associated with a 0.6% increase in trade gap in the case of homogeneous products and a 2.1% increase in the case of differentiated products.

Finally, we consider three channels through which tariff evasion may take place. These are: (i) misrepresenting the price of imported products; (ii) undercounting physical quantities of imported products, and (iii) misclassification of high tariff products as a lower tariff variety. We find strong evidence of price misrepresentation in the case of differentiated products. More specifically, our results indicate that the gap in the unit values of exports reported by Germany and imports reported by the destination country (which captures reporting a lower than actual price of imports) is positively correlated with the tariff level. This effect is positive and statistically significant in the case of differentiated products, but not for all other goods. We find little evidence of undercounting of physical quantities. Neither do we find evidence of product misclassification when we consider misclassification within the same 4-digit HS sector. We conclude that the difficulties associated with assessing the price of differentiated products make them particularly prone to tariff evasion.

Our study is related to the literature documenting evasion of import duties in developing countries. In their 1970 volume, Little, Scitovsky and Scott pointed out that evasion of import duties through smuggling was a major problem in Mexico, Argentina and the Philippines. Bhagwati (1964) discussed the prevalence of under-invoicing as a method of tariff evasion. The type of corruption that involved import duty evasion in which briber and bribee collude to rob the public was referred by Shleifer and Vishny (1993) as “corruption with theft.” Pritchett and Sethi (1994) examined the data from three developing countries (Jamaica, Kenya and Pakistan) and found that collected and official tariff rates are only weakly related, the variance of the collected rate increases strongly with the level of the official rate and the collected rate increases much less than one-for-one with increases in the official rate. The relationship between evasion and tariff rates was analyzed by Fisman and Wei (2004) who found that import duty evasion rises with the tariff rate. Comparing the values of imports from Hong Kong as 4