importers. Our results also provide evidence in favor of having a uniform tariff structure which would dampen the incentives to misclassify imported products.<sup>6</sup> This study is structured as follows. Section 2 describes the data. Section 3 explores the relationship between tariff rates and evasion. Section 4 presents the empirical results on tariff evasion for differentiated products, and Section 5 examines the channels through which such evasion takes place. Section 6 concludes.

# **2. Data**

Our first data source is the World Bank’s World Integrated Trade Solution (WITS) database. This database contains information on MFN and preferential tariff rates specific to pairs of countries and years, derived from the UNCTAD’s Trade Analysis and Information System (TRAINS). The tariff information is available at the 6-digit Harmonized System level. We focus on 8 Eastern European countries acceding to the European Union (Bulgaria, Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania and Slovenia) as well as on the Russian Federation and Ukraine.<sup>7</sup> As most of these countries have preferential trade agreements with the European Union, we use information on applied tariffs.

As illustrated in Table 1, tariff rates differ substantially across the countries considered. Lithuania has the lowest average tariff rate of 3.64%, as a large percentage of products are subject to zero tariff, while Russian Federation shows the highest average tariff rate of 12.58%. Slovenia is the country with the lowest maximum tariff rate, around 49%. A large fraction of imports is not taxed in Poland, although the variance in Polish tariffs is very high, due to the high tariff rates applied to tobacco imports (up to 295%). It is relevant to note that all countries in the sample undertook trade liberalization during the time period under study and their tariff rates decreased significantly over time (see Table A1 in Appendix I).

Our second data source is the United Nations’ COMTRADE database which includes information on trade flows, also at the 6-digit level. The data on tariffs and trade flows are available for the period 1992-2003, though the coverage differs by country (see Appendix I for more details). Using COMTRADE data we calculate the trade gap, which is defined as the log difference between the value of exports from Germany to each country in the sample as reported by Germany and the value of imports from Germany as reported by each partner country.

> 6 The theoretical arguments in favor of a uniform tariff structure are usually based on political economy considerations and incentives for tariff evasion (see Panagariya and Rodrik 1993; Tarr 2002; Anderson and Neary 2006).

> 7 Data constraints prevent us from including other post-Soviet transition countries in the sample. Unfortunately, WITS does not include ad valorem equivalents of specific tariffs which may be prevalent in the countries not acceding to the EU. However, not controlling for specific tariffs is likely to work against us finding a relationship between trade evasion and tariff level. As specific tariffs are more likely to be imposed on agricultural products, in our robustness checks we will exclude these products from the sample.

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