**DETECTING ILLEGAL TRADE PRACTICES BY ANALYZING DISCREPANCIES IN FOREST PRODUCTS TRADE STATISTICS: AN APPLICATION TO EUROPE, WITH A FOCUS ON ROMANIA**

# **Jeffrey R. Vincent**<sup>2</sup>

# **1 Introduction**

Corrupt and illegal activities in the global forest sector have come increasingly into the spotlight during the past few years. This report focuses on one subset of these activities: the intentional underreporting of imports and exports of forest products. It considers whether the amount of intentional underreporting can be inferred from observed discrepancies between the amounts officially reported as imported and exported by trading partners. It pays special attention to trade involving Romania.

It is well-known among trade economists that import and export statistics rarely match up exactly (Lichtenberg 1959, Woolley 1966, Feenstra et al. 1999, Feenstra and Hanson 2000, Feenstra 2000). Trading partners often report very different physical quantities and values for the products they trade between each other. These discrepancies have several possible explanations. Some explanations, like measurement error, are innocuous. Exports are especially prone to measurement error. Customs offices often make only a perfunctory effort to monitor exports because, unlike imports, exports are seldom subject to customs duties. Discrepancies can also occur due to shipment lags. For example, a cargo liner that leaves an exporting country late one year might not arrive in the importing country until early the following year, thus leading to a discrepancy in the two countries’ annual bilateral trade statistics. In the case of value data, one would always expect imports to exceed exports for the simple reason that import values include the costs of insurance and freight on top of the value of goods at the point of export.

Another possible explanation is that discrepancies reflect illegal activities, such as smuggling and underinvoicing (Pritchett and Sethi 1994, Fisman and Wei 2001). This explanation has attracted substantial attention recently among organizations interested in the international forest sector.<sup>3</sup> It was spotlighted, for example, in a recent issue of the International Tropical Timber Organization’s _Tropical Forest Update_ (volume 12, number 1, 2002), which focused on forest crime. An article in that issue noted the existence of persistent discrepancies between reported imports and exports for certain products and trading partners, such as industrial roundwood traded from Indonesia to China and sawnwood traded from Malaysia to Japan (Johnson 2002). The same article acknowledged, however, that “problems in statistical reporting together with legitimate reasons for discrepancies between trading partner reports may reduce the utility of such analyses for identifying potentially illegal trade flows” (p. 6).

In this report we develop an econometric method for disentangling the various possible explanations for statistical discrepancies in bilateral trade flows of forest products. The method is

> 2 Jim Anderson, Nalin Kishor, and Peter Dewees provided extensive and insightful comments on an earlier draft of this paper. I am grateful to them and am fully responsible for any errors that remain.

> 3 This attention is not entirely new. See Durst et al. (1986).

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