applied to data on trade flows that involve European countries as either importers or exporters. The report focuses on trade in sawnwood (i.e., lumber), which is the principal primary forest product exported by Romania. It examines discrepancies in physical quantities traded, not the value of trade. By focusing on physical quantities, the analysis avoids the confounding effects of insurance and freight costs on import data and exchange rate fluctuations on both import and export data.

The report is organized as follows. We begin by describing the source of trade flow data for the analysis, the EFI/WFSE Trade Flow Database.<sup>4</sup> We then describe a relative measure of discrepancies in trade statistics that we developed based on those data. Next, we provide descriptive statistics on the magnitude of discrepancies for Romanian imports and exports. We gauge the magnitude of these discrepancies by comparing them to discrepancies for other European countries. The purpose of this comparison is to determine whether discrepancies in trade statistics are unusually large or small when Romania is one of the trading partners compared to when it is not. We find that Romania’s discrepancies are large by European standards in the case of exports of coniferous sawnwood and imports of nonconiferous sawnwood. In both cases, however, the signs of the discrepancies suggest that, to the extent the discrepancies reflect illegal trade activities, those activities are more likely occurring in Romania’s trading partners than in Romania itself.

Following this descriptive analysis, we turn to the econometric analysis, which seeks to identify the relative importance of the various potential explanations of these discrepancies. We first present a theoretical model that provides guidance on the choice of explanatory variables to include in an econometric model of discrepancies in trade statistics. We test the significance of these explanatory variables by analyzing data for 1982-97 pooled across European countries, not just Romanian data. We find statistical support for several of the potential explanations of the discrepancies, including intentional underreporting of imports and exports. The explanatory power of the model is poor, however, and the coefficients on several key explanatory variables are statistically insignificant or have the incorrect signs. For these and other reasons, we conclude that the practical usefulness of econometric methods for detecting illegal trade practices in the Romanian forest sector is likely to be limited.

# **2 Data on trade statistics discrepancies**

# **2.1 The EFI/WFSE Trade Flow Database**

The EFI/WFSE Trade Flow Database was developed by the European Forest Institute (EFI).<sup>5</sup> It contains annual data on physical quantities and values of imports and exports of forest products for all countries in the world, not just those in Europe. It is, to our knowledge, the best available database on forest products trade flows.

The EFI Database is based on standard COMTRADE data from U.N. Statistics Division. In addition to the original COMTRADE data series, which it stores in a variable named QORIG, the

> 4 We are grateful to the European Forest Institute, Mr. Bruce Michie in particular, for granting access to the data. We are also grateful to Kevin O’Connell and Max Auffhammer of the University of California at San Diego for their assistance in converting the data to a form readable by STATA and to O’Connell for his assistance in an exploratory analysis that preceded this one. 5

> For more information, see the webpage for the database: <u>http://www.efi.fi/efidas/fpstf.html.</u>

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