Conference Paper
Traders’ War Against Trade Walls: Evidence from Import Prohibition in Iran
No.
ERF30_6
Publisher
ERF
Date
March, 2024
It is an acknowledged fact that traders employ different tactics to circumvent trade barriers imposed by governments, including trade evasions, avoidance, misclassification, and substitution of similar products. The barriers, justified in terms of home protection and industrial developments, become significant during a crisis. We assess a substantial import prohibition policy in Iran that began in 2018 and has continued until now. The policy was imposed after the currency crisis, followed by the unilateral withdrawal of President Trump from the Joint Comprehensive Plan of Action (JCPOA). The policy prohibited more than 1300 products at 8-digit of Harmonized System (HS), from which 57% are consumption goods. In this study, we employ a measure of illegal import, which is the difference between reported imports by the Iran Customs Administration and the reported exports by the mirror data obtained from the World Integrated Trade Solutions, with an inverse hyperbolic sine transformation, can be applied to zero importation of prohibited goods after the policy. We define prohibited goods as the treatment, and others as the controls and employ methodologies of causal inferences, including difference-in-difference (DiD) and event studies. Other covariates, such as tariffs, value-added tax (VAT), and products’ fixed effects at the HS6 level, are controlled. Findings indicate that the policy caused a 20% rise in illegal imports. Many robustness tests confirm the results, like controlling for mean reversion and adding specific trends at HS2. While the literature provides a local estimate of about 2% for the elasticity of illegal imports with respect to tariffs, we contribute by providing a substantial estimate for the tails of the distribution of this elasticity. As advice to policymakers who aim to control the demand for foreign currency through prohibition, our results show how effective a prohibition policy can be. Albeit, based on the experts’ statements and non-academic reports, other measures like misclassifications and barter informal trade are widely used to circumvent this policy, which could be measured in future studies using richer datasets.
Authors
Kowsar Yousefi
Associate Professor, University of Tehran
Authors
Samad Alaamati
University of Tehran