Trade Misinvoicing: A Channel for de facto Capital Account Openness

In this paper we examine trade misinvoicing as a means of evading capital controls. With the trade liberalisation that has taken place in most emerging markets, and with an outlook of high GDP growth in many of these countries, traditional explanations for trade misinvoicing such as high custom duties and weak domestic economies cannot explain the misinvoicing witnessed today. We construct a multi-country dataset over a 26 year span, covering both industrialised and developing countries to study this phenomenon. The scale of misinvoicing that is observed is large when compared with capital flows. The incentives created by capital controls coupled with the opportunity offered by trade liberalisation play an important role in explaining trade misivoicing.