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Tariff evasion and rules of origin violations under the Canada-U.S. Free Trade Agreement

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  • Andrey Stoyanov

Abstract

Using product-level data on trade between Canada and the U.S., this paper presents evidence of tariff evasion and violation of the rules of origin occurring under the Canada-U.S. Free Trade Agreement (CUSFTA). It shows that more imports go unreported at the destination country when tariffs are higher. Consistent with the tariff evasion hypothesis, this result implies that the trade creation effect of a free trade agreement may in fact be due to less underreporting. Further, this paper shows that the larger Canadian tariff preference margin for the U.S. is associated with more goods originating in third countries being transshipped through the U.S. territory for re-export. The preference margin is also positively correlated with the value of excess imports from the U.S., which qualify for preferential treatment. Both results suggest the presence of persistent violations of CUSFTA's rules of origin.

Suggested Citation

  • Andrey Stoyanov, 2012. "Tariff evasion and rules of origin violations under the Canada-U.S. Free Trade Agreement," Canadian Journal of Economics, Canadian Economics Association, vol. 45(3), pages 879-902, August.
    • Handle: RePEc:cje:issued:v:45:y:2012:i:3:p:879-902
    DOI: 10.1111/j.1540-5982.2012.01719.x
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    Cited by:

    1. Cyril CHALENDARD, 2015. "Use of Internal Information, External Information Acquisition and Customs Underreporting," Working Papers 201522, CERDI.
    2. Mianshan Lai & Jia Hou, 2023. "Let us misinvoice more? The effect of de jure capital controls on trade misinvoicing," The World Economy, Wiley Blackwell, vol. 46(7), pages 2157-2186, July.
    3. Cyril Chalendard & Gaël Raballand & Antsa Rakotoarisoa, 2019. "The use of detailed statistical data in customs reforms: The case of Madagascar," Development Policy Review, Overseas Development Institute, vol. 37(4), pages 546-563, July.
    4. Hiroshi Mukunoki & Hirofumi Okoshi, 2021. "Tariff elimination versus tax avoidance: free trade agreements and transfer pricing," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1188-1210, October.
    5. Adrien Bussy & Annalisa Tassi, 2025. "Cross-border value-added tax fraud in the European Union," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 161(1), pages 1-23, December.
    6. Xinzheng Shi & Zhufeng Xu, 2023. "Export tax refund and the misreporting by Chinese exporters," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1469-1489, November.
    7. Derek Kellenberg & Arik Levinson, 2019. "Misreporting trade: Tariff evasion, corruption, and auditing standards," Review of International Economics, Wiley Blackwell, vol. 27(1), pages 106-129, February.
    8. Hinnerk Gnutzmann & Arevik Gnutzmann-Mkrtchyan, 2019. "The silent success of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 178-224, February.
    9. Xuepeng Liu & Huimin Shi, 2019. "Anti‐dumping duty circumvention through trade rerouting: Evidence from Chinese exporters," The World Economy, Wiley Blackwell, vol. 42(5), pages 1427-1466, May.
    10. C.J. Krizan & James Tybout & Zi Wang & Yingyan Zhao, 2020. "Are Customs Records Consistent Across Countries? Evidence from the U.S. and Colombia," Working Papers 20-11, Center for Economic Studies, U.S. Census Bureau.
    11. Bussy, Adrien, 2023. "Corporate tax evasion: Evidence from international trade," European Economic Review, Elsevier, vol. 159(C).
    12. Deng, Jianpeng & Li, Jialin & Mai, Joseph & Shi, Yanmin & Zhu, Linke, 2025. "Trade circumvention in free trade areas," Journal of International Money and Finance, Elsevier, vol. 150(C).
    13. Stiller, Wojciech & Heinemann, Marwin, 2024. "Do more harm than good? The optional reverse charge mechanism against cross-border tax fraud," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 61-84.
    14. Lorenzo Rotunno & Pierre‐Louis Vézina, 2015. "Quota‐Hopping In‐Bond Diversion," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 34-48, January.
    15. Cyril Chalendard, 2015. "Use of internal information, external information acquisition and customs underreporting," CERDI Working papers halshs-01179445, HAL.
    16. Bilal M. Khan & Karrar Hussain & Zara Liaqat, 2024. "Trade misreporting: Evidence from Pakistani importers," The World Economy, Wiley Blackwell, vol. 47(2), pages 390-414, February.
    17. Mirco Tonin, 2014. "Reporting import tariffs (and other taxes)," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(1), pages 153-173, February.
    18. Marwin Heinemann & Wojciech Stiller, 2023. "Digitalization and Cross-Border Tax Fraud: Evidence from E-Invoicing in Italy," CESifo Working Paper Series 10227, CESifo.
    19. Temesgen Worku & Juan P. Mendoza & Jacco L. Wielhouwer, 2016. "Tariff evasion in sub-Saharan Africa: the influence of corruption in importing and exporting countries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(4), pages 741-761, August.
    20. repec:aep:anales:4843 is not listed on IDEAS
    21. Hinnerk Gnutzmann & Arevik Gnutzmann‐Mkrtchyan, 2019. "The silent success of customs unions," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 178-224, February.
    22. Yanyun Li & Faqin Lin, 2022. "Beyond tariff evasion: bypass effect of FTAs to circumvent technical barriers," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(4), pages 1085-1105, November.
    23. Marwin Heinemann & Wojciech Stiller, 2025. "Digitalization and cross-border tax fraud: evidence from e-invoicing in Italy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 32(1), pages 195-237, February.
    24. Zara Liaqat, Karrar Hussain, 2025. "Costly Imports: Exchange rate shocks and trade misreporting by firms," LCERPA Working Papers jc0154, Laurier Centre for Economic Research and Policy Analysis, revised 2025.
    25. Hiroshi Mukunoki & Hirofumi Okoshi, 2025. "Wake Not a Sleeping Lion: Free Trade Agreements and Decision Rights in Multinationals," Review of International Economics, Wiley Blackwell, vol. 33(3), pages 505-518, August.

    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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