Tax Avoidance, Tax Preference and Re-imports: The Case of “Redundant” Trade

Xuepeng Liu

This paper studies re-imports, a type of round trip trade originated from a country and
shipped back to the same country. During 2000-2008, 59 countries or regions had
reported re-import data to the United Nations and the volume is surprisingly large for
some countries. For example, China has imported more from herself than from the
United States since 2005. Despite the large volume, there are no empirical studies by
now on re-imports. This paper fills the gap by investigating one of the important
incentives behind re-imports: tax avoidance. The initial exporters can get export valueadded
tax (VAT) rebates after exporting. When these products are re-imported back, reimporters
may enjoy tax-free preferential treatment under processing trade policy.
Hence re-imports can offer an extra tax benefit compared to domestic sales which
require full VAT payment. We provide strong empirical evidence based on both the
product level analysis of China and the cross country analysis at aggregate level. The
results are robust to the considerations of endogeneity of export taxes, different
measures of the key variables, and the extensive margin of re-imports.