Reported trade figure discrepancy, regulatory arbitrage, and round-tripping: Evidence from the China–Hong Kong trade data

This study uses reported trade figures from China and Hong Kong to examine the relationships among market impediments, trade figure irregularities, and tax-induced regulatory arbitrage. The empirical findings, consistent with our tax-induced regulatory arbitrage models and the round-tripping phenomenon in China (that is, moving funds across the Mainland Chinese border through trade, typically to Hong Kong or an offshore tax haven, before re-entering China as foreign direct investment), provide support for several conclusions. First, the spurious flows of funds to and from China, via the underreporting of exports and the overreporting of imports, closely follow the preferential tax incentives accorded to foreign investors. Second, the underreporting of exports is negatively related to export tax rebates. Third, the overreporting of imports is negatively related to import tariffs. Finally, both of these two appear to be most prevalent in state-owned enterprises.