Selected Issues

Abstract

Selected Issues

Haiti’s Cross Border Trade with the Dominican Republic1

A. Background

1. Official trade statistics with the Dominican Republic (the DR) are lopsided. The border between these two countries, which spans 360 kilometers, is very porous and much trade goes unrecorded, particularly Haitian imports from the DR. The purpose of this study is to estimate the magnitude of informal cross-border trade between Haiti and the DR, and assess its impact on tax and customs revenues in Haiti. The main findings show that informal trade is estimated to represent an important chunk of bilateral trade with the DR, equivalent to about 50 percent of the official data, and that foregone tax revenues amount to about 7 percent of total revenues. Further observations are made about non-fiscal costs of informal trade. The paper reflects on priority areas to improve customs’ effectiveness and strengthen compliance and border control.

2. Haiti’s trade deficit with the DR has increased significantly over the last two decades. More than 25 percent of Haiti’s recorded imports come from the DR. Haitian imports from the DR rose from US$208 million in 2002 to about US$875 million in 2018, after peaking at US$1.5 billion in 2012. Haitian exports to the DR are small at US$51 million, or less than 10 percent of imports. Most bilateral trade (85 percent) moves overland. Anecdotal evidence suggests that a significant share of imports from the DR—mostly food items—are not officially recorded, while goods going unrecorded to the DR— mostly fuel products—are minimal.

Trade Flows In/Out of Haiti From/To Dominican Republic

(USD millions)

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A004

Sources: Oficina Nacional de Estadistica (ONE) and IMF staff calculations.

B. Cross-Border Informal Trade

3. The border is porous with hundreds of poorly monitored or unmonitored crossing points. The border region attracts Haitians from other parts of the country who are looking to take advantage of the additional employment and trade opportunities. The populations of the Haitian communities in the border zone for which data is available have grown by nearly 4 percent annually over the last 10 years compared to 1.3 percent in the rest of the country (Duret, 2010). However, the border area on the DR side is thinly populated as the incidence of extreme poverty there is twice the national average (UNDP, 2013).

4. An important share of Haiti’s imports from the DR are not registered. Informal trade refers to goods that are unrecorded on official government records and/or that fully or partly evade payment of duties and charges. Such goods include commodities that pass through unofficial routes and avoid customs controls, as well as goods that pass through official routes yet involve illegal practices such as under-invoicing, lower tariff payments, misclassification (i.e., falsifying the description of products), or bribery of customs officials (Box 1). Merchandise traded informally can cover both small volumes transported by individual traders across the border by foot, as well as larger volumes transported by other means.

5. There are significant discrepancies in trade flows reported by the Haitian and the DR authorities. Estimating the extent of informal cross-border trade can be done by comparing Haiti’s customs data with that of its trading partners. Corresponding “mirror” trade statistics point to a large negative gap between Haiti’s recorded imports and the corresponding DR exports as recorded by the DR. In 2016, the total value of formal exports from the DR to Haiti was valued at US$800 million, while the total value of Haiti’s formal imports from the DR was estimated at US$400 million.2 As a result, US$400 million is the estimated approximate value of unrecorded imports, about 50 percent of the official data on exports from the DR.

6. The difference between Haiti’s recorded imports and corresponding exports from the DR cannot be explained by freight-related costs. In principal, the value of imports recorded from one country should be higher, or at least as high, as the corresponding value of exports recorded by the trade partner in a common currency. As a rule of thumb, the OECD (2005) estimates “Cost-In-Freight” (CIF) values paid by the importer should generally be about 10 percent higher than “Free-On-Board” (FOB) values received by the exporter. However, the value of DR exports to Haiti exceeded the corresponding import value recorded by Haiti by about US$400 million in 2016— a much larger discrepancy that goes in the opposite direction, implying that other factors must be in play .

Discrep ancy in Haiti-Dominican Republic Trade Data

(USD millions)

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A004

Sources: Administration Generale des Douanes (AGD) and Oficina Nacional de Estadistica (ONE).

7. By contrast, other trade flow data does not suffer from large unexplained discrepancies. Panel A of the figure below plots the value of Haiti’s recorded imports from the U.S. and the corresponding U.S. exports to Haiti. In this case, the discrepancy between US exports to Haiti and corresponding Haitian imports from the US has averaged around 6 percent over the period 2011 -2016. In addition, the ratio of CIF imports to FOB exports calculated on the value of Haiti’s total imports to the sum of export values reported by all other partner countries was minimal, averaging about 0.99 during the last 20 years, implying that insurance and shipping related costs cannot account for the difference.. (Panel B).

Figure 1.
Figure 1.

Haiti: Bilateral Trade Flows with the US and the World

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A004

Disparity in Bilateral Trade Statistics

Disparity in mirror statistics can be attributed to both methodological and economic factors:

  • Misclassification of products by customs offices can drive discrepancies when the same good is recorded under different commodity codes by either the importing or the exporting party.

  • Misclassification of source country of imports.

  • Overinvoicing of exports by exporting countries, for example if firms try to benefit from VAT exemptions on exported goods.

  • Cross-border smuggling, whereby imported goods are not recorded at entry into the country, for example to avoid duties or other official levies, or because they are illegal products.

  • Undervaluation or under-invoicing in order to maximize profits, or misreporting of products to take advantage of differences in tax rates across products.

  • Timing or lag effects related to the delay between recording of exports from the exporting country (the DR) and delivery to customs authoritis in the importer (Haiti).

C. Drivers and Implications of Cross-Border Trade

8. Haiti’s informal trade with the DR is likely related to weak institutions, poverty, and corruption. Households and small businesses are incited to escape trade-related regulations and duties when price disparities arise between formally and informally traded goods. In addition, Haiti’s limited monitoring and enforcement capabilities and alleged widespread corruption could enable individuals and small enterprises to conceal activities and evade taxes. Informal cross-border trade can also arise if officially traded goods are subject to complex, non-transparent, or divergent regulatory requirements such as customs formalities, quality controls, or sanitary standards that raise trade transaction costs. Finally, loss of government legitimacy and weak law enforcement facilitates the conduct of informal trade and undermines the rule of law. This reduces the general sense of obligation to comply with civic and legal obligations and can result in a vicious circle.3

9. Large scale unrecorded trade has important fiscal implications. Table 1 presents a simple calculation of the possible loss of revenue from under-reporting of Haiti’s imports from the DR based on the assumption that unreported imports would be subject to the overall average tariff estimated in a given year. Revenue forgone as a result of Haiti’s unrecorded imports is estimated at about US$78 million in 2016, or 7 percent of total domestic revenues.4 The government also loses revenues through legal loopholes. A 2015 World Bank study found that powerful, family-based economic groups benefited disproportionately from fiscal and customs duties incentives, paying duties that were 13 percent lower on average than those paid by other companies in the same sector.

Table 1.

Haiti: Tariff Revenue Implications from Under-Reporting of Imports

article image
Source: IMF staff’s calculation based on data from AGD and UN COMTRADE.

10. In the long-run, informal trade can have negative economic and developmental effects. While informal trade can enhance income earnings and employment opportunities for poor households, it creates unfair competition vis-à-vis formal traders and reduces the incentives to invest in the formal economy. Second, informal cross-border trade lowers the effectiveness of measures put in place to ensure quality controls and product regulatory standards. Third, unregistered trade flows lead to unreliable external trade statistics which might hinder the formulation of appropriate trade and structural policies. Finally, inaccurate trade data could distort analysis of the traded sector and external sustainability, and mislead macro policies.

D. Recommendations

11. The implications of informal trade reinforce the need to strengthen border security. Haiti has made efforts in the past to strengthen border control with the help of the UN stabilization force and in 2015 contracted with a foreign company to improve border-surveillance capabilities and enhance manpower capacity. However, the contract was not executed and Haiti remains unable to secure its borders against illicit trade activities. To address concerns, anti-smuggling and anti-fraud capabilities should be enhanced. Custom officers in Haiti are known to have faced political pressure and the threat of physical violence (CSIS, 2019). In addition to strengthening border security, surveillance capabilities, and intelligence, efforts should work to minimize the use of discretion at the border by implementing a risk-based inspections regime and requiring pre-arrival, online declarations, and tax payments.

12. Reforms are needed to enhance the administrative structures that monitor cross border trade. The Haitian authorities have signed various cooperation agreements with Dominican customs directors over the years to combat contraband and customs fraud. The two countries recently revived these efforts and aim to establish joint centers for information-sharing and to conduct joint surveillance. While this initiative is very welcome, other measures recommended in recent technical assistance (TA) provided by the Fund should also be implemented. Priority areas include adopting a new organizational structure to clarify roles and responsibilities; streamlining customs policies and procedures; broadening the use of ASYCUDA World to reduce the degree of discretion given to customs officers; improving control and monitoring of exemptions; and enforcing cooperation agreements with the DR to facilitate the digital exchange of information between the two countries, essential to ensuring that goods cross the border legally and efficiently.

13. A revised trade regime consisting of simplified documentation formalities and lower trade-related fees could be introduced to formalize low value cross-border transactions. Measures discussed in the framework of the WTO Negotiations on Trade Facilitation also have the potential to reduce informal cross-border trade. These measures include simplifying and reducing documentation requirements and formalities; streamlining transit and clearance processes; expediting the release and clearance of goods from customs custody; and enhancing transparency and predictability of trade-related regulations and fees. Such measures lower the incentive for corruption and enhance the efficiency of controls at the border, thus improving compliance with trade-related regulations. Finally, additional efforts to assist traders in understanding and complying with existing trade regulations could further reduce informality.

References

  • Center for Strategic & International Studies, 2019, Cross-Border Trade and Corruption along the Haiti-Dominican Republic Border.

  • Duret, P. (2010). MIF 1–01 Etude sur le potentiel de la production de la région frontalière – Belladère. PanAmerican Development Foundation & Multilateral Investment Fund: Washington, D.C.

    • Search Google Scholar
    • Export Citation
  • Perry G. E., W.F. Maloney, O.S. Arias, P. Fajnzyblber, A. Mason, J. SaavedraChanduvi (2007), Informality: Exit and Exclusion, Washington DC: The World Bank.

    • Search Google Scholar
    • Export Citation
  • Smart, A. (2013), Customs control over illicit international trade: The impact of different forms of illegality, Paper presented at the World Customs Organization Conference on Informality, International Trade and Customs, Brussels, June 34.

    • Search Google Scholar
    • Export Citation
  • UN Development Programme. 2013. Contexto Socio-Económico de la Zona Fronteriza. Human Development Office UNDP: New York.

  • United Nations Statistics Division, 2004, UN COMTRADE. International Merchandise Trade Statistics, United Nations Statistics Division, New York, USA. Available online at http://comtrade.un.org/

    • Search Google Scholar
    • Export Citation
  • World Bank, 2018, Doing Business 2018, Reforming to Create Jobs. Washington, DC: World Bank. https://openknowledge.worldbank.org /handle/10986/28608 License: CC BY 3.0 IGO.”

  • World Bank Group, Trade and Competitiveness Global Practice, “Brief Analysis of Market Functioning in Haiti: Background Paper for Systemic Country Diagnostic for Haiti,” May 2015, 21. The study found that companies belonging to these elite groups would maintain eligibility for “infant industry protections” by simply dissolving firms that aged out and creating new ones.

    • Search Google Scholar
    • Export Citation
1

Prepared by Rand Ghayad (WHD).

2

Data on Haitian imports come from the Administration Generale des Douanes (AGD) which collects, among other things, data on the taxes paid, value of imported goods, and information on the importing person/institution. Trade data in the DR are collected by the Direccion General de Aduanas (DGA) which has a more advanced reporting system with data collected at highly disaggregated levels.

3

Smart (2013) observes that the inability to eradicate smuggling reflects social attitudes regarding the legitimacy of government rules. Perry et al (2017) show that the general perception that governments are corrupt undermines tax morale and rule of law.

4

The country-level approach has the disadvantage of measuring tariffs using an average rate applied to all products, possibly introducing aggregation bias into the estimates of tariff evasion. However, the results were similar using both trade-weighted average tariffs and simple averages of tariff rates.

Haiti: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.