Assessing the effect of tariff policy on the volume of smuggling in Iran and providing solutions for resistance to it

One can study smuggling either with the approach of “reason” or “consequences”. This paper aims to study smuggling on the reason side and focuses on “import tariff rate” as a main motivation for smuggling and tries to estimate the elasticity of smuggling with respect to tariff rates. Iran trade flow data and tariff rates are collected from Trademap, WITS, Iran’s customs administration and Iran’s Trade Development Organization. By observing reported exports to Iran from main trade partners together with reported imports to Iran we construct a proxy for the amount of smuggling at HS6 dissaggregated products. We use both simple regression using 2014 data and fixed effects estimation using 2011 and 2014 for 10 main trade partners. Results show that there is a positive correlation between tariff rates and smuggling. Specifically, a one percentage point increase in tariff rate increases the trade gap by about 4.7 percents. The results are highly significant and robust to adding controls and restricting the sample.