Preferential trade and mis-invoicing: Some analytical implications

This paper examines how different trade policies affect illegal trade practices, foreign exchange market and the degree of illegal capital outflow. It builds up a three-country preferential-non-preferential trade model where low or zero tariff prevails in the preferential trade channel and higher tariff is exercised in the non-preferential trade channel. We show that initially the preferential trade channel is likely to encourage illegal capital outflow and non-preferential trade channel is conducive for illegal transactions in foreign exchange in the local market. But finally a low tariff regime takes care of both illegal capital outflow and black market for foreign exchange.