Supply chains, international trade, and gaps in tax compliance

Project Active from to State and State Effectiveness

The Rwandan Government is engaging in on-going trade reforms and discussions which continuously vary the cost of importing types of goods from specific countries of origin. These reforms imply changes in the amount of revenue that the Government collects at the border, which currently remains a substantial source of revenue to fund essential public goods. The concern over revenue loss at the border is a key input that shapes the Government’s approach to trade reform.

This project seeks to provide robust measurement of a full set of revenue impacts that follow from trade reforms. This includes the impacts that occur among domestic firms that rely on imported inputs through their production network.

Usually, studies of how international trade affects firms focus only on importers. However, this approach ignores a key aspect: that international trade potentially impacts firms throughout the supply chain, as businesses buy and sell from one another in the process of production.  Assessing the full impacts of trade requires measurement of how these relationships affect both production and tax compliance.

This study will combine several databases in order to evaluate the impact of changes in tariff rates. As tariff rates are not randomised, the project will adopt a quasi-experimental approach. The project uses variation in tariff rates induced by tariff reforms that occurred in the near past and studies the aggregate revenue consequences. The estimates will have external validity for other countries in Africa, which are simultaneously revenue-constrained similarly to Rwanda and seeking to enter the same trade agreements as Rwanda currently is.

Having direct evidence on the net revenue impacts of tariff rate changes will help the government design future trade policies which can improve final consumer welfare and production efficiency while ensuring revenue needs in the country are met.