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Some countries losing up to 67% of commodity exports to misinvoicing

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Some countries losing up to 67% of commodity exports to misinvoicing

Some countries losing up to 67% of commodity exports to misinvoicing
Photo credit: Irene Scott | AusAID

Some commodity dependent developing countries are losing as much as 67% of their exports worth billions of dollars to trade misinvoicing, according to a fresh study by UNCTAD, which for the first time analyses this issue for specific commodities and countries.

Trade misinvoicing is thought to be one of the largest drivers of illicit financial flows from developing countries, so that the countries lose precious foreign exchange earnings, tax, and income that might otherwise be spent on development.

Released during UNCTAD’s Global Commodities Forum, the study uses data from up to two decades covering exports of commodities such as cocoa, copper, gold, and oil from Chile, Cote d’Ivoire, Nigeria, South Africa, and Zambia.

“This research provides new detail on the magnitude of this issue, made even worse by the fact that some developing countries depend on just a handful of commodities for their health and education budgets,” UNCTAD’s Secretary-General, Mukhisa Kituyi, said.

Commodity exports may account for up to 90 percent of a developing country’s total export earnings, he said, adding that the study generated fresh lines of enquiry to understand the problem of illicit trade flows.

“Importing countries and companies, which want to protect their reputations, should get ahead of the transparency game and partner with us to further research these issues,” Dr. Kituyi said.

The analysis shows patterns of trade misinvoicing on exports to China, Germany, Hong Kong (China), India, Italy, Japan, the Netherlands, Spain, Switzerland, the UK, US, and more.

Findings of the report include:

  • Between 2000 and 2014, underinvoicing of gold exports from South Africa amounted to $78.2 billion, or 67% of total gold exports. Trade with the leading partners exhibited the highest amounts: India ($40 billion), Germany ($18.4 billion), Italy ($15.5 billion), and the UK ($13.7 billion).

  • Between 1996 and 2014, underinvoicing of oil exports from Nigeria to the United States was worth $69.8 billion, or 24.9% of all oil exports to the US.

  • Between 1995 and 2014, Zambia recorded $28.9 billion of copper exports to Switzerland, more than half of all its copper exports, but these exports did not show up in Switzerland’s books.

  • Between 1990 and 2014, Chile recorded $16.0 billion of copper exports to the Netherlands, but these exports did not show up in the Netherlands’ books.

  • Between 1995 and 2014, Cote d’Ivoire recorded $17.2 billion of cocoa exports to the Netherlands, of which $5.0 billion (31.3%) did not show up in the Netherlands’ books.

  • Between 2000 and 2014, underinvoicing of iron ore exports from South Africa to China was worth $3 billion.


Introduction

The problem of trade misinvoicing has generated increasing attention in the research and policy communities. It is an issue that has gained particular traction through the current debates on illicit financial flows, since trade misinvoicing continues to be used as a key mechanism of capital flight and illicit financial flows from developing countries. This study aims to contribute to research and policy debates by providing empirical evidence on the magnitude of trade misinvoicing in the particular case of primary commodity exports from five natural-resource-rich developing countries: Chile, Cote d’Ivoire, Nigeria, South Africa, and Zambia. This sample comprises four resource-dependent developing countries and a more diversified resource-rich middle-income country (South Africa). It covers a representative sample of products in the three main categories of primary commodities: oil and gas; minerals, ores and metals (copper, gold, iron ore, silver and platinum); and agricultural commodities (cocoa). The inclusion of two copper exporters in the sample makes it possible to compare and contrast patterns of copper misinvoicing between two countries and over time.

Estimates of trade misinvoicing have been based, traditionally and primarily, on bilateral trade data published in the Direction of Trade Statistics (DOTS) of the International Monetary Fund (IMF), which provides aggregate values of imports and exports between a country and its trading partners. More recently, there has been growing interest in investigating trade misinvoicing at more disaggregated levels, at sector and product levels, and by trading partner. This interest is motivated by two major factors. First is the presumption that some products may be more frequently smuggled and mispriced than others based on their idiosyncratic characteristics. Second, there may be variations among trading partners with regard to transparency and enforcement of trade recording rules that may generate differences in trade misinvoicing across partners. The analysis at the product and partner levels is made possible by the existence of disaggregated data published in the United Nations Commodity Trade Statistics (UN Comtrade) Database, which provides time series on imports and exports broken down by product, country and trading partner. Such an analysis produces valuable insights about the sources, directions and patterns of trade misinvoicing.

The study describes in detail how to use UN Comtrade data to identify major products and leading partners in order to guide the analysis of trade misinvoicing. It describes the statistical model for estimation of export misinvoicing at the product and partner levels. In the case of Nigeria, which exports oil and gas while also relying on imported oil products, the study also investigates the extent of oil import misinvoicing for this country.

The data show heavy concentration of exports both by product and by partner. With the exception of South Africa, the export baskets of the other countries in this sample – Chile Cote d’Ivoire, Nigeria, and Zambia – exhibit a heavy dependence on two or three primary commodities; South Africa has a more diversified export basket, though it is also rich in natural resources. These stylized facts illustrate the relevance and appropriateness of the sample selected for this study on trade misinvoicing in primary commodities. The results from the analysis show substantial levels of trade misinvoicing in all five countries covered by the study, but the patterns vary substantially across countries, products and trading partners. Some interesting patterns and contrasts emerge. At the product level, while trade in copper exhibits pervasive and large amounts of overinvoicing in Chile, the results for Zambia show substantial underinvoicing, as well as considerable overinvoicing in trade with Switzerland and the United Kingdom. Iron ore and gold exports from South Africa exhibit systematic underinvoicing. Relatively little gold appears in South Africa’s export data, although the country’s trading partners record substantial amounts of gold imports from South Africa. Exports of oil from Nigeria and silver and platinum from South Africa show mixed results both underinvoicing and overinvoicing. At the partner level, the Netherlands presents the most peculiar case, with systematic export overinvoicing in trade with all the countries in the sample and for all the products. In other words, exports registered as going to the Netherlands cannot be traced in the Netherlands’ bilateral trade data. In contrast Germany’s trade with all the countries and products in the sample exhibits underinvoicing. The results generally show a close correlation between export concentration by destination and the extent of trade misinvoicing.


7th Global Commodities Forum: Breaking the chains of commodity dependence

Closing Statement by UNCTAD Deputy Secretary-General Joakim Reiter

The crash in commodity prices since 2014 has brought macroeconomic difficulties in many commodity-dependent developing countries, especially oil exporters.

But, as the discussions of this forum have highlighted: high, low or volatile prices are not the only problem.

There is a more pervasive problem.

Most exporting countries were unable to convert windfalls from the 2004-11 commodity price boom into structural transformation and reduction in poverty levels.

This is actually an old story of developing countries not benefiting enough, and not using the benefits well enough, from the production and trade of commodities.

This cannot continue.

We should never miss the opportunity of a crisis. Times are tough but there are remedies and, low commodity prices, taking firm action is all the more urgent.

Indeed, there are actions that can and will now have to be taken to harness the revenues of commodities to sustainable development.

Let me focus my closing remarks on three important ideas of future action that you have discussed during this forum.

First, we need to get a handle on trade misinvoicing and other illicit flows related to the trade of commodities.

Professor Ndikumana shared with us yesterday his estimates of the magnitude of trade mispricing on commodity exports and imports in five developing countries.

The figures in his finding are striking.

There are literally tens of billions of dollars of export earnings and government revenues lost to trade misinvoicing. This represents a drain on government revenues, and certainly a lost opportunity for all commodity exporters and their citizens. It reduces the ability of countries to drive growth, diversification and poverty reduction, and achieve the SDGs.

Therefore, it is clear that we need to address trade misinvoicing. But it is also clear that this requires more transparency and more effective cooperation, from exporting and importing countries, and traders. UNCTAD stands ready to support all of you in these efforts.

My second message is on policies to promote greater value addition.

Improved local content is a way to improve the value and revenue countries can get from their exports of natural resources. However, for this to happen, countries have to adopt a long-term approach based on developing human capital.

In this context, we need to update the policy options we suggest to developing countries, to help them “break the chains of commodity dependence”.

Early local content policies disappointed, boosting only low-value activities in the host country.

Drawing from these past shortcomings, panellists in this forum highlighted on the need to abandon a short-term approach to local content framework, characterised by governments imposing, in isolation, penalty-based conditions on extractive projects.

Of interest was the assertion by private sector representatives on the importance of training programmes including skills and enterprise development.

UNCTAD is active in this area, with programmes such as Empretec – as are our partners at the Commonwealth Secretariat and other international organisations – but our role in skill and enterprise development need to be expanded.

My third message of today is on the importance of regional value chains.

Developing countries, especially in Africa, must develop regional value chains to expand their export markets and broaden their export baskets.

Of course, export diversification has been prescribed for many years, without many examples of successful implementation.

The rise of global value chains (GVCs) has had a mixed effect on this picture for commodity producers.

On one hand, developing countries now see a more disaggregated chain, with more activities for which they can compete.

On the other hand, developing countries now face more questions to answer: “what activities should we pursue? And how do we prepare ourselves?”

In this regard, international organizations could help countries in identifying the best opportunities for developing new products and export markets, given their comparative advantages.

Another piece of the puzzle is the assistance for developing countries to streamline their trade procedures and lower trade costs, thus improving their competitiveness when entering new markets.

There is a clear message for developing countries, especially in Africa emanating from this forum: to pursue regional value chains, to grow the markets for exports, without incurring the high transportation costs that can render their exports uncompetitive.

Finally, allow me to briefly refer to the ministerial session. At this session you debated whether to “go green or go coal”. This highlights the tough question we have to answer: on the one hand, energy for all and, on the other hand, the necessity of reducing carbon emissions.

The UN and UNCTAD’s position is clear on this: coal is a dead end. We must convert power generation to renewables to reduce the carbon footprint of our global economy. Otherwise, we cannot achieve the sustainability enshrined in Agenda 2030.

Also, in the discussions about agricultural development, several ministers highlighted the importance of putting women at the centre of this agenda: women provide the majority of agricultural labour on small farms in Africa, but earn less. This is an issue of great importance for UNCTAD, and in fact, later in the UNCTAD 14 programme we have a special session on this topic.

Let me conclude by congratulating everyone for a successful Forum. You have indeed highlighted a number of critical areas where more action is needed. We, at UNCTAD, stand ready to shoulder our responsibility and look forward to carrying these outcomes and messages forward through UNCTAD 14 and beyond.

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