Events

Prof. Michael K. Lim
Professor, Operations Management
College of Business Administration
Seoul National University

ABSTRACT

Informal cross-border trade (ICBT) refers to the illegal activities of cross-border commerce conducted by unregistered small-scale traders. We seek to develop insights to understand the ICBT value chain and offer policy recommendations to successfully integrate it into the formal economy. Using a game-theoretic model, we analyze the operations and key market dynamics of ICBT. We further examine the policy implications of three representative UN directives: enhancing traders’ access to formal channels, reducing export tax rates for traders, and providing an alternative simplified trade regime (STR) to informal traders. All three formalization policies increase government proceeds when the inherent profitability of the formal or STR channels is sufficiently high. On the other hand, an increase in social welfare is achieved when the policies successfully balance the degree of wholesale price competition within the formal and informal channels. We apply our model to a case study based on Uganda’s agricultural exports over an 11 year horizon to obtain policy insights on the efficacy of these policies and the tradeoffs that must be considered. We find that only the access enhancement policy increases both the government proceeds and social welfare. Nonetheless, the tax reduction and STR policies can lead to a greater increase in welfare at the cost of government proceeds. From the individual stakeholder’s perspective, only the STR policy achieves a pareto improvement among all stakeholders, while the other policies improve welfare by concentrating them in the hands of traders.