The transhipment problem: Smuggling and welfare in Paraguay

Abstract

This paper studies the effects of contraband on resource allocation and welfare using Parguayan data. A major portion of exports from this economy involves the transhipment of goods from third countries through Paraguay to Brazil and Argentina to avoid trade taxes, both explicit and implicit via quantitative restrictions and multiple exchange rates. Using international and Paraguayan databases for 1990, we calculate that contraband accounted for 58% of exports and 31% of imports. Finally, we estimate that such trade increased welfare by 2.1% of GDP.