Financial Transparency Coalition

By Tom Cardamone, President & CEO  of Global Financial Integrity

If Covid-19 has brought any point about the global economy into sharp focus it is that international trade is the lifeblood of developing countries. Without the ability to export key commodities, whether they are fish, petroleum, flowers or timber, countries will have a difficult time keeping people employed and hard currency will evaporate, effectively limiting fiscal space and exacerbating the debt burden. Imports, too, are an important component of the economy not just for the goods they provide, but also for the import duties and value-added tax (VAT) payments that are collected. Such revenue is a vital funding mechanism for health programs urgently needed to fight the pandemic.

Customs duties and VAT are the low-hanging fruit for developing country revenue authorities. Global Financial Integrity’s research has shown that from 2008-2017 there was an $8.7 trillion value gap between what developing nations reported as the value of imports and exports with advanced economies, and vice versa. This translates into a potential loss of revenue as high as $1.5 trillion during that period.

Unfortunately, the already-tenuous trade revenue stream is being made worse by the pandemic. First, scores of countries are lowering or eliminating import tariffs for medical products, which will reduce revenue collection. Secondly, the multilateral call for “simplifying and facilitating the customs process” is akin to telling customs departments to all-but-abandon oversight of products deemed critical to the pandemic response. This will result in a “Wild West” situation in which unscrupulous traders will mislabel non-medical goods in order to evade VAT and customs duties, thereby aggravating the situation by lowering trade-related revenues even further.

‘Trade integrity,’ defined as international trade transactions that are legal, transparent and properly priced, is important in “normal” times to ensure that developing countries garner the proper value from their participation in the global economy. In times of great hardship, as we are now experiencing, the legitimacy of global trade is absolutely essential. Indeed, without assurances that goods are untainted by counterfeiting, misinvoicing, tax evasion, or money laundering, poor countries will be woefully underfunded and unable to deal with a virus that will likely be with us for many months, if not years.

In order to quickly boost revenue for the short term and to lay the ground work for long-term solutions to systemic problems that undermine trade integrity, the international community should do the following:

▪ JULY – The United Nations Economic and Social Council (ECOSOC) hosts a donor conference comprised of governments, regional bodies and international financial institutions to discuss funding for developing country customs departments. The purpose is to boost the technical capabilities with a special focus on the implementation of commercially-available trade risk-assessment technology to increase revenue collection;

▪ SEPTEMBER – The Organization for Economic Cooperation and Development (OECD) convenes experts from public and private institutions to collaborate with an aim to catalyze efforts to reduce trade-based money laundering, with a special emphasis on capacity building in developing nations;

▪ OCTOBER – The United Nations Conference on Trade and Development (UNCTAD), in place of its canceled Quadrennial Conference, convenes a meeting of key stakeholders to develop a legal and regulatory framework to create stricter definitions, reporting requirements and oversight of areas frequently referred to as ‘free trade zones’ to address the opacity and corruption plaguing those areas;

▪ NOVEMBER – The G20, in its Summit Communiqué, calls for UNCTAD, the World Trade Organization, the World Customs Organization and the World Economic Forum to fast-track an examination of the feasibility of establishing a global norm in which the use of distributed ledger technology by customs departments is required to address the information asymmetry in international trade transactions to help curtail trade misinvoicing.

Without a concerted, multi-pronged approach by global institutions to address the challenge of trade integrity, developing nations will continue to suffer the indignity of a second-class health system and will be at the mercy of the capriciousness of a deadly virus.

An opportunity to discuss plugging such leakages due to the increasing need of resources amidst COVID is happening on May 28^th, in the virtual conference, Health versus Wealth? Tax and Transparency in the Age of COVID-19.