Page 122 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

Unit 5: Methods of Financing Exporters and Business Risk Management

combine a relatively open capital account (reducing incentives for overinvoicing as a Notes
capital flight mechanism), trade liberalization (reducing incentives for underinvoicing as
a tax evasion mechanism), and local institution building aimed at improving all customs
functions.
But a practical tension often arises. Institution building and structural revenue changes
take time. Shorter-term revenue requirements are often pressing in countries that rely on
trade taxes as an important source of government revenue. Different views on the
effectiveness of preshipment inspection reflect different policy priorities as well as a lack
of clear empirical evidence on impact. Consider the three main functions of preshipment
inspection.
Disbursement Verification
Low (1995) finds that the World Bank’s policy of encouraging governments to use pre-
shipment inspection—and sometimes requiring it as a loan condition—has been driven
by concerns about the use of donor funds. This rationale is in line with basic Bank
procurement guidelines on import documentation for investment operations.
In addition, the desire to ensure the efficient use of funds through a trade verification
procedure is relevant for loans with disbursements that are linked not to the inputs needed
to implement specific investments, but rather to balance of payments support through
procurement of general imports. In such cases there is a need to verify that prohibited
goods are not procured or that agreed goods are procured. Where governments have poor
statistical capacity, preshipment inspection can provide useful evidence. But no study
exists on the benefits and costs of alternative forms of disbursement verification.
Revenue Collection
Probably the most important reason that governments seek preshipment inspection
services is to deal with inefficient or corrupt customs administrations. Such administrations
introduce distortions through widespread evasion of trade taxes, either through
misspecification of quantity, misclassification of tariff heading, or undervaluation of goods.
It is not easy to directly assess the costs and benefits of preshipment inspection in this area.
Preshipment inspection services are often introduced at the same time as policy reforms
affecting revenue collections and customs performance, and the full benefits depend on
other government actions. Moreover, many preshipment inspection programs have been
poorly implemented by administrations that did not want the services because they would
reduce available rents.
Although reported revenue savings generally exceed preshipment inspection fees — which
are about 1 percent of the value of inspected goods—case studies suggest that the
information provided by preshipment inspection companies has often been disregarded,
so potential revenue increases have not been realized. Revenue collection shortfalls of up
to 50 percent are reported to have occurred in some countries.
Unless governments consistently use a reconciliation system and act on generated
information, preshipment inspection will not contribute much to revenue collection. For
sustainable revenue collection, customs modernization and institutional reform are also
needed, and should specify how preshipment inspection services will be phased out over
time. Ideally, this should be a prerequisite for any country signing a preshipment inspection
contract.

Trade Facilitation
Opponents often argue that preshipment inspection hinders the flow of goods with the
rest of the world. They point out that at best, preshipment inspection creates a series of
Contd...

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