A New Approach to Measurement of Errors from Bilateral Trade Discrepancies: The Duty-free Zero Incentive Approach (DFZI)

Abstract

The Duty-Free Zero Incentive Approach (DFZI) for measuring errors in trade discrepancies draws from the assumption that in the absence of taxes, there should be no incentive to evade taxes. Assuming there were zero taxes on goods, that is, duty-free, then there would be zero-incentive to evade (hence the term “duty-free zero incentive”) such that any discrepancy in trade data would solely be on account of errors in measurement only. This approach is useful for ascribing the errors arising from missing imports and is very useful in the estimation of smuggling.