QUOTA‐HOPPING IN‐BOND DIVERSION

We show that the U.S. in‐bond system of imports may be used by firms to illegally avoid trade barriers, a practice known as in‐bond diversion. The illicit scheme involves declaring Chinese exports bound for Mexico but diverting them to the U.S. market while in transit, thus creating a gap between Chinese and Mexican reports. Using the phaseout and removal of U.S. quotas at the end of the Multifiber Agreement as a policy experiment, as well as variation in quota bindingness across products, we show that quota‐bound products were associated with larger trade gaps which shrunk following the quota removals. (JEL F13, O17, O19)