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Economics of smuggling

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Research on smuggling as economic phenomenon is scant. Jagdish Bhagwati and Bent Hansen first forwarded a theory of smuggling in which they saw smuggling essentially as an import-substituting economic activity. Their main consideration, however, was the welfare implications of smuggling. Against common belief that the private sector is more efficient than the public sector, they showed that smuggling might not enhance social welfare though it may divert resources from government to private sector. In contrast, Faizul Latif Chowdhury, in 1999, suggested a production-substituting model of smuggling in which price disparity due to cost of supply is critically important as an incentive for smuggling. This price disparity is caused by domestic consumption taxes and import duties. Drawing attention to the case of cigarettes, Chowdhury suggested that, in Bangladesh, smuggling of cigarettes reduced the level of domestic production. Domestic production of cigarettes is subject to value added ta...
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Legal definition

In popular perception smuggling is synonymous with illegal trade. Even social scientists have misconstrued smuggling as illegal trade. While the two have indeed identical objectives, namely the evasion of taxes and the importation of contraband items, their demand and cost functions are altogether different requiring different analytical framework. As a result, illegal trade through customs stations is differently considered, and smuggling is defined as international trade through ‘unauthorized route’. citation needed A seaport, airport or land port which has not been authorized by the government for importation and exportation is an ‘unauthorized route’. The legal definition of these occurs in the Customs Act of the country. Notably, some definitions define any 'undeclared' trafficking of currency and precious metal as smuggling. Smuggling is a cognizable offense in which both the smuggled goods and the goods are punishable.
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History

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Smuggling has a long and controversial history, probably dating back to the first time at which duties were imposed in any form, or any attempt was made to prohibit a form of traffic. Smuggling is often associated with efforts by authorities to prevent the importation of certain contraband items or non-taxed goods; however, there has also been smuggling based on illegally exporting goods. In England smuggling first became a recognised problem in the 13th century, following the creation of a national customs collection system by Edward I in 1275. Medieval smuggling tended to focus on the export of highly taxed export goods — notably wool and hides. Merchants also, however, sometimes smuggled other goods to circumvent prohibitions or embargoes on particular trades. Grain, for instance, was usually prohibited from export, unless prices were low, because of fears that grain exports would raise the price of food in England and thus cause food shortages and/or civil unrest. Following the los...
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