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This paper examines the theory and evidence of the role of corruption as a barrier to trade, highlighting the interaction with nominal tariffs. It assesses the effect of corruption by customs officials on international trade flows stressing the dichotomy between extortion and evasion.

The paper develops a theoretical model that studies the effect of both types of corruption on trade flows on the basis that a more corrupt environment reduces the expected social and legal penalties associated with bribes. It suggests that the net effect of corruption on trade is ambiguous with a trade taxing effect from extortion and a trade enhancing effect from evasion.

The paper argues that:

• the direction of the relationship between corruption and trade flows is affected by the level of tariffs
• when tariffs are low a rise in corruption lowers trade flows by facilitating extortion by customs officials
• when tariffs are high a rise in corruption enhances trade flows due to increasing the scope for evasion
• the impact of corruption on trade flows displays an inverted U-shape, if the level of tariffs is high; when corruption is low, evasion is limited and has space to increase therefore an increase in corruption expands trade flows.Conversely, when corruption is high the space to expand evasion reduces and the increase in extortion dominates
  

This suggests that when regulations are stringent a little bit of corruption helps trade but too much corruption becomes harmful.

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