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  • P-ISSN 1738-656X

한국개발연구. Vol. 12, No. 2, August 1990, pp. 81-94

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Illegal Transactions and Import Restriction Policy (Written in Korean)


Author & Article History

Manuscript .


Illegal transactions such as blackmarketing and smuggling allegedly result from too restrictive trade policies. A recent U.S. Senate hearing on the blackmarketing of American goods imported into Korea for the purpose of supporting United States troops and their dependents stationed in Korea concluded with the allegation that Korea's highly restric­tive trade practices are responsible for the emergence of the black market. It has also suggested that the removal of such restrictive trade policies would eliminate black market activities. This study addresses the relationship between trade policy and blackmarketing by investigating whether trade liberalization results in the reduction of illegal transactions, and whether the eradication of blackmarketing indeed improves social welfare. When both legally imported goods and illegally exchanged items command the same price, trade liberalization, meaning a decrease in tariff rates or an increase in import quotas, will increase the quantity of legal imports at the expense of illegally transacted goods on the black market. But the price of legally imported goods usually differs from that of illegally sold ones. In this case, a change in the relative prices of these two groups of goods due to a change in trade policy will give rise to income, as well as substitution, effects. Initially, a decrease in the import price due to a decrease in import tax rates or an increase in the allotted quota will reduce illegal transactions, since the decrease in the import price will induce the substitution of legal imports for illegally exchanged, but otherwise, identical goods. On the other hand, the demand for the illegally tran­sacted goods will rise, because of the income effect of the reduced import price. Thus, assuming the positive income effect overwhelms the negative substitution effect, the demand for illegal goods will increase, thwarting the reduction of blackmarketing through trade liberalization. Yet, stepping up the enforcement measures which are geared to preventing blackmarketing itself will drastically reduce the extent of illegal transactions, since it in-creases the cost of blackmarketing and hence the price of the illegally transacted goods. What this study suggests is that the emergence of the black market in Korea should be attributed more to the excessive supply of duty, free goods imported through U.S. commissaries and exchanges than to the excessive demand for foreign goods. On the other hand, blackmarketing, in most cases、improves economic welfare、since it constitutes an increase in the “actual" amount of imported goods. Suppressing blackmarketing through stepped up enforcement methods is beneficial only when the substitution effect of the legally transacted goods resulting from the increase in the price of the illegal goods prevails、since the increase in the demand for legal imports must override the decrease in the demand for black market goods as well as the negative income effect.

JEL Code

K10, F42

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