Following the Trail of Illegal Timber: The Role of Consumer Countries in Combating Forest Crime

Consumer Demand fueling Illegal Trade is a significant contributor to Poverty in Developing Nations.

Illegal trade is a major challenge for governments across the world. It presents a real threat to peoples’ culture, wildlife and natural resources.  In addition to loss of government revenue and local economic development, illegal trade can undermine environmentally sustainable activities. In the extreme case, it can erode the rule of law. This is known to lead to resource misallocation, armed conflict in fragile states, and financing of civil conflicts.

According to a report by Global Financial Integrity, the estimated value of global illegal trade in 2019 was between $1.6 and $4.1 trillion. One major challenge with the historical methods of combatting illegal trade is that the burden of enforcement has disproportionally fallen on the producer/ exporter country. Given that illegal trade is highly correlated with countries that have weak institutions to begin with, this approach has singularly failed to stem the growth of illicit activities.

We can see this play out for forestry products in the chart below, which builds on work done by Fisman and Wei. It shows the cross-country relationship between illegal trade (measured using trade mirror statistics) with USA in forestry products and the level of corruption in the exporter country (measured using the WGI).

Notice the strong relationship between corruption and illegal trade in forestry goods in the right-hand quadrant. As table 1 shows, these are mostly low-income countries. Out of 29 low-income countries covered by the data, 72% have a corruption index and illegal trade measure above 0. In short, there is a clear relationship between the higher level of corruption in these countries and the amount of illegal forestry products that arrives in the USA.  

While the data covers just forestry products, you don’t have to stretch your imagination too far to think of other cases where a similar relationship may exist. Just think “blood diamonds” or poaching of wildlife. In both cases, the product is harvested and smuggled out of the host countries that tend to have very weak institutions, making it very easy for illicit activities to take place.

Consumer countries, which typically have higher levels of state capability, can help reduce demand for illegal products and disrupt supply chains by enforcing laws against the sale and purchase of illegal goods. The USA is a leading nation in this fight. What makes it distinct is the degree of responsibility placed on the importer, where willful negligence has been used in courts to sentence buyers of illegal goods. In 2008, the US applied the Lacey Act to stem the flow of illegal trade in forestry products. The Lacey Act is a U.S. law originally passed in 1900 to protect wildlife from trafficking. In 2008 it was amended to include plant products, making it the world's first ban on the trade of illegally sourced wood products. The hope was that by cutting off the head of the snake the tail will vanish. The most famous prosecution done in the USA was in 2009 when Gibsons Guitar, a prominent musical instrument manufacturing company was heavily fined for importing endangered wood from Madagascar and banned wood from India.

Returning to forestry goods, analysis of the impact of the Lacey Act on illegal trade has found a fall in illegal trade between the USA and countries with higher degrees of corruption (see here for more details). There is also evidence that the USA’s composition of trade with other countries did not change. This is important because it tells us that exporter countries actually did reduce illegal trade, rather than just channeling it through transit countries.

When consumer countries up their enforcement, as the US did with the Lacey Act, there is likely going to be a fall in overall imports in the short term as countries adapt to the new normal. If the policy implementer is a market maker, as in the case of the USA, we should transition to a better steady state where illegal exports are replaced by legal exports over time.

Getting to grips with illegal trade really matters for the economic development of low-income countries. Consumer countries must recognize the part they play in this. Their demand for these goods enables corruption and underdevelopment in low-income countries, perpetuating a vicious cycle of poverty. But the Lacey Act’s application to illegal trade in forestry goods shows that they have the power to make a big difference. Consumer countries must use this power to stop the trade in illegal goods and boost legitimate markets in low-income countries.