WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Based on the theoretical foundations as described in Bhagwati (1974), illegal trade can be defined to consist of faked invoicing on the one hand and smuggling on the other hand. While in the first case at least one of the trading partner countries has recorded a trade flow either as an export or as an import, in the latter case no official customs data is available. Smuggling is bypassing legal trade channels altogether. Therefore it is difficult to estimate the full magnitude of illegal trade with the help of one single method. In this paper we rather tried to detect faked invoicing and smuggling in the Balkans separately. Therefore we first tried to measure illegal cross-border trade in South East Europe (SEE) in order to have at least some impressions about the magnitude of this phenomenon and second we analysed illegal trade from a more theoretical perspective and provided an overview of possible policy relevant aspects. The paper ends with some discussion on the impact of illegal trade on security and of some soft security instruments that could be used to address it.