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Where is China’s hidden art money?

A study reveals troubling import/export anomalies between China and the US

Art and antiquities shipments between the US and China may disguise money-laundering and tax evasion. Photo: REUTERS/Nicky Loh

Money-laundering, tax evasion and the illicit transfer of cultural heritage objects could be factors explaining large discrepancies that have emerged in an analysis of art shipments between China and the US.

There has been consistent under-reporting by the Chinese of the value, volume and type of art shipments in both inbound and outbound directions, according to a recent report, “The People’s Republic of China and the Foreign Art Trade: Where the Data Falls Short”. The thesis was produced by Alice Lovell Rossiter for her master’s degree in art business from Sotheby’s Institute of Art.

“While most studies of art markets focus on where the light is—namely, on public auction records—Alice’s work uses the documentation from international trade transactions by national statistical agencies. These have the added benefit of having been used in well-cited academic papers about international trade,” says Benjamin Mandel, a former economist at the Federal Reserve Bank of New York, who has been studying the art trade. He is now a research economist at Citibank and advised Lovell Rossiter on her thesis.

The report is founded on records aggregated every year in the United Nations Commodity Trade Statistics Database (ComTrade). It examines shipping data between the US and China for the 13-year period between 2000 and 2012 (the most recent year for which information was available). The thesis focuses on two shipping categories. The first, code 97, relates to “works of art, collectors’ pieces and antiques”; the second, code 9706, is a subset of the former and refers to “antiques of an age exceeding 100 years”.

Trade from China to the US

The greatest volume of goods flows from East to West. The dollar values of US import and Chinese export records should tally. “In principle, the margin for error should be zero,” Mandel says. ‘But roughly 15% of the value of all traded goods between China and the US shows discrepancies,” he says. Although China’s general lack of trade transparency is well documented, the situation is especially unclear when it comes to information about the shipment of cultural objects. “The margin is bigger for types of goods subject to trade restrictions or a more complicated export process—cultural items, for example,” Mandel says. The US reports, on average, 60% more value in art shipments from China than China reports leaving its borders, according to Lovell Rossiter’s report: there was a $262.7m difference in 2007 alone. The biggest discrepancy—78.6% on average—concerns art more than a century old.

Probable smuggling

“As the US does not have an import tax on fine art and China does not have an export tax, another explanation… must be given,” the report says. It suggests that smuggling of cultural artefacts is the probable explanation. “Millions of dollars [worth] of art objects over 100 years of age are being exported out of China” to the US, the author states. “In 2012, the US imported $1.4bn worth of antiques older than 100 years, $191m of which was from China—which is $107m more than China reported,” Mandel says.

The report argues that laws passed in 2002 by the Chinese government to regulate the trade of cultural heritage objects have largely failed, resulting in “loopholes where corruption can take place”. The level of misreporting for objects more than 100 years old, which should always be accompanied by export applications approved by the Chinese ministry of culture, peaked in 2001 with an 83.4% difference in the dollar value of the figures reported by the US and those reported by China (a difference of $121.6m that year). This dropped to 65.5% (a difference of $90.9m) in 2002, when the laws came in. By 2007, the data gap had risen to 73%, with a difference of $180.8m in the value of the objects recorded.

International laws have had more impact, though not all positive. The report considers the Unesco convention, signed by 190 countries in 1970 to regulate the transfer of objects of cultural importance. The US was the only country to sign with a “reservation”: it will not regulate the illegal exportation of objects. If a culturally significant object is illegally imported into America from China, the US will neither return it nor prosecute its shipment. This has turned the US into a “quasi-safe haven for works of art that have left their countries of origin illegally”, Lovell Rossiter argues in her report.

China asked the US to regulate almost all art imported from China in 2004, when it filed a request for a “Memorandum of Understanding”. There followed a brief drop in the levels of misreporting, which rose again when the US refused to sign the agreement that same year. In 2009, the US agreed to a moderated memorandum, restricting the importation of archaeological material from the Palaeolithic period up until the Tang Dynasty (AD618-AD906), as well as monumental sculpture and wall art more than 250 years old. Since then, the value of exports has fallen, but so has the number of US imports, suggesting that “a reduction in trade occurred, rather than… a decrease in corruption occurrences”, the report argues.

The biggest change in behaviour occurred in 2011, when “a complete shift in tactics takes place”, the report says. “It is likely, though not documented, that China has been cracking down on border control for objects marked 9706”, the shipping code that relates to works more than 100 years old. Now, rather than misreporting the value of cultural heritage objects leaving China, as in previous years, the shipping category may be being misreported. Packages are then properly reclassified by the time they enter the US, with the codes switched somewhere in transit.

Marking down prices

The US also reports exporting millions of dollars more in art to China than China reports receiving. Objects entering China are consistently classified at 94.8% less value, on average, than they were upon leaving the US.

Such gaps in shipping data are typically correlated with tax rates. In general, “much more value is ‘lost’ for products with higher tax rates”, says the report, and China’s steep import duties on fine art suggest that evasion is likely. However, the report finds that tax evasion is only part of the story, since “avoidance behaviour is significant regardless of the tax rate”.

More striking is the fact that the annual differences in US and Chinese shipping data mirror the growth of the Chinese economy. “The levels of misreporting spike during times of peak capital inflow to China, which might indicate the potential for money-laundering,” Lovell Rossiter says.

Chinese households shield $1.4 trillion in income—equivalent to 30% of the country’s GDP, according to a study produced for Credit Suisse by the China Reform Foundation in 2010. It is estimated that 80% of this hidden wealth is in the hands of the country’s richest people. Art, the report says, fetches “high enough prices that significant amounts of money can be transferred with one shipment of fine art”.

To read Lovell Rossiter’s thesis, visit www.proquest.com from 1 April


China's reported exports vs the US’s reported imports. Graphic: Katherine Hardy (data courtesy of COMTRADE)
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Comments

5 Feb 14
19:35 CET

MICHAEL OSTER, NEW YORK, NY

Having been a dealer in Chinese antiques in New York City for the last 35 years, I see nothing wrong with Ms. Rossiter's facts, but I see no indications that support her conclusions. During the time period of Ms. Rossiter's thesis, both the dealers and the auction houses have consistently bemoaned the obvious and growing depletion of Chinese antiques in a highly competitive seller's market. Surely, I and my associates would all occasionally notice or be offered some surprisingly "fresh" objects if there existed such an enormous exportation. Instead, with thinner and thinner supply, many a dealer and auction house has turned to offering fakes, a decidedly shady market where modern Chinese technology is able to reproduce passably accurate copies of antiques for a few RMB per item and amazingly accurate copies for a few thousand RMB. Just like the shipping data in Ms. Rossiter's thesis, these become treasured heirlooms mid-Pacific and I suspect are also contributing to her other facts.

5 Feb 14
16:15 CET

JAMES MCANDREW, NEW YORK

As the former Department of Homeland Security subject matter expert in international art & antiquity investigations, and the creator of DHS's art theft investigations program and training, there is much about doctoral thesies that I applaud and much about them that miss their mark and lack accurate information. Eitherway, bringing public attention to how source countries behave is a good start toward levelling the playing field between source and market countries.

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