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This research shows that misreporting of trade is rampant, which markedly reduces the quality of reported bilateral trade data. We devise a novel methodology to correct for misreported bilateral trade while accounting for the composition of product types and for trading partners. Based on bilateral data for 196 countries in the world at the product level over the period 1996–2017, we find that (i) our corrected trade data are significantly more reliable than reported data; (ii) our corrected data are significantly more reliable than data based on conventional misreporting correction methods; (iii) corrected trade balances are often quite distinct from their reported counterparts; (iv) capital flight is the most important source of misreporting and (v) the misreporting propensity tends to cluster geographically, with the main offenders often deviating from common perceptions in the literature. Based on estimates of the gravity model, we show that geographical characteristics are more influential than institutional variables in explaining misreporting.

Does trade openness systematically imply bigger governments, as proposed by Rodrik (1998)? This paper presents a novel and more refined explanation for when and why international trade may enlarge the public sector. We propose that trade openness is associated with bigger governments if (i) the price volatility of a country's export basket is substantial and (ii) the country is democratic. The first condition satisfies the prior that open trade barriers indeed introduce uncertainty and external risk -something that is not necessarily the case for all trade. The second condition ensures that the people's desire for greater economic security can be realized through government spending. Empirical evidence for 143 countries (accounting for approximately 96 percent of world population) from 2000-2016 is consistent with this hypothesis. Exploring areas of public spending, we find intuitive patterns: Consistent with the compensation hypothesis, government spending on economic affairs and housing increases significantly with trade openness, whereas public spending on education, health care, and the military are not immediately concerned. As with our general result, this is only the case in democracies that are subject to high price volatility on the global market.

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