Magnification Effect in International Production Networks: Evidence from Asia

Discussion Papers

No.821

by Kazunobu Hayakawa and Hiroshi Mukunoki

July 2021

ABSTRACT

This study empirically examines the "magnification effect" proposed in Yi (2003, Journal of Political Economy). He demonstrated theoretically that, as the number of separable production stages increases, the magnitude of trade increases explosively through the reduction of trade costs. We investigate the existence of the magnification effect for intra-Asian trade in machinery industries. Specifically, we estimate a gravity equation for worldwide trade that includes tariffs and their interaction term with a dummy variable for intra-Asian trade. As a result, we found a significantly negative coefficient for this interaction term, especially in the electrical machinery industry, indicating that tariff reductions increase intra-Asian trade more greatly than other trade. These results are robust against endogeneity in tariffs and other confounding factors. Keywords: Production networks; Asia; Tariffs

Keywords: Production networks, Asia, Tariffs

JEL classification: F15, F53

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