The magnification effect in global value chains

We examine the “magnification effect,” which demonstrates that as the number of separable production stages increases, trade increases dramatically as trade costs decline. We empirically investigate the existence of this magnification effect by estimating gravity-type equations for worldwide trade to obtain the tariff elasticity of trade per industry. We find that tariff elasticity is higher in industries with a greater degree of global value chain participation. These results are observed for both gross and value-added trade. Furthermore, we find that tariff elasticity is higher in intra-Asian trade, especially in machinery industries.