Tariff evasion in machinery production networks: Evidence from East Asia

We estimate the effects of tariff rates on bilateral tariff evasion in international production networks, namely parts and components and final products, focusing on intra-regional trade in East Asia during 1996-2011. Our results reveal that tariff evasion is prevalent in 7 of the 12 East Asian countries studied, particularly in non-high-income importers. Specifically, the tariff evasion of parts and components increases by 1.10%-1.55% compared with that of final products (0.55%-0.96%), with a one-percentage-point increase in the tariff rate. Moreover, the responsiveness of the unit price gap to the tariff level is greater for parts and components than for final products. Finally, we investigate the nonlinear issue and tariff evasion of the misclassification of imported products and obtain robust results. Our findings provide relevant economic implications for policy makers regarding the severity of tariff evasion because machinery production networks are crucial factors driving intra-regional trade in East Asia.