RDP 2014-07: International Trade Costs, Global Supply Chains and Value-added Trade in Australia 6. Conclusion

The growing prevalence of global supply chains has been associated with important structural changes in Australian trade that are not fully reflected in conventional measures of gross trade flows. The World Input-Output Database allows the construction of value-added measures of trade that can identify Australia's underlying trade linkages. The estimates suggest that the United States and Europe comprise a larger share of Australia's value-added exports than implied by gross exports. In contrast, the estimates indicate that China comprises a smaller share of value-added exports than gross exports. The service sector also constitutes a higher share of Australia's value-added exports than implied by gross exports because of its indirect exposure to trade, as services are extensively used as inputs to produce goods exports.

The value-added content of Australian trade is high by international standards, mainly due to Australia's large endowment of natural resources and its geographic isolation. These factors contribute to Australia exporting a relatively high share of resource commodities and a low share of manufactured goods. Manufactured exports typically embody little value-added as their production involves the extensive use of intermediate inputs, which are increasingly sourced from imports. These compositional differences also explain why the value-added content of Australian trade has been relatively stable while it has fallen for most countries over the past two decades, as they increasingly source intermediate inputs from other countries.

Australia has increasingly become a net exporter of intermediate products and a net importer of final products over the past two decades. This reflects the growing fragmentation of production across borders, as the emerging economies in Asia become major importers of Australian resource commodities that are used as intermediate goods for processing and export.

We also apply new measurement techniques to historical input-output data to examine how the domestic supply chain has evolved over recent decades. By international standards, Australian production is highly fragmented and relatively upstream, partly because of the importance of resource exports. We find evidence of an increase in the average number of stages involved in production (fragmentation), and the average distance to final demand (upstreamness), mainly during the 1990s. These changes coincided with a period of significant structural change in Australia, and result from both the changing composition of Australian industry as well as adaptation within industries.

Our analysis suggests that the rise in vertical fragmentation in Australia is, at least in part, a global phenomenon. In particular, our econometric analysis indicates that, since the mid 1990s, the global rise in vertical fragmentation and offshoring has reflected a combination of lower international trade costs, extensive deregulation of markets that produce intermediate goods and services, and rapid economic growth in emerging economies, particularly in China.