RDP 2014-07: International Trade Costs, Global Supply Chains and Value-added Trade in Australia 1. Introduction

Structural change in the Australian economy has been a prominent issue in recent years (Connolly and Lewis 2010). We provide a new perspective on structural change by investigating how the domestic supply chain has evolved in recent decades. We also examine how the structure of Australian international trade has evolved in response to the development of global supply networks. The paper is divided into three parts.

First, we investigate how Australian trade has been affected by the growing fragmentation of production across international borders through global supply chains. Australia's trade linkages have been affected by the expansion of global production networks; Australia typically exports commodities that are used to produce goods and services that are, in turn, exported to other markets. We present new estimates of value-added trade for Australia that complement conventional trade statistics. The value-added trade estimates suggest that the United States and Europe are more important for export demand than implied by conventional trade statistics, as some Australian content is indirectly exported there via east Asia. The value-added trade estimates also highlight the extent to which the services sector is integral to the production of goods exports.

Second, we quantify how the Australian supply chain has evolved in recent decades using novel measures based on historical input-output tables. Overall, compared to a few decades ago, the Australian economy now involves more stages of production, with a greater share of production occuring overseas and more domestic production occuring earlier in the supply chain. That is, production in the Australian economy has become more ‘vertically fragmented’, more ‘offshore’ and more ‘upstream’. Most of these adjustments occurred over the 1990s, which suggests that economic reform and competitive pressures due to ‘globalisation’ were contributing factors.

Third, we undertake econometric analysis to explore how the level of vertical fragmentation across countries and industries has been affected by factors such as lower international trade costs and deregulation of product markets.