Australian services exports – the complete picture
02 Oct 2020
The global health crisis has heavily impacted Australia’s services exports, but there are important areas of strength to build upon.
COVID has introduced a threat to travel and transport exports from Australia – and accelerated digital adoption across the globe. This changing external environment is the backdrop to a period of transformation for services exports sold from Australia.
However there is an under-discussed component of Australia’s services exports – the activity of Australia’s foreign affiliates. With the release of ABS data on Australian Outward Foreign Affiliates [i] data last month we can, for the first time in 16 years, see the complete picture of Australia’s services exports. [ii]
Australia’s foreign affiliates are a source of stability and dynamism for the services sector as it aims to strengthen its international engagement during and beyond the pandemic.
The COVID challenge to services exports
The COVID pandemic has impacted heavily on Australia’s services exports.
As a large continent, located at a distance from major world economic hubs, and attracting many international visitors, a large share of services exports by Australian residents (72 per cent of Australia’s AU$102 billion) are from the travel and transport sectors, and these have been severely impacted by the pandemic. [iii]
The pandemic has also accelerated the adoption of digital technologies by businesses and consumers. This COVID-driven acceleration is additional challenge to our remaining services exports from Australia – termed here as Other Services.
The Other services segment accounts for a smaller proportion of services exports than Travel and Transport combined – just 27% in 2019. Unlike travel and transport categories that rely on face-to-face interaction, a large share of Other services can be digitised and potentially delivered by any foreign market empowered by digital platforms. The pandemic has heightened speculation around greater global outsourcing of Oher Services - what we consider to be knowledge-intensive work.[iv]
June quarter export data confirms the disruption to services export categories Travel and Transport, as a result of the COVID-2019 pandemic.
Travel & Transport vs Other Services Exports
Source: ABS (2020) Balance of Payments, original data
Australia’s Other services exports have shown resilience in recent years, perhaps taking advantage of digitisation. In fact June quarter data that covers the initial period of COVID disruption shows Other services sold from Australia grew by 4% over the previous quarter, and by 4% compared to June quarter 2019.
A COVID opportunity – leveraging global integration of scale
Data released last month sheds light on ‘‘hidden’ exports of services, or the sale of services to foreigners by Australian affiliates based overseas.
This data (irregularly collected), shows a large share of Australian services sales in 2018-19 occured via Australia’s “foreign affiliates” – i.e. Australian majority owned subsidiaries, branches and joint ventures that are resident overseas.
Australian affiliates sold $89bn in services in 2018-19 from their overseas bases. This is just short of the total value of services sold from an Australian base, in that year ($97bn in 2018-2019), and means affiliates count for around 48% of Australia’s total services exports of $185bn.[v]
Australian services exports in 2018-2019
Sources: ABS (2020) International Trade: Supplementary Information, Financial Year, Table 3; ABS (2020) Australian Outward Foreign Affiliates Trade; and Economic Insights, Data & Evaluation team’s calculations.
Affiliates offer the services sector a ‘COVID’ opportunity for a number of reasons.
In contrast to services sales from Australia, only a minority of Affiliate sales (9%) are from the Travel and Transport sectors. Four times as many ‘knowledge’ based services are sold from an overseas base by Australian companies than are sold from Australia – an asset when borders are closed.
In fact in some markets, including the United States, United Kingdom, Canada and New Zealand, Australian businesses sell at least five to eight times more in services exports through companies on the ground than they do through cross border exports from Australia.
- If we consider totals services exports – defined here as the sum of cross-border exports and affiliate sales to a market – the United States rises to become our leading services export market. In 2018-19 we sold over $20bn in services through companies based in the US. This compares to $2.5bn in services exports that crossed borders into that market from Australia.
- China is Australia’s leading services export market for cross-border exports, valued at $18.5bn in 2018-19. This is mainly due to large numbers of international students undertaking study in Australia. However affiliate sales of services (sales occurring via Australian companies with a presence in China) account for just 5% of total services exports to China. The new data reveals China is ranked 5th in terms of total services sales when both cross border and affiliate sales are considered.
Importantly, key exports also rely heavily on Australian affiliates overseas for their export sales. DFAT analysis[vi] shows
- Nearly all health services provided abroad in 2018-19 were delivered via affiliates ($6.4 billion versus $34 million in exports)
- Well over 90 per cent of services incidental to mining were delivered via affiliates ($3.2 billion versus $218 million in exports)
- Construction services provided from Australian affiliates abroad totalled over $11 billion (or 92 per cent of construction services provided abroad).
Foreign affiliates have offshore networks and existing sales channels, an important base for Australian companies looking to expanding new services exports from Australia.
Affiliates also have access to, and must choose from, the best Australian or foreign talent, processes and management. Affiliates’ integration with the global economy will help Australia-based companies to keep pace with best-in-class business trends.
Australian affiliates will remain an important ally as the local services sector looks to move through the pandemic and prosper globally.
[i] Affiliates are majority Australian-owned subsidiaries, branches and JVs based overseas
[ii] The ABS most frequently compiles services exports sold by Australian residents (Modes 1, 2 and 4, totalling $97bn in 2018-19). AOFAT data details Mode 3 exports - the sales of services by Australian-majority owned foreign affiliates, $90bn in 2018-19 (including $2bn of services exports sold back to parent companies in Australia). Together, services exports delivered through Modes 1-4 in 2018-19 totalled $187bn.
[iii] Education is listed within ‘Travel’ segment, as it largely relies students visiting Australia for face-to-face studies.
[iv] The segment, Other services, is defined here to include a range of business categories which we can loosely describe as ‘knowledge’ business, sold from Australia. This includes work conducted in the following fields: professional services (legal, accounting, management consulting), financial and insurance services, information technology, research and development, technical services etc.