Australia’s participation in Global Value Chains
04 Feb 2016
- Australian Economy
- Global Value Chains
- International Trade
We’ve noted before the central role that global value chains (GVCs) play in today’s international trade landscape. Related, we’ve also discussed in the context of services the way in which statistics based on trade in value added (TiVA) (pdf) can sometimes paint quite a different picture of a country’s trade profile than trade statistics based on ‘gross’ flows.
In a world where a significant share of production is now conducted by GVCs, for many countries their exports of goods and services will depend on and embody imports of intermediate goods and services. For example, in the case of a country exporting an aircraft, intermediate imports from other economies might include engines, seats, fuselage, landing gear, wings, tail fin, electronics and software. According to the OECD, ‘GVCs drive trade today, with 75 per cent of global trade now comprised of intermediate inputs and capital goods and services’. A joint OECD-WTO initiative produces TiVA statistics that help improve our understanding of a world of GVCs by providing estimates of the sources of value (by country and by industry) that is added in goods and services at each stage along a value chain. But where does Australia fit into this picture and how integrated are we into GVCs relative to our peers?
A useful starting point is this OECD summary of Australia’s trade on a TiVA basis as it stood in 2011.1
The OECD-WTO TiVA database allows us to decompose the value of Australia’s gross exports into domestic and foreign value added. In 2011, the total domestic value added share of gross exports was 85.9 per cent. That in turn comprised three sub-components:
- First, domestic value added sent to the consuming economy, which captures domestic value added embodied in final or intermediate goods and services that are consumed in the importing economy (for example, the share of domestic value added in Australian exports to China that are then consumed in China). This accounted for 56.3 per cent of Australia’s gross exports in 2011.
- Second, domestic value added contained in foreign exports, which measures the domestic value added embodied in intermediate goods and services that are then embodied in new goods and services in the importing country before being re-exported to a third country (for example, the share of domestic value added in Australian exports to China that ends up in products that are subsequently exported by China to say the United States or European Union). This component accounted for a further 29.5 per cent of gross exports in 2011.
- Third, domestic value added re-imported into Australia, which accounted for just 0.5 per cent of gross exports in 2011.
The balance (of 14.1 per cent) consisted of the foreign value added content of Australian exports. This is the value added associated with imports of goods and services that were used as inputs in the production of Australian exports.
This last measure, the share of foreign value added in exports, also serves as an indicator of the degree of our integration into GVCs, since a higher level of GVC participation would be expected to be accompanied by a greater level of foreign content in exports.
The OECD-WTO data show that the overall contribution of foreign suppliers to Australian exports in value added terms was actually quite low in 2011: as noted, foreign value added content of Australia’s exports in that year was just 14.1 per cent. That was a bit higher than the share recorded over the immediately preceding 2008-10 period, but it was still below the 15.9 per cent share reached back in 2000. In international terms, it was also a lower share than that recorded by any other OECD member economy that year.2
By definition, that relatively low share of foreign value added in Australian exports reflected a high share of domestic value added (85.9 per cent, again as noted above). That higher figure is consistent with the large role that commodities play in Australia’s export mix, as economies that specialise in activities that take place towards the beginning of GVCs (‘upstream’) will tend to have a higher level of domestic value added content in their exports than those further down the chain (‘downstream’).
This domestic value added content can be split into two sub-components: value added that’s embodied in the export of intermediate goods and services, and value added embodied in exports of final goods and services. In the case of Australia, in 2011 total exports of domestic value added content mainly reflected exports of intermediate products (66.1 per cent of total exports, or about 77 per cent of all domestic value added). Once again, that figure is in line with the major role played by resources in the export mix.
The ‘GVC participation index’ pulls together these various estimates of domestic and foreign value added in exports to provide a summary measure of a country’s participation in GVCs. The index consists of two components which capture the upstream and downstream linkages in the value chain.
- One component measures ‘Forward participation’ in a GVC, which takes place when a country exports a domestically produced good or service to partners further downstream. In the case of Australia, this might involve the export of iron ore which was transformed into exports of Chinese steel to a third market, for example.
- The second component measures ‘Backward participation’ which occurs when a country imports foreign inputs in order to produce the goods and services that they will export. For example, that might involve the import of capital goods to operate and develop Australian mines.
Forward participation corresponds to the share of domestic value added contained in foreign exports while backward participation is captured by the share of foreign value added in gross exports.
Drawing on the preceding analysis, we have a forward participation index of 29.5 per cent for Australia in 2011 and a backward participation index of 14.1 per cent in the same year, which when added together gives a total GVC participation index of 43.6 per cent. That total puts Australia’s level of GVC participation below that of most OECD member economies (but still above that of Greece, Canada, Turkey, the United States and New Zealand). By sub-component, Australia has one of the highest levels of forward participation in GVCs, while the level of backward participation is quite low. As suggested above, that’s consistent with Australia’s role as a major commodity exporter which would tend to position it upstream in terms of GVC participation.
The OECD-WTO data also show a gradual increase in Australia’s overall participation in GVCs over the past two decades, with the forward participation index rising from 18.4 per cent in 1995 to a high of 29.5 per cent in 2011 and the total participation index increasing from 30.5 per cent to a high of 43.6 per cent over the same period. While the backward participation index also increased from 12.1 per cent in 1995 to 14.1 per cent in 2011, however, that last value was still below the 15.9 per cent peak the backward index had reached in 2000.
The relative importance of different export sectors in the Australian economy has a substantial impact on the overall index of GVC participation. In 2011, exports from the mining sector accounted for by far the largest source of domestic valued added in Australian exports, comprising almost 37 per cent of the total value added of gross exports. Foreign value added in mining contributed a further 4.8 per cent for a total share for mining in gross exports of almost 42 per cent. That was well ahead of manufacturing which made a total contribution to gross exports of 24.6 per cent in 2011, comprising a domestic value added share of 18.6 per cent and a foreign value added share of six per cent. At the same time, however, the foreign value added share in mining exports was just 11.6 per cent in 2011, compared to a 24.4 per cent share for manufacturing. The fact that manufacturing has the highest share of foreign value added is not surprising, given that manufacturing is the sector most associated with the expansion of GVCs.
It follows that some of Australia’s relatively low share of foreign content in total exports (and hence low backward participation in GVCs) reflects a composition effect driven by the relatively high share of mining in total exports and the relatively low share of manufacturing.3
That might not be the full story, however, as the share of foreign value added in Australian manufacturing exports is also relatively low by OECD standards, with only four OECD member economies (Chile, New Zealand, the United States and Japan) having a smaller share.
A wide range of factors could influence GVC participation including openness to trade and investment flows, resource endowments, market size and location. For example, larger economies tend to have lower foreign (and higher domestic) value added content in their exports, which probably reflects a greater ability to source from domestic suppliers, consistent with the low rankings of the United States and Japan shown above.
In addition, (geographic and perhaps temporal) distance from other markets might also be an important driver of the rate of GVC participation. An adverse impact of distance on participation rates would help explain why three of the OECD’s most remote economies (Australia, Chile and New Zealand) all have relatively low shares of foreign value added content in their manufacturing exports.
The large and complex data requirements involved in their construction means that TiVA estimates are only available with a significant lag relative to traditional data on gross trade flows. The latest (2015) edition of the OECD-WTO TiVA database includes 61 economies covering OECD, EU28, G20, most East and South-east Asian economies and a selection of South American countries. The estimates also cover 34 industrial sectors, including 16 manufacturing and 14 services sectors. The years covered are 1995, 2000, 2005 and 2008 to 2011. The database
is available online.2
The charts accompanying the text benchmark Australia against other OECD member economies plus a selection of non-member emerging and developing economies. 3
There may also be an additional effect at play via the impact of resource exports on the composition and performance of manufacturing exports.