International trade costs, global supply chains and value-added trade in Australia

We examine how the structure of Australian production and trade has been affected by the expansion of global production networks. As conventional measures of international trade do not fully capture the impact of global supply chains, we present complementary estimates of value-added trade for Australia. These 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 exported to those locations indirectly via east Asia. The estimates also highlight the importance of the services sector to Australian trade, as the services sector is integral to producing goods exports. We also find that, compared to thirty years ago, Australian production now involves more stages of production, a greater share of production occurs overseas, and more production occurs towards the start of the supply chain. For Australia, these structural adjustments mainly occurred during the 1990s, and we provide evidence that similar adjustments have occurred elsewhere in the world driven by several factors, including lower international trade costs, deregulation of markets that produce intermediate goods and services, and economic development in emerging economies, such as China.