Global Value Chains Challenges and opportunities for Australia

Agenda  The rise of GVCs  The challenge for government  The structural challenge  Opportunities – services and manufacturing  Manufacturing in ASEAN

The rise of GVCs  Half the world’s manufacturing imports are themselves semi-finished inputs  Around 70% of world service imports are intermediate services  Trade in intermediate goods and services account for the majority of international trade

The rise of GVCs

The challenge for government Efficient import capacity = competitive exports “ The statistical bias created by attributing commercial value to the last country of origin perverts the true economic dimension of bilateral trade imbalances. This affects the political debate and leads to misguided perceptions. ” - Pascal Lamy, former WTO Secretary-General (Source: Lowy Institute)

The challenge for government iPhone global value chain Source: OECD, 2011

The challenge for government  GVCs rely on coordinated, efficient movement of goods across borders  Government can help through trade facilitation reform  ‘Hard’ infrastructure improvements  ‘Soft’ customs and border policies and procedures  Accreditation and mutual recognition  Trusted Trader  MRAs in FTAs

The structural challenge Foreign value-added content of gross exports by country Source: OECD, 2008, 2009, 2011

The structural challenge Australia’s industry share of domestic and foreign value content of gross exports Source: OECD, 2011

The structural challenge Australia’s imported intermediate inputs used for exports, by import category Source: OECD, 2008, 2009, 2011

The structural challenge Australia’s domestic value-added embodied in intermediate exports to main partner countries Source: OECD, 2008, 2009, 2011

Summing up – where are we Australia’s domestic value-added embodied in intermediate exports to main partner countries Source: OECD, 2008, 2009, 2011

Opportunities “ I think what we’re seeing is a big shift away from large, vertically-integrated organisations, towards smaller, more independent units of production. Global value chains have emerged as a predominant form of activity in both manufacturing and in services, and the two are increasingly blurred. ” - Roy Green, Dean, UTS Business School (Source: Manufacturers’ Monthly) “ Australia will never win a race to the bottom on price and we should not seek to do so. Rather, the key to Australia’s future prosperity is to gain a permanent seat at the high value-added head of the GVC table. To that end, the impact GVCs have on the service economy is a primary consideration. ” - Nicholas Humphries, Australia Customs and Border Protection Fellow, Lowy Institute

Services and manufacturing Services content of gross exports by country, gross and value-added terms Source: OECD, 2011

Services and manufacturing Services value-added embodied in manufacturing exports, by country Source: OECD, 2011

Services and manufacturing Source: OECD/WTO/Austrade

Manufacturing in ASEAN  5% of global manufacturing  Easy access for Australia + regional liberalisation initiatives  Average tariffs across ASEAN-6 virtually zero since 2010  ASEAN 6 = 95% of regional GDP; US$225 billion attracted to manufacturing from

Manufacturing in ASEAN Source: Dealogic/McKinsey

Case: Thailand - Automotive  Thailand’s 3 rd largest industry – 12% of GDP  4 th largest in Asia  3m vehicle p/a capacity; 1800 parts suppliers  Growing aftermarket sector with 55% of vehicles 5yrs+  Parts sector supplies 100% of local pickup components, 60% of passenger car components

Wrapping up  Australia’s integration with GVCs is still tied to and defined by resources and geography  Services and to a lesser extent manufacturing are bright spots of potential  Government can help facilitation greater GVC integration through trade facilitation reform  Opportunity is right here, a short hop away

Thank you Niels Strazdins Head Research Manager Export House, 2/22 Pitt St, Sydney