Chapter 3. Australia’s services advantages

Chapter 3 identifies the global and regional strengths of Australian services trade based on analytical evidence from services trade data and micro-data. The chapter sets out opportunities for Australians in global markets, examining sectoral strengths and relative export performance with main trading partners, including with regard to Australia’s comparative advantage, bilateral export patterns and the demand-side role of regional value chains.

    

Global and regional opportunities for Australians

During the last 15 years, patterns of world trade have changed, with more types of services than ever before being traded through digital delivery of data and with new actors in global markets. In particular, the People’s Republic of China (hereafter “China”) and other Asia-Pacific economies are turning to services as a complement to their exports of labour-intensive manufacturing products, and India is already a major exporter of computer and business services. This chapter examines how Australia’s services trade has adapted to the changing international commercial environment. Evidence is presented for the services sector as a whole, for individual industries within the sector and at firm level.

Mapping Australia’s services trade

Global markets for Australian services

In 2016, the Asia-Pacific region was the destination of 62% of all Australian gross services exports (Figure 3.1, Panel A).1 Europe and the Americas took 17% and 16%, respectively. The fastest growing markets for Australian services exports are also in the Asia-Pacific region, whose shares of total services exports increased by 12 percentage points (pp) in a decade, heightening the geographic concentration of trade towards proximate markets.

This trend mainly reflects strong growth in services exports to China and, to a lesser extent, India. In 2000, China was Australia’s ninth largest services export market (with a 3% share worth AUD 859 million). By 2016, China was the most important services export destination, with a 16% share worth AUD 11.3 billion. India’s share increased from just over 1% of total services exports (AUD 467 million) in 2000 to 5% (AUD 3.5 billion) in 2016. There was also strong growth in the value of Australian services exports to Malaysia, the Philippines and Viet Nam. These trends are driven by changes in global economic conditions, particularly by rising income levels in many Asian economies and their increasing demand for services.

Inevitably, the shares of Australian services exports in other destination markets have shrunk between 2000 and 2016. For example, the share to Japan fell by 7 pp to 3% of total services exports in 2016, and that to New Zealand by 2 pp, although in absolute value terms, exports to both countries are large (in 2016 Japan: AUD 2.3 billion, New Zealand: AUD 4.3 billion).2 Although the shares of Australian services exports going to traditional English-speaking markets (the United States, the United Kingdom and New Zealand) have decreased, these markets remain among Australia’s main trading partners.

Geographic concentration is less marked on the import side (Figure 3.1, Panel B). In 2016, the Asia-Pacific region accounted for 47% of total services imports in 2016, up from 38% in 2000, Europe for 27%, and the Americas for 22%. The growth pattern is similar to that observed on the export side, with increasing import shares in particular from India, China, and Singapore, compared to a shrinking share of imports sourced from Europe (most notably, from the United Kingdom and Switzerland) and the Americas (mainly the United States), all lower by 2-3 pp than in 2000.

Figure 3.1. Australia's trade in services by region
Shares, percentage, 2000-2016
picture

Source: Own calculations on OECD International Trade in Services Statistics by Partner Country (ITSS), EBOPS 2010.

Australia’s sectoral strengths

Figure 3.2 shows the decomposition of Australia’s trade by main services categories and main trading partners. In 2016, the top 15 partner countries accounted for more than 70% of Australian total services trade. Australia’s most important trading partners are within the Asia-Pacific region, most notably China, but also Singapore and New Zealand.

Travel services dominated Australia’s exports to most of its main markets, and more so in the Asia-Pacific region. In 2016, Australian exports of travel services were around 90% of total services exports to China, India, Korea and Viet Nam (largely exports of education services).3 These shares were particularly high for Viet Nam (85%), India (74%) and Thailand (71%), where Australian exports of education-related travel services represented by far the most important service exported to those countries. Australian exports to Chinese Taipei, Korea, Germany and the United Kingdom, were mostly concentrated in personal travel services (other than education), with shares between about 40% and 50% of total services exported to those economies (or, in other words, services provided to international visitors from those economies). Nearly half of Australian services exported to the United States and Singapore were business services, whilst financial services were relatively more important for New Zealand, the United States and the United Kingdom, with shares above 10% of Australian total services exports to these economies.

Figure 3.2. Australia's services trade, by partner and services sector, 2016 (in %)
picture

Note: Economies are ranked by their share in Australian total services trade in 2016. Manufacturing services on physical inputs owned by others; Maintenance and repair services n.i.e.; Charges for the use of intellectual property n.i.e.; Telecommunications, computer, and information services; and Other business services. The “Other services” aggregate is composed of Construction; Personal, cultural, and recreational services; and Government goods and services n.i.e. More details can be found in Annex C, Tables A C.4 and A C.5.

Source: Own calculations on OECD International Trade in Services Statistics by Partner Country (ITSS), EBOPS 2010.

On the import side, in 2016, nearly all imports from Italy were personal travel services. Other important destinations for Australian tourists were Indonesia and Thailand, where 70-80% of all Australia’s services imports from those countries arose from personal travel services. Business services accounted for over half of Australia’s services imports sourced from India and the Netherlands, and around 40% of the services sourced from the United States and Singapore. One-ninth of the services sourced from the United Kingdom in 2016 were finance and insurance services, while transport services accounted for around half of services imported from Germany and Hong Kong, China.

Australian comparative advantage

Table 3.1 shows Australia’s comparative advantage vis-à-vis other OECD countries.4 By definition, all countries have areas of both comparative advantage and comparative disadvantage.5

Table 3.1. Australia's revealed comparative advantage vis-à-vis OECD countries, 2015

 

RCA

Rank

1

2

3

4

5

Agriculture and food (HS Chapter 1-24)

2.0

4

NZL

ISL

CHL

AUS

NLD

Mineral and fuel (HS Chapter 25-27)

6.9

2

NOR

AUS

CHL

CAN

GRC

Manufacturing (HS Chapter 28-97)

0.4

31

SVK

MEX

CZE

KOR

JPN

SERVICES

0.8

24

LUX

GRC

IRL

ISL

GBR

Maintenance and repair services n.i.e.

0.1

25

USA

FRA

EST

ISR

PRT

Transport

0.5

33

DNK

GRC

ISL

LVA

EST

Travel

2.1

7

GRC

NZL

ISL

PRT

ESP

Business

1.9

9

ISL

USA

SWE

LUX

NZL

Personal

3.1

5

GRC

NZL

ISL

TUR

AUS

Education-related

11.9

1

AUS

NZL

USA

CAN

LVA

Personal travel, other

1.9

10

GRC

ISL

NZL

TUR

AUT

Construction

0.1

29

DNK

FIN

KOR

EST

JPN

Insurance and pension services

0.2

23

IRL

LUX

GBR

CHE

USA

Financial services

0.4

15

LUX

GBR

USA

CHE

IRL

Charges for the use of intellectual property n.i.e

0.1

23

USA

JPN

SWE

CHE

NLD

Telecommunications, computer, and information services

0.4

29

IRL

FIN

ISR

SWE

NLD

Telecommunications services

0.4

22

LUX

SVN

NLD

EST

FRA

Computer services

0.4

22

IRL

ISR

SWE

NLD

ISL

Information services

0.3

20

USA

NLD

LUX

SWE

SVN

Other business services

0.5

25

LUX

GBR

FRA

ISR

IRL

Research and development services

0.3

23

ISR

USA

FRA

SWE

LUX

Professional and management consulting services

0.9

12

BEL

USA

LUX

FRA

ISR

Legal, accounting, auditing, bookkeeping, and tax consulting s.

1.1

9

BEL

USA

LUX

CAN

FRA

Advertising, market research, and public opinion polling s.

0.8

18

ISR

LVA

EST

LUX

BEL

Technical, trade-related and other business services

0.4

27

LUX

IRL

FRA

SWE

PRT

Architectural, engineering, scientific and other technical s.

0.8

13

FRA

AUT

CAN

SWE

PRT

Waste treatment and de-pollution, agricultural and mining s.

0.5

10

NLD

FRA

GRC

DNK

SWE

Operating leasing services

0.2

21

IRL

EST

LVA

FRA

NLD

Trade-related services

0.6

17

LUX

ISR

IRL

FRA

KOR

Other business services n.i.e.

0.5

20

SWE

PRT

FRA

NLD

LVA

Personal, cultural, and recreational services

1.3

13

LUX

TUR

NZL

GBR

ISL

Note: Some OECD countries are not included in the calculations for detailed sector breakdown due to of missing data. The ranking of countries only refers to the countries in the dataset.

Source: Own calculations using OECD International Trade in Services Statistics by Partner Country (ITSS), EBOPS 2010, for services trade and World Integrated Trade Solution (WITS) by WTO, UNCTAD, ITC, UNSD and World Bank for goods trade.

Australia has a comparative advantage in the mineral and fuel sector and in agriculture and food products. The overall index for services is 0.7, indicating a comparative disadvantage for the sector as a whole. However, among individual services industries, Australia has a comparative advantage in travel services, and in particular in education-related travel services, outstripping all OECD countries. Indices for personal, cultural, and recreational services, and for legal, accounting, auditing, bookkeeping, and tax consulting services are slightly above one, indicating a marginal comparative advantage in these sectors.6 Other services industries revealed a comparative disadvantage.

Australia’s comparative advantage can also be calculated for different regions of the world, although only for the main divisions of the services sector, since trade data for detailed sector decomposition are not broken down geographically.7 Table 3.2 shows that Australia has a wider range of comparative advantage in the Asia-Pacific region than in European, American and African markets. Insurance services and personal, cultural and recreational services are among the services for which Australia has a strong comparative advantage in the region. Other business services (mostly professional services) and financial services also have a comparative advantage in the Asia-Pacific region but less so in OECD markets.

Table 3.2. Australia's regional revealed comparative advantage, 2015
Vis-à-vis OECD countries

 

World

Asia & Oceania

Europe

Americas

Africa

Agriculture and food (HS Chapter 1-24)

2.0

6.1

0.3

1.5

1.1

Mineral and fuel (HS Chapter 25-27)

6.9

21.3

0.5

0.4

0.2

Manufacturing (HS Chapter 28-97)

0.4

1.1

0.1

0.2

0.3

SERVICES

0.8

2.6

0.3

0.6

0.5

Maintenance and repair services n.i.e.

0.1

0.2

0.0

0.0

0.0

Transport

0.5

1.6

0.2

0.4

0.3

Travel

2.1

6.8

0.8

1.3

2.2

Construction

0.1

0.2

0.1

1.2

0.2

Insurance and pension services

0.2

2.6

0.0

0.0

0.1

Financial services

0.4

1.7

0.3

0.5

0.9

Charges for the use of intellectual property n.i.e

0.1

0.1

0.1

0.2

0.1

Telecommunications, computer, and information

0.4

1.1

0.2

1.0

0.1

Other business services

0.5

2.7

0.2

1.4

0.4

Personal, cultural, and recreational services

1.3

14.2

0.5

1.4

1.3

Note: Some OECD countries are not included in the calculations due to missing data. Hence, resulting RCAs might be inflated. Numbers should be considered as upper bound for Australia’s revealed comparative advantage.

Source: Own calculations using OECD International Trade in Services Statistics by Partner Country (ITSS), EBOPS 2010, for services trade and World Integrated Trade Solution (WITS) by WTO, UNCTAD, ITC, UNSD and World Bank for goods trade.

Australia’s services export performance

Growth potential must also be considered in order to assess Australia’s trade performance fully. Some countries may be located in a world region where demand is growing rapidly; others may be in a better position to grow because they have comparative advantage in sectors where world demand is growing faster than average.8 Figure 3.3 assesses Australia’s performance on the world services market when these external factors are controlled for.9

Results in Figure 3.3 are based on data for 32 of the 34 bilateral partners that Australia distinguishes in its export statistics, across eleven services sectors.10 These country-sector combinations represent about 80% of Australia’s exports in 2015. Australia’s annual export growth from the eleven services sectors covered to the 32 partner countries is shown in billion USD for the periods 2006-2015 decomposed as defined in endnote 9.11

Aggregate market demand shifts have generally worked in Australia’s favour. This is particularly true for Australia’s geographical location. Proximity to the world’s fastest-growing economies led to substantial export growth potential with particularly high growth rates in 2009 and 2010. Since 2012, additional potential growth was associated with the sector mix of Australia’s services exports and with their concentration in relatively fast-growing segments of the world market. Nevertheless, Australia could not always capitalise on this favourable shift in the world market demand for services.

Figure 3.3. Decomposition of Australia’s export growth
Annual 2006-2015
picture

Source: Own calculations on OECD International Trade in Services Statistics by Partner Country (ITSS), EBOPS 2010.

The results suggest that Australia performed in line with expectations roughly up to 2011. During that time Australia had a slight disadvantage due to the export mix (concentration in relatively slow growing sectors), which was offset by a favourable geographic profile (concentration in relatively fast-growing markets in the Asia-Pacific region). However, Australia’s services export performance has fallen in recent years both in absolute terms and relative to potential export growth. This pattern may partly be due to a mechanical drop in the USD value of exports of tourism and education services, due to the depreciation of the AUD since 2013. Latest data from 2015 could indicate a reversal of this trend.

Figure 3.4. The performance of Australian services export markets, 2010-2015
picture

Note: Services industries reported in Figure 16 include: (SC) transport, (SE) construction, (SF) insurance and pension services, (SG) financial services, (SI) telecommunications, computer, and information services, and (SJ) other business services, (SH) charges for the use of intellectual property n.i.e., (SK) Personal, cultural, and recreational services, (SDB2) education-related travel services, (SDA) Business-related travel services and (SDB-SDB2) Personal-related travel services.

Source: Own calculations on OECD International Trade in Services Statistics by Partner Country (ITSS), EBOPS 2010 and IMF World Trade in Services.

To pinpoint areas of strategic importance, Figure 3.4 plots the correlation between Australia’s initial exports in 2010 and the relative export performance in 2010-2015, broken down by sector (panel a), by import market (panel b), and by sector-market (panel c).12 Negative correlations (downward sloping linear trends) imply that Australia was losing ground in some of its previous strongholds. By contrast, initially less important sectors, like insurance and financial services, over performed in relation to their export potential 2010 and 2015 (presumably partly reflecting a post-crisis rebound in cross-border financial transactions). Although the analysis offered here is purely descriptive and does not identify the reasons for these performance outcomes, it indicates key sectors and markets where Australia’s export performance is lagging general import growth and therefore represents strategic opportunities for improvement.

About 90% of Australia’s performance deficit is due to travel services, more specifically, to education-related personal travel and other personal travel services (mainly tourism). The largest “deficit-market” is China, followed by Japan, Singapore, India and Korea. While more and more residents of these countries travel to Australia for tourism or education purposes, growth rates of personal travel from these countries to other destinations are even higher. It is debatable whether this trend should be considered worrying. Alternatively, it may reflect a strong recovery of countries that were hit harder than Australia by the global financial crisis or it may be due to capacity constraints in Australia.

Foreign students make up around 3% of Australia’s population and a strong regional concentration of tourists and students in certain areas puts additional strain on existing capacity. While Australia clearly has a large potential for further growth of travel services exports, well-managed expansion of the sector should take into account the preservation of Australia’s natural landscapes and unique ecosystems in order to make exports of Australia’s education and travel services sustainable in the long run. Short-run growth cannot be the exclusive priority for Australia’s tourism industry.

Bilateral trade patterns

Bilateral trade flows between countries are determined by a number of diverse factors. Countless studies in different periods and contexts have found that factors like country size, distance, common language, and cultural and historical links, generally have a role to play. Regulatory trade barriers, such as those measured by OECD Services Trade Restrictiveness Index (STRI) (Box 2.1), and the degree of policy heterogeneity in the two trade partners, are also important.13 The participation of both countries in the same FTA, and its specific coverage, may be crucial. Finally, the Mode by which the trade flow is delivered may also be a significant causal factor.14

In the case of Australia’s services exports, market size and proximity matter, and trade is also positively influenced by other historical and cultural factors. A common language virtually doubles trade flows (other things equal).15 Besides the language effect shared with all English-speaking countries, when the trade partner is the United Kingdom, this has a further near-doubling effect on trade. Inevitably, it is not possible to identify the true driver of these trade effects: a common language is in fact a proxy for a whole set of commonalities between English-speaking countries, including a common legal system, which may be important determinants of services trade.

When there is an FTA with specific provisions on services in place between Australia and the importing country, this boosts Australia’s trade with the FTA partner by about two-thirds relative to non-FTA partners.16 Recent OECD work confirms that the legal bindings found in services trade agreements tend to have a positive effect on exports by reducing the level of uncertainty faced by services providers.17 The work demonstrates that an ambitious services trade policy can ensure that Australians have the opportunity to seize the benefits of global services sector growth.

Furthermore, the STRI indices, measuring the trade restrictiveness of Australia’s export markets, have a negative impact on bilateral trade. Thus, Australia’s exports are negatively affected by regulatory barriers in the importing country. A strategic focus on reducing behind-the-border regulatory barriers in key markets, for example through bilateral, regional and multilateral co-operation and an ambitious trade negotiation agenda, can generate tangible benefits for Australian exporters. For example, reducing a trading partner’s STRI score by 0.1 can increase Australia’s exports by up to 50%. Such reduction of the STRI corresponds to around 50% of the average trade barriers in relatively liberal sectors like distribution and sound recording. In more restrictive sectors, such as legal services and air transport, it corresponds on average to around 25% of all existing barriers. Countries that are more restrictive than average have a much larger potential for liberalisation, opening up much larger opportunities for export growth of Australian services firms.

Barriers specific to different trading Modes have differential effects. Barriers to Mode 3 (such as restrictions on foreign equity thresholds or residency requirements for board members for Mode 3) have a large impact on trade in services, highlighting the complementarity between commercial presence abroad and cross-border services trade. Barriers behind the border (like barriers to competition and the efficiency of doing business in a country, which are relevant to all Modes) also appear to impede services trade. Furthermore, not only the level of restrictions, but also the heterogeneity of regulations between Australia and the partner country is in itself a barrier to trade: the more dissimilar the regulatory environments are, the less they trade with each other.

As such, Australia’s services exports are negatively affected by both the level of the regulatory barriers in the partner country and the difference in regulation compared to the domestic regulatory framework. Lack of liberalisation and regulatory cooperation may go some way to explaining why Australian services exports have not achieved their potential in some key sectors and markets, while they performed well in others. Consequently, regulatory reforms in major markets, negotiated reductions of regulatory barriers, including through FTAs, and international regulatory cooperation can help to foster Australia’s international trade in services.

Travel services

Travel services make up about 61% of Australia’s services exports and 44% of its services imports in 2016. Australia has its strongest comparative advantage in this sector, after mining. However, the decomposition analysis above shows that Australia has lost some ground in travel services exports since 2010, especially in education-related travel.

The determinants of bilateral travel services exports are also analysed.18 As well as the usual factors underlying bilateral trade patterns (see previous section), the academic ranking of origin countries and destination countries (Table 3.3) and the existence of a free trade agreement covering services as well as goods, are recognised.19

As expected, bilateral travel services exports are higher between larger economies as measured by their Gross Domestic Product (GDP). Greater distance between partners has a negative effect on travel exports, and, for most components of travel services, there is an additional boost to bilateral travel when countries share a common land border – with the exception of education-related travel. Moreover, bilateral distance has a less negative effect for education-related travel than for other categories. Other things being equal, students are more likely to travel to remote destinations than tourists or business travellers.

A common language gives the greatest boost to education-related travel and, to a lesser extent, other personal travel (tourism, health-related travel), but has no impact on business travel. Bilateral travel exports are greater between countries with historical ties. Generally, this impact is similar for both directions of bilateral travel.

Table 3.3. Number of universities in top 200 list

Country

2005

2010

2015

United States

90

89

78

United Kingdom

19

19

21

Germany

16

14

13

China

2

4

10

Australia

6

7

8

France

8

7

8

Netherlands

7

9

8

Japan

9

9

7

Canada

8

8

6

Switzerland

6

6

6

Source: Academic Ranking of World Universities, Shanghai Ranking Consultancy. Available at http://www.shanghairanking.com/.

In addition, trade in travel services is greater between countries that are linked by an FTA covering services commitments and this effect is particularly high for education-related travel services.20 Moreover, the quality of the academic education matters for education-related travel. Students tend to travel from countries with fewer or no top 200 universities to countries with many top 200 universities. The analysis underlying these results suggests that one additional top 200 university in Australia could increase exports of education-related travel by around 9%. The quality of Australia’s education partly explains why Australia has been one of the world’s major exporters of education-related travel services. Nevertheless, underlying trends (picked up after other variables have been controlled for) suggest that Australia is losing some of its past competitive advantage in education-related travel services and in other personal travel services, corroborating the results in Figure 3.5. The declining trend is plotted in Figure 3.5; Australia still over-performs in exports of travel services, but has lost ground since 2010 compared to other exporters of education services.

Figure 3.5. Australia’s export of travel services, 2000-2015
Unidentified underlying trends
picture

Note: Time trends picked up by the gravity model.

Source: Own calculations on OECD International Trade in Services Statistics by Partner Country (ITSS).

Regional demand drivers of Australian services exports

Australia’s trade in services relies heavily on regional partners in the Asia-Pacific region, with about 62% of exports and 47% of imports remaining within the region in 2016.21 Figure 3.6 shows the growing dependence of Australian total and sectoral gross exports on regional demand between 2000 and 2014, in terms of how much Australian exports expand when final demand for all categories of goods and services rises by 1% in Asia and Oceania.22 In 2000, a 1% rise in final demand in Asia and Oceania led to 0.69% additional Australian exports of goods and services worldwide, whereas by 2014 the export boost was 0.83% (0.86% for services sectors and 0.82% for goods sectors). The stronger export response is due to growing regional trade in intermediate goods and services. Australia has become increasingly engaged in regional value chains as a supplier of raw materials, intermediate manufactured goods and increasingly intermediate services.

China is the main driver of this development (Figure 3.6, bottom panel, and Table 3.4). While a 1% increase in Chinese final demand would have led to a mere 0.07% growth in Australian exports in 2000, this response had increased to 0.32% by 2014. These figures confirm Australia’s strong position as a services exporter to China, but also expose its economy’s vulnerability to economic slowdown in that country.

Export growth for the aggregate economy is virtually identical whether measured in gross or in value added terms. However, when exports are identified by the origin of value, the dependency of each Australian services sector on final demand from Asia and Oceania emerges more clearly. Considering Australia’s export dependency in 2014 on the final demand from its five most important regional partners (China, Japan, Korea, India and New Zealand), China is the largest source of final demand for Australian value added in every single sector of the economy. In line with evidence presented above, the education and hospitality sectors are most dependent on final demand from Asia and Oceania. China accounts for more than half of the total trade effect in Australia’s education sector, which is larger than for any other sector, thus highlighting the importance of Australia as a destination for Chinese students.

Figure 3.6. Impact on total exports
picture

Note: In the OECD-WTO TiVA database, Asia and Oceania covers: Brunei; Cambodia; China; Chinese Taipei; Hong Kong, China; India; Indonesia; Israel; Japan; Korea; Malaysia; New Zealand; Philippines; Saudi Arabia; Singapore; Turkey; Thailand; Viet Nam.

Source: Own calculations based on the OECD-WTO TiVA database, June 2017.

Table 3.4. Impact on value added export
Of a 1% increase in final demand from Asia and Oceania, 2014 (in %)

 

Asia & Oceania

CHN

JPN

KOR

IND

NZL

Services

0.844

0.319

0.125

0.053

0.052

0.052

Electricity, gas and water supply

0.810

0.305

0.149

0.051

0.061

0.037

Construction

0.821

0.321

0.172

0.052

0.051

0.036

Wholesale and retail trade; repairs

0.816

0.300

0.131

0.059

0.047

0.042

Hotels and restaurants

1.154

0.493

0.070

0.066

0.047

0.103

Transport and storage

0.881

0.310

0.124

0.040

0.058

0.060

Post and telecommunications

0.816

0.277

0.122

0.054

0.051

0.069

Financial intermediation

0.784

0.317

0.142

0.049

0.045

0.036

Real estate activities

0.874

0.317

0.127

0.055

0.069

0.058

Renting of machinery and equipment

0.809

0.283

0.139

0.049

0.075

0.077

Computer and related activities

0.798

0.263

0.131

0.047

0.065

0.074

R&D and other business activities

0.738

0.262

0.126

0.049

0.052

0.046

Public admin. and defence; compulsory social security

0.824

0.302

0.140

0.049

0.052

0.053

Education

1.193

0.638

0.059

0.077

0.039

0.065

Health and social work

1.011

0.299

0.124

0.073

0.065

0.044

Other community, social and personal services

0.637

0.222

0.059

0.051

0.042

0.065

Goods

0.825

0.334

0.196

0.056

0.043

0.024

Agriculture, hunting, forestry and fishing

1.044

0.361

0.157

0.080

0.027

0.029

Mining and quarrying

0.798

0.368

0.231

0.053

0.043

0.003

Manufacturing

0.797

0.244

0.128

0.052

0.050

0.070

Total economy

0.835

0.327

0.160

0.054

0.048

0.038

Note: In the OECD-WTO TiVA database, Asia and Oceania covers Turkey; Israel; Saudi Arabia; New Zealand; China; Chinese Taipei; Hong Kong, China; India; Japan; Korea; Brunei; Cambodia; Indonesia; Malaysia; Philippines; Singapore; Thailand; Viet Nam.

Source: Own calculations based on the OECD-WTO TiVA database, June 2017.

Australia’s services trading firms

Firm-level analysis of ABS trade and investment data offers further insights. After a descriptive analysis of trading firms in Australia engaged in services exports and imports, the firm-level impact of regulatory barriers on services trade is examined.23 Firm-level and sector-level data on foreign direct investment holdings are then analysed in order to highlight the main aspects of investment in services in Australia and overseas.

A portrait of firms trading services in Australia

The average firm in Australia imports considerably more services than it exports. In 2016, firms imported on average around AUD 30 million, and exported a little over AUD 20 million.24 Firms importing services are typically larger in size than those exporting services, both in terms of annual average turnover and average number of employees.

Table 3.5 shows the intensiveness with which the average firm trades in services (fourth column) and the extensiveness of the average firm’s services trade in terms of average number of countries served and average number of services traded (second and third columns, respectively). Average turnover (in AUD million), average number of employees per firm, and the share of firms in the sample whose core activity is in services sectors, are also shown. Manufacturing firms are also involved in services trade, although more so on the importing side, where they account for about 20% of the sample (last column). The period covered by Table 3.5 is too short to discern any clear trends.25

Table 3.5. Australian exporters and importers of services, 2013-2016

 

Average number of partner countries by firm

Average number of products traded per firm

Average trade value per firm, million AUD

Average turnover per firm, million AUD

Average number of employees per firm

Share of firms with main activity in services

Exports

2013

4.1

1.6

10

498

896

88%

2014

5.1

1.8

18

863

795

88%

2015

5.2

1.8

20

1 029

827

87%

2016

5.2

1.7

20

667

773

86%

Imports

2013

3.7

2.3

43

674

1 049

81%

2014

4.6

2.6

36

1 137

967

82%

2015

4.8

2.5

32

1 274

966

81%

2016

5.0

2.5

29

933

916

80%

Note: Only partial information is available in the first year of the sample.

Source: Own calculations on ABS Survey of International Trade in Services data. More information on ABS firm-level data can be found in Annex A.

Behind these averages, however, Australian services trade at firm level is very concentrated in relatively few global players that engage with a diversified set of foreign markets and realise the large majority of international sales (Figure 3.7, left side). In fact, of the few firms that export to more than ten countries, representing nearly one fifth of the sample, these account for the largest part of total services exports (more than 40%). At the other end of the distribution, about 30% of all exporting firms serve only one foreign market and contribute to no more than 18% of total services exports.

Concentration is less pronounced in terms of the number of services exported (Figure 3.7, right side). Nearly half of all firms in the sample export only one kind of service, but these firms are responsible for about 30% of total services exports. At the same time, there is also a smaller number of, possibly larger, firms that provide multiple services to foreign markets and realise non-negligible shares of total services exports.

Figure 3.7. Concentration of services exporters, average 2013-2017
picture

Source: Own calculations based on ABS Survey of International Trade in Services data.

Services exporters in Australia also depend strongly on their top destination market (Table 3.6). On average, and across all firms, their largest market accounts for more than two thirds of their exports. Some firms, most likely smaller firms specialised in providing one service type only, export to only one destination. There are, however, a few larger firms that diversify their international activity in ten or more foreign markets, offering a range of services, and they account for the vast majority of services exports. The distribution of firms’ exports across countries is, however, more and more dispersed for firms that have a diverse number of trading partners, where each additional market accounts for a dwindling share of total services exports compared to the first foreign market. For instance, for firms that export to ten destination markets, the first foreign market absorbs 45% of their international sales, while the second market takes one quarter, and so on. Thus, even for firms engaging with up to ten destination markets, the first one is by far the market where they realise most of their international sales.

Table 3.6. Concentration within firms by main destination markets
Average 2013-2017, percentage

Export market ranking

Share of market (all firms)

Share of market (Number of destinations=1)

Share of market (Number of destinations=2)

Share of market (Number of destinations=5)

Share of market (Number of destinations=10)

1

67.2

100

94.9

70.2

45.3

2

14.5

5.1

20.4

25.2

3

6.1

6.9

10.0

4

3.9

2.1

8.0

5

2.7

0.5

4.2

6

1.9

3.0

7

1.4

2.4

8

1.0

0.9

9

0.7

0.5

10

0.6

0.4

Source: Own calculations on ABS Survey of International Trade in Services data.

Furthermore, some firms only export occasionally, while others succeed in establishing longer-lasting trading relationships. Figure 3.8 shows that the largest share of one-time exporters is found in insurance services, where nearly half the exporting relationships cease after one quarter and only 5% of all firms manage to hold an exporting relationship for more than three years.26 By contrast, 83% of all exporting relationships in the air transport services sector are still in place after one quarter. Unsurprisingly, this is also the sector where export relationships hold the longest: on average, around two-fifths of all air carriers continue exporting for over three years to the same destination.

Australian firms whose main activity is not services sectors also trade in services (Figure 3.9). The share of services exports by non-services firms is relatively important for construction (40%) and engineering services (30%), the latter being typically involved from the designing to the building stage of goods, but also mining sites. Hence, non-services companies in manufacturing and mining also engage in exports of engineering as well as construction services. Between 15% and 30% of firms exporting accounting, legal and computer services are non-services firms, although these firms only account for a small share of total services exports in these sectors. These might be goods-producing firms that could internalise additional functions such as data analytics, software development, accountancy and legal advice.

Figure 3.8. Continued exporting relationships
picture

Note: The vertical axis measures the percentage of firms with a positive export volume in a given quarter that continue exporting the same service to the same destination market for at least the number of quarters indicated on the horizontal axis. Therefore, in correspondence of “0”, all firms observed exhibit a positive exporting relationship; whereas “1” is associated with the share of firms that continue exporting after one quarter, and so on.

Source: Own calculations on ABS Survey of International Trade in Services data.

Figure 3.9. Distribution of exports between services and non-services firms
By sector, average 2013-2017
picture

Note: Within each services sector block, the first bar represents the share of services and non-services firms in the total number of firms observed in the sample, while the second bar reports the share of services and non-services firms' exports over total services exports for that particular sector.

Source: Own calculations on ABS Survey of International Trade in Services data.

In sum, Australian services exporting firms concentrate on just a few destination markets, and their low survival rates suggest the presence of fixed and variable trade costs; firms in Australia might face entry (and sunk) costs when entering new foreign markets, but once there, they might also experience extra variable costs adding to their business operations and making their experience in foreign markets short-lived. The next section examines this question more closely.

Regulatory barriers to services trading firms in Australia

The restrictions on services trade as measured by the OECD STRI affect not only Australia’s services exports, measured at sector level, but also have different impacts on the firm-level exports of services firms depending on the firm's characteristics. This information is valuable for designing and implementing effective and well-targeted export promotion strategies.27

The main findings are:

  • Larger firms are more active in services exports than smaller firms. Comparing two firms, which differ by 10% in terms of turnover, the larger firm would export on average about 3% more services than the smaller firm.28

  • There is a very robust correlation between services exporters and services importers. Firms that also import services will export around 18 times more than firms that do not import services. This effect seems large, but must be seen in light of very low services exports of non-importers of services, so that an increase by a factor of 18 is applied to a very small base.

  • The services exports of firms that are predominantly services providers are around double those of firms whose main activity is in a goods-producing sector.

  • Country-specific control factors are as expected: the larger a country’s GDP, the higher the value of Australian services exports to that country; the further away a country is from Australia, the smaller the value of Australian services exports to that country; more services are exported to other English-speaking countries.

  • Regulatory barriers in the importing country, as measured by the OECD STRI, have a strong negative impact on the value of Australia’s services exports to that country. In fact, reducing a country’s STRI by 0.1 points could increase services exports of Australian firms to that country by about one-quarter.

  • STRI barriers against services trade appear to bite most strongly for delivery Modes 1 and 2, but also for Mode 3. This is consistent with sector-level findings.

  • Discriminatory restrictions and barriers to the establishment of trading relationships are related to the volume of Australian services exports.

Not only is the ability of Australian firms to export to a given market significantly restricted by services trade restrictions, the heterogeneous impact of services trade barriers on firms with different characteristics is also noteworthy. The differential impact according to firm size (measured by turnover) is important, as is the distinction between firms with previous export experience and first-time exporters. Another relevant characteristic is whether a firm has export experience in specific markets or export experience in general.

There is a very strong correlation between firm size and the firm's ability to overcome barriers to services trade. While all firms export lower volumes of services to more restrictive markets, exporting to more restrictive destinations is significantly easier for large firms than it is for small firms. In turn, this implies that small firms have more to gain from liberalisation of services trade. The reduction of a country’s regulatory barriers can expand the contribution of small Australian exporters to total Australian services exports to that country. For example, reducing a country’s STRI by 0.1 can be associated with an increase of 80% in the exports of small firms with an annual turnover of around AUD 10 million. By contrast, services exports of medium-sized firms with an annual turnover of AUD 100 million will increase by 51% and large firms with a turnover of AUD 1 billion will only experience an export growth of 28% (Figure 3.10)

These results underline that the detrimental effect of regulatory barriers on the diffusion of gains from open markets conceal substantial heterogeneity, particularly across firms, and that firms which are less affected by services trade restrictions in the first place have less to gain from a reduction of the STRI in a specific market.

Figure 3.10. Increase in export volume when STRI falls by 0.1
By annual firm turnover (AUD)
picture

Note: Percentage changes indicate average export growth resulting from a reduction of the importing country’s STRI by 0.1. Annual firm turnover is in AUD.

Source: Own calculations based on ABS Survey of International Trade in Services data.

Foreign Direct Investment

Since Australia’s official trade statistics record only those economic transactions that occur between residents and non-residents, they do not pick up trade in services delivered by foreign subsidiaries or branches established in Australia, or by Australian affiliate companies established overseas.29 It follows that trade flows delivered by Mode 3 are not included in trade data. Typically, the importance of Australian businesses abroad as well as that of foreign-owned companies providing services in Australia would be better assessed with Foreign Affiliate Trade Statistics (FATS). These data however are currently not available for Australia. The best proxy for these statistics is Foreign Direct Investment (FDI) data collected by the ABS.30

In 2016, the stock of total Australian direct investment abroad in the services industry was worth AUD 218 billion, accounting for nearly 40% of total accumulated outward FDI.31 The largest shares were in Financial and Insurance services (31%), followed by Manufacturing and Mining (17%, each). Inward accumulated services FDI stocks were equally important, and worth AUD 288 billion in 2016 (about 36% of total foreign investment holdings in Australia). Not surprisingly, Mining accounted for the largest share of this stock (39%), followed by Manufacturing and Real Estate (around 11% each).

The main markets for Australian direct investment abroad were in the United States, the United Kingdom and New Zealand, accounting for 47% of total Australian foreign asset holdings in 2016 (Figure 3.11, right panel).32 The United States was also Australia’s largest inward investor, followed by Japan and the United Kingdom, which were jointly responsible for 44% of foreign-owned investment in Australia in 2016 (Figure 3.11, left panel). More disaggregated ABS Survey of International Investment data permits a decomposition of bi-directional FDI stocks by country and by main industry, offering greater detail on the relative importance of these countries as direct investors or investment destinations for specific industries.

In terms of inward FDI stocks, the United States, Australia’s largest direct investor, invested predominantly in the Mining industry, with AUD 122 billion in 2016, accounting for almost two-thirds of inward FDI from this country. The United States also invested in Manufacturing, with nearly AUD 30 billion, and in Financial and insurance services, with about AUD 10 billion.33 Japan, the second largest Australian investor, focused on similar industries, with AUD 44 billion in Mining, AUD 15 billion in Manufacturing and AUD 9 billion in Financial services. The direct investment of the United Kingdom focuses mostly on Mining, with inward FDI stocks worth AUD 38 billion, various Services sectors (AUD 21 billion) and Manufacturing (AUD 8 billion).34 The Netherlands, Australia’s fourth largest direct investor is Australia’s main owner of FDI stocks in the Services industry. Dutch investment in Australia was almost equally split between Mining and Services (47% and 42% of total inward FDI stocks in 2016, worth AUD 24 and AUD 21 billion, respectively). Most of the investment in services was in Finance (25% of total Dutch foreign direct investment), Distribution (5%) and Transport (4%).

Figure 3.11. Foreign direct investment stocks, 2016 (in AUD billion)
picture

Note: Data refer to all industries, and not just services.

Source: Own calculations based on ABS FDI data, catalogue number 5352, Tables 2 and 5.

As seen in Figure 3.12 (right panel), Australian direct investment stocks abroad are mainly in the United States (worth AUD 118 billion in 2016), of which AUD 28 billion’s worth was in Financial and insurance services, whereas direct investment in Manufacturing industry was valued at AUD 27 billion.35 Several Australian businesses are also present in the Manufacturing industry in the United Kingdom, which, in 2016, accounted for nearly half of Australian direct investment holdings in that country, worth AUD 37 billion. Australian banks and insurance companies also participated in the capital of several such institutions in the United Kingdom, with FDI stocks worth AUD 34 billion in 2016. Australian direct investment in New Zealand was predominantly concentrated in Financial and insurance services, which accounted for nearly 80% (AUD 53 billion) of total FDI stocks in that country in 2016. Australian businesses were also engaged in the Distribution industry and in Construction in New Zealand, with FDI stocks in 2016 worth AUD 3 billion and AUD 2 billion, respectively. Singapore ranked fourth largest for Australian direct investment stocks in 2016 (AUD 20 billion). As expected, Singapore being a large financial hubs, most of Australia’s direct investment stock was in Financial services (nearly 37% of its total FDI stocks in the country in 2016). Interestingly, Singapore was also the largest investment location for Australian investment stocks abroad in Transport and storage, with 54% of all Australian FDI stocks in this industry in 2016.

The concentration of international investment of both Australian businesses abroad and of foreign companies in Australia follows a striking pattern. Figure 3.12 (left panel) shows that less than one-fifth of Australian MNEs, present in more than ten markets overseas, account for nearly all total FDI stocks for 2012-2016. It is rather common for Australian businesses to invest in two foreign markets but the investment holdings in these markets are only moderate compared to the shares of Australian direct investment abroad by large MNEs with a more global footprint. The activity of foreign companies holding 10% or more ownership in Australian businesses is less concentrated (Figure 3.12, right panel). Nearly 40% of foreign-owned companies in Australia have some ownership ties with one foreign direct investing country. These are not, however, the companies with most of total inward FDI stocks. In fact, for 2012-2016, more than 35% of foreign direct investment stocks in Australia was from ten or more foreign sourcing markets.

Figure 3.12. Concentration of international activity, average 2012-2016
Number of overseas markets in which a firm invests
picture

Source: Own calculations based on ABS Survey of International Investment data.

Finally, foreign investment holdings in Australia are not concentrated only in the mining sector, which was 36% of total inward FDI stocks in 2016. Australia’s top three foreign partners, the United States, Japan and the United Kingdom favoured the Financial services industry. The Netherlands focused on services just as much as on mining, with holdings mostly in financial services, distribution and transport. As for Australian direct investment abroad, the most active services industry is finance. New Zealand and Singapore are important locations for Australian investment abroad in financial services, whereas Singapore hosts most of Australian outward direct investment in transport services, perhaps reflecting its strategic location, which makes it a good base to further investment in South East Asia. Australian investments abroad are highly concentrated, with a few large multinationals present in a large number of countries but responsible for most of outward FDI stocks. This might indicate that smaller Australian businesses face many more challenges in setting up a commercial presence abroad and are more impacted by regulatory barriers. The next section attempts to disentangle the effect of policy barriers on Australian direct investment abroad.

Behind-the-border barriers impact Australian investment abroad

The determinants of Australia’s FDI stocks in six service sectors show a degree of heterogeneity across sectors.36 Across all activities, Australian direct investment is greater in larger economies. Moreover, foreign countries with English as official language as well as closer destinations are more attractive to Australian investors. The greatest beneficial effect of a common language is in Logistics and Insurance services. The only sector for which geographical distance does not play a role is the Engineering sector. This is hardly surprising, since investment in engineering is more likely to be driven by the availability of natural resources so that Australian engineers can make use of their competitive advantage in mining-related engineering services independently of proximity to Australia.

By contrast, multilateral restrictions to services trade, measured by the OECD STRI, usually reduce the volume of Australian FDI stocks in a country. This effect is largest in Logistics, Audio-visual services and Insurance services.

Australian direct investment stocks in Distribution services, Insurance services, Logistics and Transport seems to be driven by market opportunities rather than tax considerations. By contrast, in the Engineering services sector, other things equal, the stock of Australian outward FDI is higher in countries with a lower tax rate on profits.

A more detailed analysis of the impact of regulatory barriers on outward FDI, based on the decomposition of the STRI by Mode of supply, shows that barriers to Mode 3 present significant impediments to Australian outward FDI stocks. Their negative effect is particularly pronounced in Commercial banking and Insurance services. However, other types of barriers can also restrict the ability of Australian companies to establish or acquire a subsidiary abroad. Barriers behind the border, which affect all Modes of services trade, are significantly related to lower volumes of direct investment abroad in Construction services and Logistics services. These barriers signal inadequate competition regimes and lack of regulatory transparency.

The only sector for which barriers to Mode 4 restrict the volume of Australian direct investment abroad is Engineering services. This sector relies on highly skilled workers and in some countries a protected professional degree; moreover, services in that sector are often supplied by a combination of a commercial presence and short-term visits by professionals.

A firm perspective on barriers to services exports

As part of the business consultation during the preparation of this report, an industry questionnaire was submitted to 45 selected Australia-based services companies in August-September 2017 (more than half of whom responded) in order to gather their perceptions and assessments of the potential barriers to service exports in Australia and the effectiveness of current government initiatives. The final sample was composed of 26 companies from a wide range of services sectors. They were very heterogeneous in size (nine small firms with annual turnover below AUD 3 million and fewer than 20 employees up to seven large firms with a turnover of more than AUD 200 million and more than 500 employees). Several main issues holding back the export expansion of Australian services firms were identified from the returned questionnaires.

All except one firm are active in foreign markets and about half of them own foreign subsidiaries. One third focuses predominantly on exporting, with foreign markets accounting for more than 50% of revenue in the last fiscal year. For another third, exporting was of only minor importance with less than 10% of their revenue earned abroad. Nevertheless, even firms with currently low export shares see potential for gaining market share abroad, with 70% reporting that demand in foreign markets is either much higher or higher than in Australia. Among firms with foreign subsidiaries, all except one continue serving the foreign market from home. This may happen because the Australian headquarters provides different services or serves different clients than the foreign affiliate, or because the foreign affiliate serves as an intermediary between the Australian headquarters and local clients.

China is among the three most important markets for nearly half the firms. Around 20% list Singapore, Malaysia and the United Kingdom among their most important export destinations. Also the United States and India are mentioned relatively often. Around 60% of firms use services from suppliers abroad. The most important source of services is India followed by China.

Overseas business visits are crucial for the activities of these companies. Only 15% of them do not report any business visits abroad. In particular, business visits are essential to get a first foot on the ground in a foreign market and to expand the customer base. Two thirds of all firms use business visits to get to know prospective clients abroad, around half of the firms in order to conclude business deals or negotiate contracts, and around 40% of all firms conduct market studies when going on a business visit. Other important reasons are visits to company subsidiaries, branches or affiliated companies abroad and quality control purposes in the case when suppliers or subcontractors from foreign markets are needed. Around 30% of firms mention that they visit government agencies and/or regulatory authorities abroad.

A major objective of the survey was to obtain evidence on the main obstacles faced by Australian services providers in foreign markets. Figure 3.13 summarises the results, showing that regulatory differences, red tape in foreign markets and the lack of qualified personnel are important or very important concerns for more than two thirds of services firms. Discriminatory practices and access to finance represent difficulties for just some of the services firms in the survey, while others are not affected by these. Complex licencing procedures or the non-recognition of foreign licenses/qualifications was considered very important by one third of the firms in the sample. Other challenges for services suppliers include understanding regulation in the destination market, cultural differences (e.g. language barriers, different business practices, etc.), the lack of information on local regulation and restrictions to the transfer of personal data. Geographical distance and the testing of new products seem to be of less importance. This is no surprise, given the focus on services in the survey.

However, it is not only barriers abroad that restrict Australian services firms from exploring new markets. The most important domestic factors mentioned in the survey were an insufficient scale, high domestic costs and excessive red tape in Australia. The last aspect is consistent with the results of a recent survey of Australia’s international business activity, which finds that more than 70% of firms considered red tape in Australia to be a major risk for their international operations. Respondents to this survey saw red tape becoming either very important or moderately important in the following three to five years (ECA, 2016).

Figure 3.13. Most important barriers to services exports
picture

Source: Own calculations based on the results from industry questionnaires in August and September 2017.

In some cases, these difficulties imply that firms are not able to acquire new clients in new markets. Around 40% of firms report that they have already failed in their international expansion to new markets. A wide range of countries was mentioned in this context, including China, Hong Kong, China, India, Indonesia, Viet Nam, New Zealand, Saudi Arabia, Turkey and Singapore. Important reasons for failure were difficulties in establishing a key contact, lack of experience in the markets and lack of understanding of the regulations, lack of transparency, insufficient openness of the market to new services providers, and lack of government support.

This analysis shows that services exporters in Australia face a number of challenges. Foreign regulation is not always easy to deal with and may pose explicit entry barriers. However, there are also internal factors, such as the lack of contacts or the lack of experience which prevents firms from expanding internationally. Against this backdrop, the next chapter will describe some of the most important government initiatives that help Australian businesses to overcome these challenges in order to remain competitive and to succeed in international markets.

Concluding remarks

Chapter 3 provides detailed information on the patterns of Australia’s services exports. The chapter highlights the most important services activities and most important destination markets for Australian services exporters; it benchmarks Australian services exports with the patterns of services world trade and identifies a number of barriers to services exports. The chapter also presents firm-level evidence for Australian services exporters highlighting the heterogeneous impact of trade restrictions on firms of different sizes and emphasising the challenge of continuously successful export performance. Finally, the chapter analyses patterns of Australian services FDI and presents results from a business questionnaire on services trade barriers. The key findings from this chapter are as follows:

  • Main trading partners: Australia’s most important trading partners are located in the Asia-Pacific region.37 Travel services dominate aggregate exports and imports, while business services are of high importance for exports to the United States and Singapore.

  • Comparative advantage: Australia’s global comparative advantages are primarily in travel services and in particular in education services. At the regional level, Australia has a comparative advantage in the Asia-Pacific region in a high number of sectors, above all in insurance services and personal, cultural, and recreational services.

  • Recent trade performance: during the last 15 years, Australia has been losing ground in services exports, particularly in its previous strongholds. The performance of Australia's exports of education-related and other personal travel have lagged their export growth potential. Australia’s capacity to capitalise on its proximity to fast-growing markets, and in particular to benefit from growing Chinese demand for travel services, appears to be facing headwinds. However, Australia is still one of the most successful exporters of tourism services, as measured by its comparative advantage. Therefore, the recent decline may reflect shifts in the preferences of Chinese visitors rather than a structural weakness of the Australian tourism sector.

  • Bilateral export patterns: policy barriers represent major impediments to services trade. Services trade restrictions in foreign countries prevent Australia from exploiting its full export potential. Barriers to Mode 3 and barriers behind the border towards all Modes of services trade are particularly importance for cross-border trade as well as for Australia's direct investment abroad. Additional benefits could result from regulatory harmonisation.

  • Determinants of travel services exports: high-quality education helps to attract foreign students. Education-related travel and online provision of education services are particularly promising fields for Australia as these segments are less affected by geographic remoteness than other personal travel.

  • Dependence on regional demand: Australia depends heavily on exports to China. A 1% reduction of demand growth in China could cost Australian services suppliers AUD 7.7 billion, based on 2015 values.38 In some sectors, such as education, the dependency on Chinese demand is even double this.

  • High concentration of Australian services exports and FDI: only 20% of services exporters, engaged in ten or more foreign markets, are responsible for around half of Australia’s services exports. However, even exports of these firms are still relatively concentrated, with almost 50% going to their largest market. Hence, diversification across markets and across firms is key to increasing the contribution of services trade to the Australian economy. Reducing services trade restrictions can help to raise the number of exporters, since small and medium-sized are held back more than large corporations by regulatory barriers, and might either not export at all or only export to a limited set of destinations.

  • Firms struggle to keep exporting: few firms manage to export to the same destination for a sustained period of time. In Australia, the largest shares of one-time exporters are found in insurance services and construction. There is potential for economic gains, because re-entry into an export market is significantly more difficult than continuous exporting, and even more so in the presence of high regulatory barriers in the importing country.

  • Larger benefits for SMEs: smaller businesses have more to gain from services trade liberalisation than large firms. On average, firms with an annual turnover of around AUD 10 million can grow their exports by 80% if an importer reduces its STRI by 0.1 and the probability of such a small firm exporting increases by 25%. By contrast, large firms with a turnover of AUD 1 billion will only experience export growth of 28% and there is no positive effect on their export probability.

  • Obstacles to Australian direct investment overseas: services trade barriers restrict Australian outward FDI stocks. This is especially so for logistics services, audio-visual services, insurance services and distribution services. For engineering services, which rely on highly skilled workers often with a protected professional degree, even barriers to the movement of people represent significant barriers to outward FDI. Overall, this analysis highlights the importance of barriers to commercial establishment abroad for outward foreign investment. However, a more robust analysis of Australian services trade via Mode 3 is not possible because data on foreign affiliate sales in Australia are lacking. This is a major shortcoming, since analysis based on Foreign Affiliates Trade Statistics (FATS) would be extremely relevant for the formulation of economic policies.39

Based on these findings, the next two chapters seek to identify main barriers to Australian services exporters, focusing on key markets such as the United States, the United Kingdom, New Zealand, China and India. Chapter 4 presents the regulatory regime, as described by the OECD STRI, observed in a selected number of economies for financial services and professional services. Chapter 5 presents case studies on services trade barriers in the areas of education, tourism, health, METS and ICT.

References

Ahmad, N., et al. (2017), “Indicators on Global Value Chains: A Guide for Empirical Work”, OECD Statistics Working Papers, No. 2017/08, OECD Publishing, Paris, https://doi.org/10.1787/8502992f-en.

Anderson, J., and E. van Wincoop (2003), “Gravity with Gravitas: A Solution to the Border Puzzle,” American Economic Review, American Economic Association, Vol. 93(1), pp 170-192.

Balassa, B. (1965), “Trade Liberalisation and ‘Revealed’ Comparative Advantage, The Manchester School, Vol. 33, Openshaw, Manchester, pages 99-123.

ECA (2016), “Australia's International Business Survey: 2016 Report”, Export Council of Australia, https://www.austrade.gov.au/News/Economic-analysis/Key-publications/australias-international-business-survey-2016.

Helpman, E., M. Melitz and Y. Rubinstein (2008), “Estimating Trade Flows: Trading Partners and Trading Volumes”, Quarterly Journal of Economics, Vol. 2, pp 441-487.

Kimura, F. and H.H. Lee (2006), “The Gravity Equation in International Trade in Services”, Review of World Economics, Vol. 142 (1), pp 92–121.

Lamprecht, P. and S. Miroudot (2018), “The Value of Market Access and National Treatment Commitments in Services Trade Agreements”, OECD Trade Policy Papers, No. 213, OECD Publishing, Paris, https://doi.org/10.1787/d8bfc8d8-en.

Piezas-Jerbi, N. and C. Nee (2009), “Market Shares in the Post-Uruguay Round Era: A Closer Look Using Shift-Share Analysis”, Staff Working Paper ERSD-2009-14, December.

Santos, S.J.M.C. and S. Tenreyro (2006), “The Log of Gravity”, Review of Economics and Statistics, Vol. 88, No.4, pp. 641-658.

Santos, S.J.M.C. and S. Tenreyro (2011), “Further Simulation Evidence on the Performance of the Poisson Pseudo-Maximum Likelihood Estimator”, Economics Letters, Vol. 112, No. 2, pp. 220-222.

United Nations, Department of Economic and Social Affairs, Manual on Statistics of International Trade in Services 2010, UN Publishing, New York.

Notes

← 1. Improvements made to the model ABS uses to estimate trade in travel services, and access to updated data sources, led in August 2017 to changes to a range of international trade in services data. The changes made to the travel model resulted in revisions to both exports (credits) and imports (debits) across the entire time series for international trade in travel services. Other services categories had smaller revisions due to updated data sources. The international services trade data used throughout this publication are taken from publications prior to August 2017, and thus are not the latest data available. However, the revisions applied to the international trade in services data did not significantly alter the economic storyline presented throughout this chapter, as the original data remain comparable with the previous ABS data. For more information on the revisions to international services trade data please refer to the following ABS publication, Information Paper: Changes to the Australian System of National Accounts, 2016-17 (catalogue no. 5204.0.55.012).

← 2. For more details on the geographical breakdown of Australian services trade, see Tables A C.4 and A C.5 in Annex C.

← 3. Education services and Education-related travel services are used interchangeably throughout the publication, although they refer to Education-related services under the Travel category as reported in Australian Balance of Payments. Likewise, Other personal travel services, largely including tourism-related activities, might be referred to as Personal travel services, but effectively refer to the above-mentioned sub-category.

← 4. Measured by the Balassa (1965) index of Revealed Comparative Advantage (RCA), which, for a given sector, is the ratio of its share in Australia’s exports relative to the same sector’s share in OECD exports. A value above one means that the sector’s share in Australia’s export basket exceeds that of the average OECD country, and “reveals” that Australia is more competitive in the sector than the average OECD country. Conversely, an RCA below one indicates a relative lack of competitiveness.

← 5. The calculations in Table 3.1 also cover the main divisions of trade in goods, implying that fewer services will achieve a RCA index above one than when only looking at the services sector. A further shortcoming of RCA measures based on gross trade data is their inability to allow for geographical production fragmentation. Gross trade data do not show the value added contributed by countries (firms) within each stage of production, so that “countries engaged in assembly activities at the end of a high-tech value chain will appear to have a relative comparative advantage in the manufacture of high-tech goods, whereas the truth would more accurately reflect a comparative advantage in cheap labour” (Ahmad et al., 2017). Thus, countries with high foreign content in some activities might have relatively high RCAs that do not reflect a genuine comparative advantage in those areas – e.g. Ireland and Luxembourg in Table 3.1.

← 6. The item Personal, cultural and recreational services includes audio-visual services, but also education services, health services, recreational services and other personal services.

← 7. Some OECD countries do not report a geographic breakdown of services exports for some sectors, potentially leading to inflated results of revealed comparative advantage. A case in point is construction services where US construction services export cannot be considered due to the lack of bilateral trade data, thereby overstating Australia’s RCA index with that region. Also other extreme values, as for Personal, cultural and recreational services towards Asia & Oceania, are inflated by missing export values for OECD countries.

← 8. While comparative disadvantage can be counteracted by investing more in fast-growing sectors in the long run, comparative advantage in the short run is given by past investment in physical and human capital.

← 9. Using the Shift-Share Analysis (SSA) technique, which decomposes the change in Australia’s total exports into four components: a global demand component (GLOBAL), indicating the potential growth rate of Australian exports due to overall growth in world services trade; a product composition component (COMPOSITION) that may boost or reduce the growth potential depending on whether Australia’s mix of services exports is concentrated in fast or slow growing segments of the world market; a geographical component (GEOGRAPHY) that enhances or reduces growth potential depending on whether Australia’s geographical distribution of trade is concentrated in fast or slow growing countries of the world market; and a residual component (PERFORMANCE) that is positive if Australia is performing better than expected, on the basis of the growth potential defined by the sum of the other components (GLOBAL, COMPOSITION and GEOGRAPHY), and negative otherwise. This technique was developed in regional science to evaluate the performance of a city or a region within a country. It has also been used in the trade context, e.g. by Piezas-Jerbi and Nee (2009), to analyse shifts in the global market shares of goods for different countries after the Uruguay Round in 1995. More details in the Annex.

← 10. Brunei Darussalam does not report import statistics by sector. Malaysia’s import data contain a statistical anomaly in education-related travel services for 2009-2010 that grossly distorts results if included.

← 11. The analysis ignores exchange rate fluctuations, which can be a major driver of export performance. Currency depreciation makes exports more competitive and so may allow for higher export prices in domestic currency, although prices in USD may fall if the pass-through is imperfect. However, exports in USD may fall mechanically as long as price discrimination does not exist between services exports and domestic services sales.

← 12. Relative export performance means the growth rate of Australian exports in a specific market, a specific sector or a specific market-sector combination, minus the growth rates of global imports in that market (sector, market-sector combination).

← 13. STRI heterogeneity indices involve a pairwise bilateral comparison of policy measures included in the OECD STRI regulatory database. Not surprisingly, Australia’s STRI heterogeneity indices are lowest with New Zealand and highest with Indonesia.

← 14. The analytical tool typically used to identify and quantify the effects of various factors on bilateral trade patterns is the gravity model (Anderson and Van Wincoop, 2003; Kimura and Lee, 2006; Helpman et al., 2008). It is essentially a multivariate regression, whose coefficients identify effects of individual variables when all other relevant variables are controlled for (i.e. are assumed to remain constant). Findings reported in the text come from a gravity model estimated with a Pseudo Poisson Maximum Likelihood (PPML), following Santos and Tenreyro (2006, 2011), with data on 6 EBOPS services sectors (transport, construction, insurance and pension services, financial services, telecommunications, computer and information services, and other business services) to 23 individual trade partners during 2014 to 2016. Table C.6 in the Annex C reports the regression results.

← 15. Among the countries covered by this analysis, Australia has a common official language with Canada, India, Ireland, New Zealand, South Africa, United Kingdom and the United States.

← 16. The following FTAs including specific provisions on services trade were considered: AANZFTA (2012: including Indonesia), Japan (2015), Korea (2015), New Zealand (1989), Chile (2009), United States (2005).

← 17. The empirical analysis highlighted a positive and significant impact on bilateral trade in sectors such as professional services, telecommunications and financial services when FTAs included higher levels of commitments. For more details see Lamprecht and Miroudot (2018).

← 18. A gravity model was used to estimate the determinants of bilateral travel services exports. Data on exports of travel services come from the OECD International Trade in Services Statistics by Partner Country (ITSS) (EBOPS 2010 when available, otherwise EBOPS 2002) for the period 2005-2015. Data are available on Australian exports of travel services for over 30 countries included in the analysis (available on request). Table C.7 in the Annex C reports the regression results.

← 19. Information on the restrictiveness of trade in travel services is not available from the STRI.

← 20. FTA information available from the WTO’s Regional Trade Agreements database (including whether the agreement was notified under both Article XXIV of the GATT (goods) and Article 5 of the GATS (services).

← 21. Results quoted in the text come from a simulation based on the OECD-WTO TiVA database.

← 22. The figures take account of both the direct impact on the demand of final products and the indirect impact on the exports of intermediate goods and services. Therefore, they also include intermediate goods and services with a production stage in other regions before the final product is consumed somewhere in Asia. For example, Australia may deliver financial services to an automotive company in Europe that produces for the Asian market. See the input-output section in Annex B for details.

← 23. These trade flows include Modes 1, 2 and 4 (Box 1.1). Mode 3 of services trade (commercial presence) is not included in these data.

← 24. These figures are not fully comparable with aggregate ABS statistics, since the sector coverage is not the same and so does not quite match the broader sample of trading firms underpinning ABS published data.

← 25. The first year reported in the table is based on partial data reflecting methodological changes that occurred in 2013. Hence, only the last two quarters of 2013 are considered as first year in the descriptive analysis. Although not reported in Table 3.5, the first quarter of 2017 (the only available at the time of the analysis) is also included in the remaining the summary statistics.

← 26. The short duration of these relationships might reflect firms’ decisions to serve a foreign market via cross-border exports before establishing a more permanent activity. This could apply to insurance providers, for which proximity to foreign clients is crucial, but also for other services (e.g. construction) where companies with long-term construction projects abroad whose operations would benefit from a more permanent presence. Moreover, exchange rate fluctuations might explain the short length of export relationships observed in the data, although this argument is valid more generally for exporters of all services sectors

← 27. The analysis is based on a gravity model analysing firms' cross-border services exports, drawn from the ABS Survey of International trade in Services. Ten sectors covered by the OECD STRI are included: motion pictures, sound recording, computer services, commercial banking, accounting services, architecture services, engineering services, legal services, telecommunications and maritime transport. Table C.8 in the Annex C reports the regression results.

← 28. For example, Table 3.5 shows that, in 2016, the average Australian firm in the ABS services trade survey had a turnover of AUD 667 million and services exports of AUD 20 million. The model predicts that a firm with a turnover of AUD 734 million would export services worth AUD 20.6 million. A substantially larger firm with a turnover of AUD 1 334 million could be expected to export services worth AUD 27.5 million.

← 29. Australia’s trade statistics are based on Balance of Payments data, which consider affiliates established overseas to be resident in the host country. The ABS Balance of Payments statistics follow international reporting standards for services transactions, which are classified according to the Extended Balance of Payment Statistics (EBOPS 2010) classification. EBOPS 2010 is based on definitions and guidelines outlined in the sixth edition of the IMF's Balance of Payments and International Investment Position Manual (BPM6).

← 30. FDI data may provide relevant insights into the importance of international activity of services affiliates, but there are still some differences between FDI and FATS; hence, care should be exercised when interpreting FDI data as proxy for foreign affiliates’ activities. One difference is that FDI refers to cases where an entity owns at least 10% of a foreign business, while in FATS, the company would own at least 50% of the foreign affiliate. Moreover, FDI data reflect the country of the intermediate investor and not where the ultimate owner is. This might be problematic when the investment transits through third party countries or financial centres, where holding companies might be incorporated to benefit from a more favourable taxation regime. Finally, FDI data are collected on the basis of the main activity of the company investing overseas and might not match the main activity of the affiliate abroad.

← 31. Services shares and values are extracted from the ABS catalogue 5352. They cover construction services but exclude industries such as electricity, gas, steam and air conditioning supply, and water supply, sewerage, waste management and remediation activities. Services values and shares referred to in the text also exclude confidential data not published by the ABS. The relative importance of financial services in outward FDI stocks is confirmed by more disaggregated ABS FDI data (not reported here). On the inward side, the sectors absorbing large shares of total inward FDI in services were distribution, finance and telecoms.

← 32. As discussed above, caution is needed when interpreting ABS FDI data by country. The country allocation of investment stocks is based on the immediate country of residence of the creditor in the case of Australia's foreign liabilities, or of the debtor in the case of Australia's foreign assets. The country of residence of the ultimate beneficial owner/recipient is not identified.

← 33. The United States was also the largest direct investor in Australia’s Accommodation and Food services industry, accounting for more than two-thirds of total inward FDI stocks, and in Professional, Scientific and Technical Services, responsible for 63% of total inward FDI stocks in the industry.

← 34. The United Kingdom’s FDI stock holdings in Australian services industries was over 30% of its total asset holdings there; as the breakdown by specific services industries was not fully disclosed by the ABS for confidential reasons, no specific industry can be singled out.

← 35. Only partial information is available for the level of Australian direct investment in the United States due to confidentiality restrictions. Data for industries such as Mining, likely to absorb a considerable share of Australian investment in the country, and several other services sectors, have not been disclosed by the ABS.

← 36. A gravity model was estimated using ABS Survey of International Investment data. The sectors covered are audio-visual services, construction, distribution services, commercial banking, insurance services, logistics, engineering services, telecommunications, and transport. Table C.9 in the Annex C reports the regression results.

← 37. The Asia-Pacific region, of which Australia is part, is vast. Beijing is 8 943 km from Sydney, but only 8 136 km from London. A degree of regional integration like that of, say, Western Europe would be hard to achieve

← 38. A 1% reduction of final demand in China reduces services output by 0.32%. In 2015, total services output in Australia was valued at AUD 2 400 billion.

← 39. The United Nations Manual on Statistics of International Trade in Services 2010 recommends that FATS data are collected and cover at least the following basic measures of foreign affiliate activity: sales (or turnover) and/or output; employment; value added; exports and imports of goods and services; number of enterprises (United Nations, 2010).

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