Research conducted by the University of Sydney and Westpac has revealed one of the biggest beneficiaries of Australia's growing trade ties with China has been the value-added domestic services and that they are contributing more to the export story than previously understood.
Australia's value-added services are embedded in most exported goods and services, for example, as intermediates in agriculture, manufacturing and goods exports. Often referred to as the 'Paddock to Plate' value chain, these intermediates are the fastest growing component of world trade today.
These services include things like transport, storage, packaging, communication, financial intermediation, trade, business services and research. Collectively they are contributing more to the Australian economy than direct services exported to China.
The findings of the new report reveal that in 2015, Australian domestic services accounted for 28 percent of value added in Australia's total export of goods and services to China, amounting to AUD $25.9 billion. This compares to AUD $9.8 billion worth of direct services to China in 2015, which is largely related to travel related services and education. The report authors, Professor Hans Hendrischke and Dr Wei Li from the University of Sydney Business School and China Studies Centre used estimates built on 2015 Australian trade data and ratios constructed from the latest OECD TiVA 2011 database.
According to Westpac International General Manager, Bala Swaminathan, Australian businesses are more connected to the China story than they possibly realise.
"Australia's proximity and connectivity with China has broader implications for business, industry and society that should build confidence in the economic value that comes with free trade with China," Mr Swaminathan said.
"These findings show that the increasing contribution of services to our exports makes our cooperation with China more resilient and less vulnerable to potential fluctuations in specific markets such as resources or education and tourism," he said
The University of Sydney's Professor of Chinese Business and Management, Hans Hendrischke said while we cannot underplay the importance of tourism, education and the growing demand for healthcare services as part of Australia's export story, it is important to understand the bigger contribution coming from the service inputs into manufacturing, raw produce, minerals, food, animals and livestock.
"Domestic services are critical as Australia reduces its reliance on resource exports and moves into markets where it will be competing with established players on the basis of the quality and sophistication of their services."
"This is particularly important for surviving and remaining relevant to an economy like China that is finding a new balance through innovation and consumption,' he said.
In a sector-by-sector breakdown, the Westpac/University of Sydney report indicates that income from agricultural exports include a 27 percent domestic services component. The major domestic inputs range from animal feed and real estate to finance, cold storage and transport.
Agriculture is followed by manufacturing with 26 percent including professional services, rent, insurance, finance and equipment. Domestic service inputs such as real estate, finance and professional business services contribute around 21 percent of Australia's goods exports to China.