1. Partners in Growth: Services Trade with Southeast Asia Wellington, 3 June 2011 The importance of embodied services in trade Tom Westcott, ITS Global 1

2. What are embodied services? 2 They are intermediate services inputs embodied in the final output of a business, contributing part of its value Businesses use internal resources (land, labour and capital) to manufacture, mine or grow and do this using additional external services E.g. Manufacturing steel requires services such as electricity, a water supply, transport to market and typically business services such as accountants Machinery exports include engineering services embodied in the machinery (To be distinguished from embedded services, which are services linked and related to the sale of merchandise or to the sale of another services. Eg. After-sale support.)

3. Key messages 3 1.Cross-border export data does not fully convey the contribution of services. Embodied services make a significant economic contribution to exports that is not counted by usual export data –about A$35 billion in 2008-09 in Australia are carried by merchandise exports –in addition to A$52 billion in cross-border services exports Sales of services overseas by foreign affiliates of Australian companies also provide a major contribution not reflected in services exports –estimated at around A$108 billion in 2009-10.

4. Key messages 4 2.Embodied services are critical to manufacturing and global supply chains. As businesses continue to outsource and adopt lean production techniques, embodied services exports will continue to grow –with technology advances (esp. telecoms) services can increasingly be disembodied or splintered –outsourcing means services are increasingly embodied in manufactures –this contributes to manufacturing efficiency and export growth There is a convergence in production systems in manufacturing and services –manufactures use more services –services delivery uses manufactured capital goods.

5. Key messages 5 3.Efficient services regulation matters in Southeast Asian manufacturing countries Understanding size and distribution of embodied services becomes a policy tool Policy makers can prioritise reforming regulation of services most used in manufacturing Can identify key carrier exports and services inputs they use Can identify services industries most commonly embodied in exports In general, regulating access to network services is a priority (e.g. transport, electricity, gas, water, postal and telecoms).

6. Which exports use most embodied services? 6 For Australia: –manufacturing accounted for 26% of all services exported in embodied form –mining: 31% –agriculture: 4% –Services: 38% Notable manufacturing carrier export categories for Australia were –basic non-ferrous metal &products (3.6%); and –motor vehicles & parts (2.9%)

7. Industries whose services are embodied in exports 7 Major sources of embodied services in cross-border exports: –Property & business services (26% of all embodied services exp.) –Transport & storage (15.6%) –Wholesale trade (12.3%) –Services to mining (11.9%) –Construction (6.9%) –Finance & insurance (6.3%) –Electricity, gas & water supply (5.5%) 16 ANZSIC services industry groups used in analysis

8. 8 ITS Globals report for the Australian government is available at: http://www.dfat.gov.au/publications/trade/Services-International-Linkages.html For further information, please contact: ITS Global 1/34 Queen St Melbourne, Australia Tom Westcott: t.westcott@itsglobal.nett.westcott@itsglobal.net Jeffrey Rae: j.rae@itsglobal.netj.rae@itsglobal.net