RDP 2014-07: International Trade Costs, Global Supply Chains and Value-added Trade in Australia Appendix F: Other Supply Chain Indicators

In this appendix we estimate the econometric model described in Section 5.4 for two other supply chain indicators – the level of upstreamness and the VAX ratio. The regression results are shown in Table F1.

Broadly speaking, the results from the upstreamness regressions are very similar to those found for fragmentation (columns (1) and (2)). Based on the fixed-effects estimates (column (2)), a higher level of output and weaker regulation are both associated with more upstreamness. There is also some evidence that lower international trade costs are associated with more upstreamness, but the estimates are not statistically significant when fixed effects are included in the specification. In contrast, the VAX ratio regression estimates provide strong evidence that lower international trade costs are associated with lower VAX ratios, on average. This is consistent with the notion that lower international trade costs stimulate demand for imported intermediate inputs and encourage more production sharing across international borders. In terms of economic significance, the estimates imply that the trend decline in international trade costs explains about 6 per cent of the average decline in the VAX ratio over the sample period. Compared to the fragmentation and offshoring models, these regressions appear less able to explain variation in upstreamness and the VAX ratio, as shown by the relatively low within R-squared for each of the fixed effects regressions.