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China's Trade in Services: Structural Evolution and Future Strategy

Dec 28,2012

By Long Guoqiang, Research Department of Foreign Economic Relations of DRC

International Trade No 1,2012

Trade in services refers to cross-border trading of services. Over the past 20 years, with deepening economic globalization and widely applied information technology (IT), services have become increasingly tradable and trade in services has developed rapidly. China has seen remarkable developments in trade in services, including a fast changing structure and a rapidly rising position in global rankings. But the other side of the picture is that the trade in services has been in a deficit, revealing that China's international competitiveness in this regard has yet to be improved. In face of the international economic environment and the changing comparative advantages, it is of major importance for China to constantly promote its international competitiveness in terms of trade in services for its foreign trade restructuring, which has a great strategic significance for changing China's economic development pattern and boosting economic restructuring.

I. Strategic Significance in Developing Trade in Services

First, developing trade in services is necessary for boosting China's status in international division of labor. Though China has already become the world largest exporter and second largest importer of goods, in globalization it still possesses a low position and engages mainly in sectors of low value added. With the continuous increase of the level of per capita income, basic factors that have an effect on the country's comparative advantages are changing in a profound manner, wages to ordinary workers are rising fast and the international competitiveness of labor-intensive products is weakening, but the quality of labor has improved remarkably, workers' years of education have increased greatly, and the number of university graduates has swelled rapidly–making graduate employment a social problem. Developing trade in services can, on the one hand, give full play to China's advantage in human resources, providing workers with higher-income and more decent jobs. According to a U.S. research, the average pay of the service export sector is 22% higher than that of the non-services trade sector. On the other hand it can effectively make up for the undermined international competitiveness of China's manufacturing industry caused by rising costs. It is no longer a single industrial activity, but the overall strength of industry chains, that determines the international competitiveness of a country's industries. By increasing service efficiency and developing trade in services, we can effectively improve the overall competitiveness of China's industry chains. What's more, developing trade in services can extend the value chain by which China participates in the international division of labor, and elevate China's status in the division of labor. At present China is in the labor-intensive processing and assembly sector of the global value chain of production, and extending towards both ends of the “smile curve” – R&D services and professional services, two sectors of high value added – represents the direction we should take for a better position in the global division of labor. Therefore, developing trade in services helps improve China's status in the global division of labor.

Second, developing trade in services is an effective way to promote the development of China's service industries. Service industries and trade in services supplement each other. The former provides a foundation for the development of the latter while the latter drives the level of trade and improves competitiveness of the former. One, developing trade in services produces a technology spillover effect. Trade in services brings in new business models, boosts the training of international talents, sharpens competition in the domestic service market, and consequently helps improve the levels of service industries. Two, developing trade in services helps promote the restructuring of service industries. The root cause for the underdevelopment of service industries in China is the excess internal control that has led to inadequate opening to the outside world, while opening up service industries to the outside world will help reform the service sector and thus promote the development of service industries. And three, developing trade in services helps speed up the growth of high-end service industries. For a developing country like China, internal demand determines the low-level supply structure of service industries, while making full use of the markets of developed countries helps achieve the economies of scale in high-end service industries, thus accelerating their development.

Third, developing trade in services is an important part of the efforts to change the pattern of development. Imbalanced and unsustainable economic development is quite an outstanding problem for China, making it imperative to change its pattern of development. Developing trade in services has an important role to play in this regard. One, it helps optimize the industrial structure so that service industries have a greater share in economy. Two, it is conducive to energy conservation and emissions reduction so that less energy use and fewer emissions are involved in per unit of GDP. Three, it helps improve the overall operational efficiency of the national economy. The underdevelopment of service industries has already become a major factor that affects the efficiency of China's economic performance. In developed countries, for instance, logistics take up less than 10% of GDP, but it's nearly 20% in China – suggesting to some extent the low efficiency of China's producer service industries. And four, it helps narrow regional gaps and income gaps. The central and western regions of the country, though at a geographic disadvantage in terms of goods export, are not geographically constrained to develop trade in some services; transactions in service outsourcing require only access to the Internet, and project contracting, export of labor service, tourism export and etc. are not subject to geographic conditions, either. Developing trade in services will not only help narrow down income gaps between inland regions and coastal ones, but also bring more jobs and income to university graduates, construction workers, and people in tourist destinations.

II. Characteristics of China's Trade in Services

1. Scale of trade in services expanding with fluctuating growth rates1

In 2011, China's foreign trade in services totaled US$ 420.9 billion, ranking 4th in the world, including US$182.8 billion in exports (ranking 4th in the world) and US$ 238.1 billion in imports (ranking 3rd in the world). Between 2004-2008, China's service export grew at an average annual rate of 23.9%, 9.9 percentage points higher than the world average. Under the impact of the global financial crisis, the growth rate of China's service export plunged from 20.4% in 2008 to -12% in 2009, a drop of more than 30 percentage points. In 2010, it rebounded to 32.2%, 23 percentage points higher than the world average. In 2011, the growth rate stood at only 6.8%, below the global average of 9.5%. Figure 1 shows clearly that China's service export has witnessed violent fluctuations.

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1There are four modes of trade in services: cross border trade, movement of natural persons, consumption abroad, and commercial presence. The former three modes can be fairly well counted in BOP (balance of payments), while the mode of commercial presence is only counted in a few countries such as the United States. The mode of commercial presence has gained an importance in international trade in services, and it is estimated that trade in services in this mode accounts for about half of global trade in services. China's service industries have a small scale of foreign investment, with a share in exports of services supposedly lower than the world average. Data on trade in services used in this paper come from BOP statistics.