Take trade to higher level

With its traditional development dividends shrinking, China must develop its knowledge-intensive services to compete

China’s $4.16 trillion import and export volume in 2013 means it is sure to replace the United States as the world’s largest goods trader. However, it still lags far behind the US in the trade in services. Given that the focus of global economic competition has now shifted from the trade in goods to the trade in services, China should regard boosting its trade in services as an important way of raising its capability of participating in international competition and promoting the transformation of its trade from quantity to quality.

China’s services trade continued its previous growth momentum and reached a record high in 2013, with the value of imports and exports of services reaching $484.7 billion in the first 11 months of the year, an increase of 12.4 percent on the same period the previous year, data from the Ministry of Commerce show. The full-year value is expected to exceed $520 billion, a growth rate of more than 11 percent year-on-year. But compared with developed countries, this volume is not only small in size it is also low in quality and there is still an enormous space for improvement in the future.

China’s status in international trade has been on the rise and its services trade has also achieved considerable progress in recent years, with its proportion in the world’s total increasing from 0.6 percent in 1982 to 5.6 percent in 2012. However, compared with some developed countries, China’s services trade is still seriously imbalanced. For example, the services exports of the US, the United Kingdom, Germany, France and Italy are more than 10 percent of their gross national product.

In comparison, China’s services trade has suffered a deficit for 12 consecutive years. This reflects the obvious gap with developed economies in terms of its services trade competitiveness and is partly caused by its increased services imports in the context of its further opening-up since its accession to the World Trade Organization.

Currently, the international services trade tends to be knowledge, technology and capital-oriented and services trading sectors have gradually transformed from the traditional natural resources or labor-intensive into knowledge and technology-intensive industries, a kind of structural optimization of the services trade. However, China is still weak in terms of trade in capital-intensive and knowledgeintensive services and its comprehensive competitiveness in this area is yet to be raised.

The country’s high value-added services trade, such as in insurance and financial services, has grown rapidly in recent years, but they still hold a relatively low share in its total imports and exports of services. In 2010, about half of the country’s services trade was concentrated in the transportation, tourism and other traditional areas, compared with only 7.6 percent in such high value-added services as finance, insurance, and information and telecommunication services.

The tradability of global services is beginning to change the structure of the trade in services. The supply chain of the world’s manufacturing sector has experienced a deep restructuring in the first round of globalization, in which, China, by taking advantage of its cheap production factors, has accumulated an enormous current account surplus. Against the backdrop that the world’s multinationals have basically sharpened their manufacturing edge and that China’s traditional development dividends are gradually disappearing, the country should accelerate the upgrading and transformation of its trade structure as soon as possible.

As the country’s demographic dividend is on the ebb and the growth of its labor supply is on the decline, its labor costs will surely soar. In this context, the profit margin of the country’s industrial sectors will become thinner, their capital return ratio will fall and export-driven growth dividends will decline.

With the decline of its “resources dividend”, China’s economic growth will face a resources and environmental bottleneck. The country’s decades-long extensive economic growth model, which is excessively built on industrialization, exports and investment, has seriously threatened its sustainable development and resources and constraints have become increasingly evident.

The evolution of the global economic growth pattern also highlights the urgent need for China to upgrade its services trade. With the reversal of global imbalances, the increasing costs of labor and resources and growing pressures for exchange rate appreciation of the yuan, along with other factors, China will face growing difficulties if it continues to depend on exports as the main driving force for economic growth in the future. That means it is difficult for China to continue depending on its previous low-cost advantages in labor, land, resources, environment and other production factors to participate in the international division of labor and competition and thus difficult for it to achieve some breakthroughs in its trade level and strategic interests. At the same time, if it stays at the low end of the global industrial chain the country will possibly acquire a fixed identity among the world’s consumers.

It will be an irreversible trend for China to transform from a factorsdriven to efficiency-driven economy in the future. Thus, it should gradually reverse the past growth model based on competition among primary factors, vigorously develop a higher-level services trade and push for the upgrading of its whole industrial chain. The author is an associate research fellow with the China Center for International Economic Exchanges.