Services trade for the future
Wang Dan
The 2023 China International Fair for Trade in Services (CIFTIS) was held in Shougang Park, Beijing./CGTN
The 2023 China International Fair for Trade in Services (CIFTIS) was held in Shougang Park, Beijing./CGTN

The 2023 China International Fair for Trade in Services (CIFTIS) was held in Shougang Park, Beijing./CGTN

Editor's note: Wang Dan is the chief economist at Hang Seng Bank China. The article reflects the author's opinions and not necessarily the views of CGTN.

Though the global services trade saw a sharp decline in the early months of the COVID era, hitting tourism and transportation particularly hard, transformative trends started to emerge. The volume of cross-border services delivered using IT technologies has soared, not just in the services sector, but over a wide range of manufacturing industries. 

The coverage of those services is becoming increasingly sophisticated, ranging from industrial design, supply chain monitoring, and financial and legal services, to catering for the needs of Chinese companies with a global ambition, as well as foreign companies trying to tap into China's market. Global goods trade is stagnating while services are rising. The future cross-border flow will further shift from goods to services with the information age.

Chinese businesses have accelerated the adoption of advanced technologies. Remote working, Zoom meetings, and outsourcing admin or accounting functions to low-cost countries have become more of a common practice. According to the National Bureau of Statistics, the share of IT services in China's total services export has steadily increased from 1.2 percent in 2000 to 20.3 percent in 2022, making it the second largest component of export in services. 

China is becoming both a main consumer and a supplier of related IT services. Cities, such as Hangzhou and Shenzhen, are major IT service providers to other countries, in the fields of online payment and 5G technologies. 

Chinese firms in emerging industries have high incentives to go global, especially battery producers and EV makers. Traditional firms also try to diversify their production lines to reduce operational risks. The process driving Chinese firms to invest globally is forging stronger financial and commercial connections between China and other industrial nations.

The change in China's services trade in the past 20 years was clearly linked to its economic development. Like other emerging economies, tourism originally was the biggest component of China's services trade. However, as the economy became more diversified, higher value-added services expanded at a much faster rate and quickly took the lion's share. The share of tourist income in services trade fell from 54 percent in 2001 to 12 percent in 2019 and further down to 2.3 percent in 2022 due to COVID-19. While international tourism will bounce back in the coming years, it will unlikely be the pillar for the services trade again.

One latest trend is the "servicification" of manufacturing, which bundles exported goods with foreign services. These services are delivered from abroad, either as inputs into the production process or as customer services. Not surprisingly, the largest component of China's services trade is transport, aligned with the country's strength in manufacturing supply chain. 

According to data from Chinese customs, in 2022, the total value of transport services accounted for 34 percent of exports and 36 percent of imports. China is the largest importer of commodities, accounting for 22 percent of the world's export of oil, 66 percent of iron ore, and 58 percent of copper, based on UN Comtrade data. Meanwhile, China is also the world's largest exporter of manufactured goods, accounting for 22 percent of the global total in 2022, data from WTO showed.

The financial and legal services trade took off around 2019. Services trade in intellectual property rights has been a particularly exciting development. Its exports reached $44 billion in 2022, 2.5 times the size of that in 2012; its imports were $13 billion, 13 times the size of that in 2012. This has reflected China's much-improved protection of IP and business awareness of its importance for long-term competitiveness. Yet the headwinds persist. The U.S. government has imposed export controls over sensitive equipment and technologies, adding to the difficulties in high-tech collaboration between China and the rest of the world.

A fast-growing services trade will have a positive spillover effect on emerging markets. Less developed countries in Asia, Africa, or Latin America can participate to a deeper extent in global value chains.

Previously, the main hurdle was the lack of infrastructure in those regions, but insufficient knowledge of the modern industry for local workers is an even bigger bottleneck. China has invested heavily in digital infrastructure in this part of the world, led by many state-owned enterprises such as China Unicom, and private firms such as Huawei.

According to the Ministry of Commerce, China's services trade reached $889 billion in 2022, a record high, placing the country second in the world, behind only the U.S. However, the size of the services trade remains small compared to developed countries. In 2022, the services trade accounted for only 1.3 percent of the overall trade, in contrast to 23 percent in the U.S. Starting in 2017, China began the effort to shorten the negative list of foreign investment access, easing restrictions in areas such as telecom, financial services, and cultural activities. During this year's International Fair for Trade in Services (CIFTIS), held in Beijing, China, the country highlighted its intention to further improve market access for foreign investors.

The services trade is entering a new era. This is not just for cutting costs, but also for sustainable growth. Remote tech support will help reduce the carbon footprint of transporting people and machinery. One major challenge for future services trade is the tendency to use non-tariff barriers that impede the flow of information. Oftentimes, such restrictions are justified under the name of national security. Yet the world must find a way to establish digital trade agreements that facilitate regional integration. Digital protectionism threatens to undermine a connected global economy. Localization measures that hinder cross-border data flows will jeopardize the potential of data to be used for improving productivity and growth. 

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