It is a great pleasure to address this important forum today. I would sincerely like to thank the Development Research Center of the State Council and the Beijing Municipal Government for the invitation.
The world today is facing a challenging period of overlapping crises. The COVID-19 pandemic remains a threat. Inflation has accelerated weighing on real household incomes and consumption. Governments worldwide are grappling with elevated debt levels and increasingly constrained fiscal policy space. Geopolitical tensions are also on the rise. These developments have also had an adverse effect on global trade.
While much of the recent attention has been on global trade in goods, trade in services has attracted less attention. This is somewhat surprising as services account for a significant share of trade in developed economies and play an increasingly important role for many developing economies as well. Services are less tangible, often require real time face-to-face interaction between suppliers and consumers, and are subject to complex layers of regulatory oversight. Statistics on cross-border trade in services are also harder to come by.
Nevertheless, trade in services is an important part of the global recovery from the pandemic. Over time advances in digital technologies, demographic change, urbanization, and rising incomes have brought new services into the world economy. Examples include legal, engineering, and other professional services. Services have been increasingly integrated into modern manufacturing and global value chains — research, development and design, finance, marketing, cross-border data flows and logistics. The so-called servicification of manufacturing has fueled a marked increase in embedded services inputs in manufacturing processes. Digital technologies, in particular, are likely to have a significant impact as they reshape business models. They allow firms to tap global markets and deliver services through new channels, reducing the need for face-to-face interaction.
These longer-term trends have been accelerated by COVID-19. The pandemic made face-to-face transactions difficult, hurting trade in traditional services such as tourism and transport. In 2020, world services exports declined by 19%. However, by encouraging firms and people to invest in digital technology and literacy, the pandemic has accelerated the world's digital transformation.
China is no exception to this trend of deepening services trade integration. The exports of commercial services were worth $280 billion in 2020, making China the world's fourth largest exporter. The country is also a major importer of commercial services. These reached $500 billion in 2020, the second highest level globally. Furthermore, modern services now comprise a significant share of China's export basket. Services that rely on remote delivery over digital networks expanded from 20% of total services exports in 2005 to 50% in 2019.
The digitalization of China's services sector was given a strong boost by the pandemic, which also prompted policy experimentation through the creation of pilot digital free trade zones. The development of China's services trade reflects the country’s status as the world's leading manufacturer, and the goods-services linkages that stem from China's manufacturing prowess. Still, China's transition towards a services-driven economy has some way to go. In particular, China still lags behind advanced countries in high value services not directly associated with manufacturing exports, such as professional and financial services. In many traditional services sectors, productivity levels are also relatively low, which leave scope for convergence.
Traditional services also dominate China's services imports. Travel and transport accounted for over 70% of services imports in 2019. On the positive side, this reflects the steady rise in the competitiveness of domestic services suppliers, and the related decline in the share of foreign value added in the country's gross exports. However, the relatively restrictive nature of China's services trade and investment regime, particularly for digital services, has also played a role.
This brings me to the policies that China can implement to accelerate the transition towards a services-driven economy.
First, lifting barriers on services trade and investment could boost innovation. China's market for services remains more protected than the OECD average. Services liberalization could enlarge the basket of competitive exports and imports, which will underpin China's quest for industrial upgrading, decarbonization and quality of life improvements.
Second, reducing trade barriers in services will require parallel reforms in regulatory governance. Curtailing regulatory uncertainty is often identified by both foreign and domestic investors as critical for sustainable business operations in China. Reducing the compliance costs associated with the country's governance framework for cross-border data transfers would open more opportunities for services exports and imports. Cross-border services trade is increasingly dependent on the ability to share job data with other jurisdictions promptly, efficiently and securely. China's current regulatory framework includes strict conditions for data flow across borders, adding substantial costs to cross-border digital services. Streamlined procedures for cross-border data transfers, and greater freedom for services providers to choose the location of their data storage and processing facilities would help reduce substantially these trade costs.
Lastly, reform efforts in services can also be pursued through multilateral and bilateral trade and investment agreements. China's recent trade policy initiatives — the Regional Comprehensive Economic Partnership (RCEP), and the application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) — are important signals that services liberalization is high on the authorities’ agenda. China could also take actions to achieve the goal specified in the WTO services agreement that all measures of general application affecting trade in services are administered in a reasonable, objective and impartial manner.
Similarly, as countries move to tackle the impact of climate change, China could advocate for the resumption of WTO negotiations to lower tariffs on environmental goods and to extend such talks to a range of environmental services.
To conclude, services are increasingly important to trade in the post-COVID world. They are becoming both more tradable and more vital as inputs to traded goods manufacturing. Services will define the ability of countries and their firms to compete on the international markets.
At the World Bank, we aim to develop a deeper understanding of the challenges countries face with respect to the growing role of services, and also the best strategies to address these challenges. In this respect, we hope to learn from China's reform efforts. We also stand ready to support these reform efforts to help ensure their success.
Thank you very much!
