What explains China's rising trade in services?: Empirical analysis with a modified gravity model and panel data

Abstract

From 1982 to 2009, China's exports, imports, and foreign direct investment in services have seen incredibly rapid growth. A high proportion of its trade in services is intra-industry trade, but China has no comparative advantage in most service sectors. What, then, drives the growth of trade in services? Does the law of comparative advantage still work? This article considers the features of traded services and derives a modified gravity model based on a theoretical foundation. Using a database of the bilateral trade in services between China and its main trading partners in the modified gravity model, we find that the law of comparative advantage does apply to China's services trade. China has comparative advantages in relatively low-end service tasks, which are less productive, use relatively low-skilled labor, and are less knowledge- and capital-intensive. Liberalization of trade in services, trade in goods, and China's large home market drive the growth and lead to a high level of intra-industry trade in services.