Guangfa Securities Research: From Made in China to Created in China

With the continuous improvement of China's level of technological innovation, the role that China plays in the global trade landscape has gradually shifted from being a "manufacturer" to being a "creator" and "developer". In the current global trade landscape where trade protectionism is on the rise and China's commodity exports already have a high market share, knowledge-intensive service exports based on research and development capabilities may take over from commodity exports and become the new growth point for China's exports in the next stage. Looking at the development space of knowledge-intensive services, China still has a significant gap in the scale of knowledge-intensive service exports compared to developed economies such as the United States, the United Kingdom, and Germany, indicating a broad room for improvement. At the same time, with the rapid development of China's overall level of technological innovation and digital economy, knowledge-intensive service exports have become a new trend and important growth pole for China's trade development. In terms of China's competitive advantage in knowledge-intensive services, in terms of factor intensity, China's rapid growth in technological innovation capabilities has led to the transition of technology and knowledge factors from scarcity to abundance. In terms of comparative advantages, China's large population of high-quality labor is forming a new talent dividend, providing a relative cost advantage in developing knowledge-intensive services. Overall, the demand for technology and talent in knowledge-intensive services aligns with the current trend of changes in factors in China, creating more opportunities for university graduates and promoting youth employment. Therefore, promoting knowledge-intensive service exports aligns with the dynamic changes in China's comparative advantages and can cultivate new competitive advantages for China's foreign trade. To further promote China's knowledge-intensive service trade exports, this article proposes the following policy recommendations: First, benchmark high-level free trade agreements such as the CPTPP to establish service trade standards that are aligned with international standards. Second, improve the system of cross-border data flows and gradually expand the freedom of data cross-border flows in a controlled environment through measures such as the "data cross-border regulatory sandbox" and the establishment of data free trade zones. Third, strengthen the mutual recognition mechanism for professional qualifications in the service sector between China and international partners. Fourth, safeguard the intellectual property rights of enterprises going abroad by establishing regional overseas intellectual property protection centers and exploring the establishment of overseas intellectual property operation companies led by government departments. Against the backdrop of the challenges facing China's commodity exports in the face of global trade protectionism and the already high market share of China's commodity exports, transitioning from "Made in China" to "Developed in China" and forging new "Chinese advantages" is timely. With the continuous improvement of China's level of technological innovation, China is no longer simply playing the role of a "manufacturer" in the global trade landscape. In various high-tech fields such as computer electronics, new energy, and pharmaceuticals, China has become a "creator" and "developer". In recent years, Chinese enterprises have experienced rapid growth in overseas income through technology services and intellectual property licensing. For example, in the first half of this year, the total amount of outbound transactions for innovative drugs in China was nearly $50 billion, nearing last year's total transaction volume. Knowledge-intensive service exports based on R&D technology capabilities may become the new growth point for China's exports in the next stage, taking over from commodity exports. I. China has a broad space for growth in knowledge-intensive service exports In recent years, China's service trade exports have grown rapidly. According to data from the OECD-WTO BATIS database, China's service exports reached $381.8 billion in 2023, an increase of 74.4% compared to 2015, higher than the global service trade growth of 57.2% over the same period. China still lags behind major service trading nations in terms of service exports. In 2023, China ranked fifth in the world in terms of the scale of service trade exports. The countries with the highest service export volumes are the United States, the United Kingdom, Ireland, and Germany, with service export volumes of $1.03 trillion, $584.4 billion, $439.0 billion, and $398.0 billion, respectively. China lags behind the United States, the United Kingdom, and Germany in knowledge-intensive service industries. According to the classification of service trade industries, in 2023, the industry with the highest service export volume in China was scientific research, technical services, and other business services, with an export volume of $104.0 billion, but still lower than the United States, the United Kingdom, and Germany by $150.14 billion, $126.0 billion, and $110.6 billion respectively. In addition, China's export volume of intellectual property usage fees is also lower than that of the United States, the United Kingdom, and Germany by $122.44 billion, $195.2 billion, and $355.7 billion respectively. Apart from research and development and technology-related services trade, China also has a significant gap in insurance and financial services exports, which are lower than the United States, the United Kingdom, and Germany by $189.45 billion, $121.87 billion, and $42.18 billion respectively. In terms of entertainment service exports, China also lags behind the United States, the United Kingdom, and Germany by $29.05 billion, $5.32 billion, and $1.81 billion respectively. In terms of industry growth rates, China has stronger growth momentum in knowledge-intensive service industries such as ICT (Information and Communications Technology) services, technology, and research and development services. In 2023, compared to 2019, the industries with the highest growth rates for service exports in China were the transportation industry (89.4%), intellectual property usage fees (83.1%), ICT services (68.0%), and scientific research and other business services (42.0%). In 2023, while the export volume of transportation services, which was the largest in the previous year, saw a decline, ICT services, scientific research and other business services continued to grow positively, and the export volumes of these two industries in 2023 surpassed transportation service exports, ranking first and second in China's service export industries. Taking into account the characteristics of China's service trade exports as mentioned above, on the one hand, there is still a significant gap in the scale of knowledge-intensive service exports compared to developed economies such as the United States, the United Kingdom, and Germany, indicating a broad room for improvement. On the other hand, with the rapid development of China's overall level of technological innovation and digital economy, knowledge-intensive service exports have become a new trend and important growth pole for China's trade development. II. China has strong competitive advantages in knowledge-intensive service exports To assess whether a country's export industries have competitive advantages, we can analyze them based on factors endowment and comparative advantages in international trade theory. In terms of factor intensity, China's rapid growth in technological innovation capabilities has led technology and knowledge factors to transition gradually from scarcity to abundance. In recent years, China's overall technological strength has significantly improved, especially in frontier areas of global technological development such as AI, green and low-carbon technology, and pharmaceuticals, where China's technological innovation capabilities are among the world's best. In AI technology, according to WIPO data, from 2010 to 2023, China ranked first globally in the number of academic publications related to generative AI, slightly higher than the United States and significantly ahead of other economies. In terms of green and low-carbon technology, according to the National Bureau of Statistics' "Green Carbon Patent Statistics Analysis Report," from 2016 to 2023, China's public applications for green low-carbon patents ranked first in the world at 550,000, significantly higher than Japan (200,000), the United States (157,000), South Korea (108,000), and Germany (74,000). From 2016 to 2023, among the top ten countries in terms of overseas patent grants, China had the fastest growth rate, with an average annual growth of 14.2%. In the field of medicine, according to WIPO data, after 2019, China's authorized patents in medical and pharmaceutical technology have grown rapidly, rapidly narrowing the gap with the United States. In 2022, China had 32,704 public authorized patents, which was only 2,484 less than the United States. It can be seen that China has gradually transitioned from a situation where technology and knowledge factors were relatively scarce to one where they are relatively abundant, and now has the technological strength to provide R&D and technology services abroad. In terms of comparative advantages, China's large population of high-quality labor is forming a new talent dividend, giving China a cost advantage in developing knowledge-intensive service industries. In terms of talent scale, China has more high-quality human capital compared to other economies. According to OECD statistics, China ranks first globally in the number of personnel engaged in research and development activities, surpassing the European Union and the United States by 3.14 million and 3.63 million people respectively. At the same time, China's young population has a higher proportion of individuals with higher education qualifications, approaching advanced economies. In recent years, the number of graduates from regular higher education institutions and graduate programs in China has continued to rise. In 2024, the number of graduates from regular higher education institutions (undergraduate and junior college) reached 10.59 million, with master's and doctoral graduates reaching 1.084 million. According to Eurostat data, the number of undergraduate graduates in the EU in 2023 was 2.192 million, while the number of master's and doctoral graduates was 1.722 million. According to the National Center for Education Statistics in the United States, in 2021-2022, a total of 1.21 million people were awarded associate and bachelor's degrees, while 880,000 and 204,000 were awarded master's and doctoral degrees respectively. According to China's seventh population census data, in 2020, the proportion of individuals with higher education qualifications among the 20-29 age group was approximately 45.5%, with university junior college, university undergraduate, and master's and doctoral degree holders accounting for 22.1%, 21.0%, and 2.4% respectively. In 2024, the proportion of 25-34 year-olds in the European Union receiving higher education is about 44%. In 2021, the proportion of individuals aged 25-29 in the United States with a bachelor's degree or higher (including associate degrees) was 49.2%, with 9.5% having master's and doctoral degrees. While having an abundant supply of high-quality labor, China also has relatively low labor costs compared to advanced economies. According to PayScale, the median base annual salary for researchers and research scientists in China is $21,000 and $49,000 respectively, compared to $75,000 and $91,000 in the United States. Similarly, wages for related information technology positions in China are significantly lower than in the United States. From the analysis above, it is evident that with the dynamic changes in China's factors endowment and comparative advantages, the country's technology innovation capabilities and high-quality talent have gradually become relative advantages compared to other economies. The demand for technology and talent in knowledge-intensive service industries aligns with the current trend of changes in factors in China. Therefore, vigorously promoting knowledge-intensive service exports aligns with the dynamic changes in China's comparative advantages and can cultivate new competitive advantages for the country's foreign trade. At the same time, with the increasing number of university graduates in China in recent years, human capital-intensive service industries have a stronger capacity to absorb high-skilled employment and promoting the development of knowledge-intensive service industries can provide an important tool in stabilizing employment, particularly for the younger population. III. Policy Recommendations to Promote Knowledge-Intensive Service Exports To further promote China's knowledge-intensive service trade exports, the following policy recommendations are proposed: First, benchmark high-level free trade agreements such as the CPTPP to establish service trade standards that are aligned with international standards. Continuously improve the negative list management system for service trade. Currently, China's negative list for cross-border service trade still contains a large number of prohibited items, lacks the inclusion of types that violate positive obligations, government levels, specific domestic legal basis, and the scope and conditions for the application of restrictions are not clear enough, indicating the need for further improvement in the level of negative list management and corresponding domestic laws and regulations. Secondly, expand the pilot regions for service trade liberalization. Pilot programs for service trade liberalization should not be limited to free trade zones but can also be expanded to national service outsourcing demonstration cities, national service trade innovation development demonstration zones, national digital service export bases, and national intellectual property services export bases, anchoring the pilot programs to the relevant areas of service trade in high-standard international trade agreements. Second, improve the system of cross-border data flows. The growth of digital service trade will generate a large amount of data cross-border flows, and an improved system for managing cross-border data flows is essential for facilitating the export of digital services. Currently, there are differences in China's review of the freedom of cross-border data flows, data localization regulations, and the requirements of agreements such as CPTPP and DEPA. To address this, it is recommended: Firstly, construct a "data cross-border regulatory sandbox" based on DEPA rules for different types of data, allowing companies to manage and transfer their cross-border data in a controlled environment and conduct stress tests within the sandbox to gradually expand the freedom of data cross-border flows. Secondly, use the exceptions for data localization in the CPTPP and DEPA that allow for "legitimate public policy objectives" as core concepts to define the scope of cross-border data flows in various industries. While setting flexible exception clauses, clarify the legitimate public policy reasons, legal bases, and scope of application for implementing data localization. Thirdly, explore the establishment of data free trade zones to gradually expand the experimental scope of the current data cross-border "white list" in these zones, and lead in the implementation of international high-standard digital trade rules. Third, strengthen the international mutual recognition of professional qualifications in the service sector. Enhancing international mutual recognition of qualifications is beneficial for enhancing the recognition of professional technical service personnel and enterprises in the global market, reducing compliance costs for Chinese professional technical service exports. To address this, it is recommended: Firstly, organize industry associations to learn from the experiences of developed economies to improve the structure of professional standards and technical specifications in China, providing institutional guarantees for the international mutual recognition of professional qualifications. Secondly, local areas can learn from Beijing's "Beijing International Vocational Qualification Recognition Catalog" to achieve important international mutual recognition in key areas based on the strengths of local service sectors and move from unilateral recognition to mutual recognition of professional qualifications. Fourth, strengthen cooperation in the field of digital infrastructure with "Belt and Road" economies to drive service exports. The economies along the "Belt and Road", especially emerging economies, have vast potential for developing digital infrastructure. By assisting in the joint construction of digital infrastructure projects along the "Belt and Road," China can not only provide physical support but also stimulate demand for the corresponding technical services, which is also conducive to China's tech exports. To enhance cooperation in digital infrastructure, it is suggested: Firstly, provide financial support for "Belt and Road" digital infrastructure projects, such as setting up special investment funds for digital infrastructure to provide long-term low-interest financing, increasing trade credit for relevant enterprises, and export credit insurance. Secondly, incentivize Chinese enterprises to participate in the construction of digital infrastructure along the "Belt and Road." Thirdly, encourage Chinese enterprises to establish digital technology training bases and technology exchange platforms while investing in digital infrastructure construction, forming a digital technology industry chain led by Chinese enterprises and jointly building international standards and norms related to the digital economy with "Belt and Road" economies. Fifth, safeguard the intellectual property of enterprises going abroad. Protecting the legitimate interests of enterprise intellectual property overseas is the foundation for conducting cross-border trade in knowledge and technology. To better protect Chinese enterprises' intellectual property overseas and promote the output of intellectual property services abroad, the following recommendations are made: Firstly, establish regional overseas intellectual property protection centers to build branch-specific guidance platforms for overseas intellectual property dispute resolution, reducing the threshold and cost for enterprises to obtain foreign-related intellectual property services. Secondly, explore the establishment of overseas intellectual property operation companies led by government departments where enterprises can entrust these companies to manage their intellectual property operations overseas. This would not only provide a channel for technology exports for small and medium-sized enterprises lacking sufficient funds and experience to operate intellectual property overseas but also help prevent the risks of intellectual property infringement overseas through a professional and scalable operating mechanism. Government departments can also participate in overseas intellectual property operations. Countries such as Japan, South Korea, and France have set up government investment funds to acquire, manage, and monetize intellectual property assets, assist domestic enterprises in intellectual property litigation, and safeguard patent security. This article is selected from the "Industrial Research" WeChat public account, written by Cai Qisheng, etc.; GMTEight Editor: He Yucheng.