Great changes have taken place in the global structure of service trade. Capital-intensive trades, such as transportation, telecommunications and banking, and technology-intensive trades have replaced traditional trades, such as tourism and sales service as the major elements of the world's service trade.

China mainly relies on traditional trades such as tourism and transportation for its service trade. It is still much weaker in capital-intensive and technology-intensive services. That's why its service trade remains powerless in international competition. In recent years, high value-added services such as computers, insurance and financing have been growing fast, but they still account for a very small part of the country's total volume of service imports and exports.

The global trend of services becoming tradable is beginning to change the deeper structure of international trade. The first round of globalization was the restructuring of the manufacturing industries' supply chain. Now, the global distribution of transnational manufacturing companies is basically completed.

China must speed up the upgrading of its trade patterns, while its traditional dividends are disappearing.

First, the "demographic dividend" is dwindling. The supply of labor is slowing down and the price of labor is rising. The economy is entering the stage where the cost of production factors periodically rises. Industrial companies will see their profits shrink further and the return on capital will keep falling. The export-driven growth dividend will decrease.

Second, China's "resources dividend" has diminished, posing a bottleneck for economic growth. The country's extensive growth model featuring "over-industrialization and excessive reliance on exports and investment" has threatened to break the upper limit of sustainable development. That limit is the restraint in resources supply, environment quality, eco-capacity and climate change.

Finally, China faces new challenges stemming from changes in the world's growth pattern. The external imbalance has reversed; the global division of labor is gradually stabilized; the international market capacity is growing; the price of labor and resources are rising; the pressure for the RMB to appreciate is mounting; trade protectionism has returned and become widespread. Under the influence of these factors, exports won't continue to be the main driving force for China's economic growth.

That means that China's long-standing advantage in foreign trade stemming from cheap labor and low costs of land, resources and environment cannot last, let alone lead to great achievements. Besides, staying at the lower end of the world's industrial chain for so long may cause China to become accustomed, and riveted, to its global position.

It is unavoidable for China to change its growth pattern from "production factors-driven" to "efficiency-driven". It should depend on technological innovation, brand creation and market extension to generate profits and added value and should devote greater effort to the development of high-end service trades in the upgrading of its industrial chain.

Zhang Monan is a researcher at the Strategic Studies Department of the China International Economic Exchange Center.

This article was first published at Chinausfocus.com. To see the original version please visit: http://www.chinausfocus.com/finance-economy/the-service-sector-is-key-to-chinas-trade-upgrade/