Dr. Stephen K. KwanProfessor, Service Science

Management Information SystemsCollege of Business AdministrationSan José State University, CA, USA

http://www.sjsu.edu/ssme

Contact: stephen.kwan@sjsu.edu

China and the World:Trade, Innovation, and

Its Role in the WTO

関嘉龄 博士服务科学

管理信息系统科 教授商业管理学院

美国加州圣荷西州立大学

September, 2012

Prepared for

UNVS 196 Provost’s Honors Seminar

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The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.

157members

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Exchange between the Laplanders and Russians by Olaus Magnus, 1555

Trade in History

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Silk Road – Trade between East and West

Less Complex – Need Less Rules

*

* Chris Lau, 2012

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Broad Areas of Trade:

GoodsServicesTrade-related Aspects of Intellectual Property Rights

Ranging from architecture to voice-mail telecommunications and to space transport, services are the largest and most dynamic component of both developed and developing country economies. Important in their own right, they also serve as crucial inputs into the production of most goods. Their inclusion in the Uruguay Round of trade negotiations led to the General Agreement on Trade in Services (GATS). Since January 2000, they have become the subject of multilateral trade negotiations.

Agricultural

Non-Agricultural

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Adapted from WTO definitions

Modes of Trade Some Examples

Cross Border Trade Software, Insurance, tele-diagnosisfrom country B into A

Consumption Abroad A’s residents obtain education or hospital treatment in B

Commercial Presence Bank, telecommunications firm, hospital from B set up subsidiary in A

Movement of Natural Persons Engineers, doctors from B provideservices in A

Different Types of Trade in Services

Cloud

Computing?

The World is now more complex in Politics and Commerce.

Quick Facts about US Service Sector

The largest labor force migration in human history is underway, driven by global

communications, business and technology growth, urbanization and

regional variations in labor and infrastructure costs and capabilities.

Numeric change in wage-salary employment by industry sector, projected 2004-14(Thousands)

Professional and business service 4566

Healthcare and social assistance 4303

CIA Handbook, International Labor OrganizationNote: Pakistan, Vietnam, and Mexico now larger LF than Germany

42%6433 3 1.4Germany

37%261163 2.1Bangladesh

19%201070 1.6Nigeria

45%6728 5 2.2Japan

64%692110 2.4Russia

61%661420 3.0Brazil

34%391645 3.5Indonesia

23%7623 1 5.1U.S.

35%23176014.4India

142%29224925.7China

40yr Service

Growth

S

%

G

%

A

%

Labor

%

Nation

World’s Large Labor ForcesA = Agriculture, G = Goods, S = Service

20102010

US shift to service jobs

(A) Agriculture:Value from harvesting nature

(G) Goods:Value from making products

(S) Service:Value from enhancing the

capabilities of people and their ability to interconnect and co-create value

Employment Change

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China’s Service Sector

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In its 11th Five-Year Plan, China had targeted an increase of the service sector’s output to 43.3% of GDP by 2010, up from 40.3% in 2005

In its 12th Five-Year Plan, China had targeted an increase of the service sector’s value-added

output to 47.3% of GDP by 2015, up 4%.

China Innovation in Modern Services

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Member sinceDecember 2001

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Service Sector in China

$419 billionIn 2011

4th largest in world≈ 43% GDP

+ 11%

6/23/2012

“Products will need more support from service providers such as marketing, branding and packaging, so as to fetch a better price.

An underdeveloped service sector will hinder the technical upgrading of the manufacturing sector.”

Qiu Hong, assistant commerce minister

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Service Sector in China

Wen JiabaoPRC Premier

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Maslow’s Hierarchy of Needs

Disposable Income &Desire forServices

Needsvs.

Wants

Maslow 的需要阶层

1990 2000 2010 2020 20300

5000

10000

15000

20000

25000

350 1000

4400

8500

20000

Estimated China Per Capita National Income

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Guangdong vs. China

China’s Internal Market for Services

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What happened in the last few years?Attempts at Purilateral Agreements

WTO Doha Round of Trade Talks with goals of

Reduce Trade BarriersOpen Market Access….

“..fundamental disagreements between the developed nations and the major

developing countries…”

BIC nations…

RS

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Doha Talks Aftermath

With plurilateral agreements derailed,nations are now engaged in more (inefficient) negotiations for

• Bilateral agreements• Regional agreements – e.g., NAFTA – to be renewed soon

• Sector/Sector Agreements – US has service sector agreements with Japan and EU

• Free Trade Agreements (FTA) – US has FTA (or pending) with Australia, Andean Countries, Bahrain, CAFTA, Chile, Colombia, FTAA, Korea, Israel, Jordan, Malaysia, Morocco, Oman, Panama, Peru, Singapore.

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Doha Talks Aftermath

G20 and APEC meeting in November 2008 agreed on a “standstill” policy:• revive Doha talks • no imposition of new trade barriers• 12 months

IneffectiveGlobal

Financial Crisis

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Global Financial Crisis

“The US Service Sector contracted for the 11th straight month, …”

“Global trade is expected to shrink 10% in 2009.”

• Less imports, less exports• less consumption, particularly for services (less disposable

income)• stimulus of domestic markets (more protectionist measures)

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Doha Talks might be out of reach

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Potential Problems for US Trade in Services

• Complacency – “We have a huge trade surplus…. We are doing fine…”• Other countries that are “top-down” will catch up or exceed US in their

service sector abilities• No Intellectual Property protection on Service Concepts – no patents• Very little International Service Standards – potential for national and

domestic standards development• Continued weak economy – shrinking of global trade• Loss of confidence in US services – e.g., financial services

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G-20 Ministers Meeting in Korea

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Growth of Protectionist Measures

Global Trade Alert:G20 members passed over 100

“blatantly discriminatory measures”.

WTO reported 53 newmeasures this year.

Everyone sinned a little, or a lot…

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Russia’s Accession to the WTO

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Russia’s Accession to the WTOAugust, 22nd, 2012

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World Trade in ServicesImports vs. Exports

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US Services Surplus with China

US $ 3.7 Billion Trade surplus with China in

2007

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Problems of doing business in China

“2009 Joint Commission on Commerce and Trade (JCCT)Input on Standards and Conformance Issues in China”

cited the following concerns:

• Transparency – national “GB” standards are easily accessible but not so with regulatory agencies, local/provincial, professional, decrees, etc.

• Uneven Enforcement – inadequate enforcement for local companies, tedious procedures put US companies at a competitive disadvantage, etc.

• Conformity Assessment Policies – only by designated Chinese bodies, does not recognize external certifications, etc.

• Revisions to “China Compulsory Certification” Program• Foreign Participation on Chinese Technical Committees

Will what happened to Manufactured Goods going to happen with Services?

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Technical regulations and product standards may vary from country to country. Having many different regulations and standards makes life difficult for producers and exporters. If regulations are set arbitrarily, they could be used as an excuse for protectionism. The Agreement on Technical Barriers to Trade tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles.

Technical Barriers to Trade (TBT)

Conformity Assessment Problems

and service

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China maturing in the Standards game

Completed Service

Standards

ResearchDirections

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More Complaints against China

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China – Complainant and Respondent

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US – Complainant and Respondent

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Service Sector Challenges

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Innovation

CREATINGSOMETHING

NEW

혁신創新创新革新

Innovation resides at the intersection of invention and insight, leading to the creation of social and economic value.

National Innovation Initiative

Innovation can happen anywhere on the Value Chain!

(business model, organization, environment, process, technology, etc.)

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Some Thoughts on Innovation

“Creativity can be taught. Innovation can be learned.”

David Blakeley, Director

“Incremental Innovation vs. Radical Innovation”

Judy Estrin“Closing the Innovation Gap”

“Open innovation argues that the future belongs to those who do the best job of integrating the best of their internal ideas and capabilities with the best external ideas and capabilities.  Designing and orchestrating a global network of capabilities is the basis for a brighter future for us all.” Henry Chesbrough

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Radical Innovations Major Innovation: new service that customers did not

know they needed. Start-up Business: new service for underserved market. New Services for the Market Presently Served: new

services to customers of an organization.

Incremental Innovations Service Line Extensions: augmentation of existing service

line. Service Improvements: changes in service delivery

process. Style Changes: modest visible changes in appearances.

Levels of Innovation

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自主创新

Indigenous Innovation in China

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Innovation in China

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Current Issues

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Current Issues

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Greater China

?

2012 – 2013?

How can Service Science HelpChina develop its Service Industry?

Conclusion

• US cannot become complacent – real/potential trade barriers

• Learn from (non-protectionist) best practices in other countries

• Sustainability of Competitive Advantage requires Innovation

J. Bradford Jensen (2011)

Much more details Available in this new book