Service Trade, Technology And Wage Inequality

Since the implementation of reform and opening up, foreign trade has been expanding rapidly in China. Within only 35 years, the total volume of foreign trade had grown to 4000 billion in 2013, which is the top 1 in the world. Although it brings huge economic growth, foreign trade also has significant impact on the widening of income gap that has become the principal contradiction in China.In 2013, the Gini coefficient of China, a measure of inequality of wealth, had risen to 0.47 that surpassed the international dangerous mark level. Not only in China, this situation was also found in many other places including both developing and developed countries. Throughout the trade liberalization, there is an obvious tendency of widening income gap in a global context, and this is approved by numerous researches. For that reason, the relationship between trade and factor income is always a cutting edge research topic in academic area of international economic.Recently, it was noticed that the industrial restructuring in China had reached a major period due to the rapid growth of economy and policy guidance of Chinese government. As the top priority area of industrial restructuring, service industry has been particularly emphasized in economic development. Definitely, this action will raise changes in trade composition, and service industry will become a new highlight in trade activities. From the aspect of scale, the total volume of service industry in 2013 has an explosively increase in China that is more than 116 times compare to 1982. Simultaneously, China has become the second largest importing and the fifth largest exporting country of service trade in 2013. This paper investigates the effect mechanism that how service trade influences labor factor income from theoretical and practical perspective.In the first place, this paper reviews the effect mechanism from the traditional trade theory point of view. As the representative of traditional theory, the Stolper-Samuelson Theorem considers factor income gap can be narrowed through manipulating the impact of trade on commodity price. However, economic performance from several countries does not support this opinion. Therefore, this paper takes a further step to investigate the modern trade theory and identified the effect mechanism that through technology improvement to control commodity price. After that, by examining the current development situation of service trade and factor income inequality, this paper explains the effect mechanism that the impact of biased technological progress lead by productive service trade on income inequality.Afterwards, by analyzing the related data from 1995 to 2013 in China, this paper details the two effects that service trade liberalization has on income inequality, which are direct and hysteresis effect. In a word, the direct effect narrows down income gap whereas the hysteresis effect expands income gap. Additionally, the former has more influence than the later. Other than that, service trade can be decomposed into productive and consumer service trade. This paper explains the positive impact of both trades on income inequality in current period and the negative impact of productive trade on wage inequality in second hysteresis periods.In the last, this paper believes China should avoid or minimize the risk of expanding wage gap during the process of service trade development and proposes several valid suggestions in order to achieve that purpose.