How Censorship Hurts Chinese Internet Companies

Why has China, the world champion of the outsourcing of goods, not translated its success into exporting services? China may be the world's factory, but India stands poised to become the world's back office, and Silicon Valley remains its information intermediary.

This is especially puzzling given China's three natural advantages: one, a large domestic market that should permit Chinese companies to develop economies of scale without braving foreign waters; two, a large labor pool of trained engineers; and three, a large diaspora in the United States, which would help connect Chinese companies to American companies. But despite these advantages, China runs a huge deficit in trade in services; in 2012, the country exported $190 billion of commercial services while importing $281 billion, a deficit of $91 billion. In other words, Americans, Europeans and others export far more services to China than China exports to the rest of the world. What's keeping Chinese companies from accomplishing in services what it did with manufacturing? The most obvious reason is language.

But even if China develops a large English-speaking workforce, it still faces a second major roadblock: while Western businesses and consumers freely buy goods produced in China, they may be reluctant to buy services from there. Unlike goods, services often contain personal or sensitive information, and can be harder to evaluate at customs checkpoints. Services involve data -- information about people and businesses that can be shared or used without a person's knowledge. Consider the data at issue for the two types of enterprises involved in the international trade in services -- those from Bangalore, and those from Silicon Valley.