Revealed Comparative Advantage in Services Exports: How Is India Different from China?

Abstract

In recent years, India has become one of the select few emerging economies to feature in the list of the world’s top services exporters. However, given similarities in demography, resource endowments and comparable shares in world services exports, India faces potential competition from China in this sector. Using a theoretically founded, regression-based measure of revealed comparative advantage, we contrast India’s revealed comparative advantage vis-à-vis China in disaggregated services sectors between 2005 and 2018. India, we find, has a comparative advantage in sectors, such as ‘telecommunications, computer, and information services’ and ‘other business services’. However, China’s advantage lies in ‘manufacturing services’ and ‘transport’. Notably, the sectors of India’s comparative advantage are also the sunrise sectors within services, displaying high growth rates and an increasing share in world services trade. A related measure—the trade elasticity index—reveals that, due to sectoral differences in comparative advantage, China does not pose a major threat to India in most of the latter’s major export destinations. Our finding implies that even if China were to enter free trade agreements with India’s major services export partners, the trade diversion losses for India would be small. JEL Codes: F11, F14