| Abstract | Drawing upon the HOV framework and recently compiled World Input-Output Database (WIOD), this paper makes a multi-dimensional evaluation of factor flow distortions embodied in China’s trade in value-added. On the whole, the distortions are less serious in labor flows than in capital flows, but the former is worsening while the latter is improving. The distortions in capital flows are more profound in export than in import, but it is converse for labor flows. Compared with high-skilled labor, low- and medium-skilled and especially low-skilled labor is less distorted in the cross-border trade. Compared with China’s bilateral trade with the so-called BRICS economies such as Brazil, India, and Russia, China’s bilateral trade with the USA, Japan, South Korea, Germany and Taiwan, which are China’s major trade partners, is characterized by less distorted capital and labor movements. There are fewer sectors that are affected by distortions in low- and medium-skilled and especially low-skilled labor flows. Sectors with more trade are less affected by factor flow distortions. The implications are twofold: first, improving Chinese trade and industrial structures in the open economy should be based on the optimization and upgrading of domestic factor endowment structures relative to foreign economies; second, in order to “get prices right” for both domestic and international markets and make factors “flow in right directions”, it is necessary to pursue market-oriented reforms both in home and in trade partners through multilateral and bilateral/regional channels. |