Globalization in transition: The future of trade

Globalization in transition: The future of trade

Globalization is in the midst of a transformation. The mix of countries, companies, and workers that stand to gain in the next era is changing. Yet the public debate about trade is often about recapturing the past rather than looking toward the future. Understanding how the landscape is shifting will help policy makers and business leaders prepare for globalization’s next stage and the opportunities and challenge it will present.

Flows of services and data now play a much bigger role in tying the global economy together. Not only is trade in services growing faster than trade in goods, but services are creating value far beyond what national accounts measure. Using alternative measures, we find that services already constitute more value in global trade than goods. In addition, all global value chains are becoming more knowledge-intensive. Low-skill labor is becoming less important as factor of production. Contrary to popular perception, only about 18 percent of global goods trade is now driven by labor-cost arbitrage.

Trade rose rapidly within nearly all global value chains from 1995 to 2007. More recently, trade intensity (that is, the ratio of gross exports to gross output) in almost all goods-producing value chains has fallen. Trade is still growing in absolute terms, but the share of output moving across the world’s borders has fallen from 28.1% in 2007 to 22.5% in 2017. Trade volume growth has also slowed. Between 1990 and 2007, global trade volumes grew 2.1 times faster than real GDP on average, but they have grown only 1.1 times faster than GDP since 2011.

However, this trend does not signal that globalization is over. Rather, it reflects the development of China and other emerging economies, which are now consuming more of what they produce. In fact, trade in services has grown more than 60 % faster than goods trade over the past decade. Some subsectors, including telecom and IT services, business services, and intellectual property charges, are growing two to three times faster.

Yet the full role of services is obscured in traditional trade statistics. First, services create roughly one-third of the value that goes into traded manufactured goods. R&D, engineering, sales and marketing, finance, and human resources all enable goods to go to market. In addition, we find that imported services are substituting for domestic services in nearly all value chains. In the future, the distinction between goods and services will continue to blur as manufacturers increasingly introduce new types of leasing, subscription, and other “as a service” business models.

Second, the intangible assets that multinational companies send to their affiliates around the world—including software, branding, design, operational processes, and other intellectual property developed at headquarters—represent tremendous value, but they often go unpriced and untracked unless captured as intellectual property charges.3 Years of R&D go into developing pharmaceuticals and smartphones, for example, while design and branding enable companies such as Nike and Adidas to charge a premium for their products.

Finally, trade statistics do not track soaring cross-border flows of free digital services, including email, real-time mapping, video conferencing, and social media. Wikipedia, for instance, encompasses 40 million free articles in roughly 300 languages. Every day, users worldwide watch more than a billion hours of YouTube’s video content for free, and billions of people use Facebook and WeChat every month. These services undoubtedly create value for users, even without a monetary price.

We estimate that these three channels collectively produce up to $8.3 trillion in value annually—a figure that would increase overall trade flows by $4.0 trillion (or 20 percent) and reallocate another $4.3 trillion currently counted as part of the flow of goods to services. If viewed this way, trade in services is already more valuable than trade in goods. This perspective would substantially shift the trade balance for some countries, most notably the United States. This exercise is not meant to argue for redefining national trade statistics. It simply underscores the underappreciated role of services, which will be increasingly important for how companies and countries participate in global value chains and trade in the future.

(Based on McKinsey Report- Feb 2019)