Anger over tariffs obscures a shift in patterns of global trade | McKinsey
Financial Times
Anger over tariffs obscures a shift in patterns
of global trade
February 26, 2019 | Article
By Susan Lund and James Manyika
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Over the past decade, globalisation has undergone little-noticed but profound structural
shifts that are tilting the playing field in favour of advanced economies, write Susan Lund
and James Manyika in Financial Times.
While US President Donald Trump seems to have temporarily soothed trade tensions with
China by delaying a planned increase in tariffs on $200bn of Chinese goods, the threat of
levies on US imports of foreign cars and car parts remains. And America’s trading partners
look ready to retaliate.
Governments that once carried the banner for free trade are now retreating into
protectionism. But this is precisely the wrong moment for economies to turn inward —
particularly advanced ones.
Over the past decade, globalisation has undergone little-noticed but profound structural
shifts that are tilting the playing field in favour of advanced economies. The US, UK and
countries across Europe all stand to gain in globalisation’s next chapter — if they don’t slam
the door prematurely.
Output has continued to rise but the share of goods traded across borders has fallen
sharply. This decline has nothing to do with the recent trade wars. Nor does it mean that
export markets are drying up. In fact, it reflects healthy economic development in China and
other emerging markets. More of what gets made in these countries is now consumed
locally instead of being sent to advanced economies.
The geography of global demand has shifted radically, according to a comprehensive report
by the McKinsey Global Institute. The developing world accounted for less than 20 per cent
of global consumption in 1995. Now that share is up to nearly 40 per cent and on a
trajectory to top 50 per cent by 2030. These new global consumers are creating major
export opportunities. Companies in advanced economies sold more than $4tn worth of
goods to the developing world in 2017. Digital e-commerce marketplaces with global reach
are opening the door for more small and medium-size manufacturers to capture a slice of
this growth.
While trade in goods has flattened, services and cross-border data flows have become the
real connective tissue of the global economy. Some types of services trade — IT services,
business services and intellectual property royalties — are growing two or three times faster
than trade in goods. From design to marketing, services also account for 30 per cent of the
value of exported goods. Collectively, advanced economies run a trade surplus in services of
$480bn, twice as high as a decade ago. They are well-positioned to capture future growth in
areas such as entertainment streaming, cloud computing, remote healthcare and education.
All industry value chains, including those that produce manufactured goods, now rely more
heavily on research and development and innovation. Spending on intangible assets such as
brands, software and operational processes has more than doubled relative to revenue over
the past decade. This bodes well for Europe, the US and other advanced economies with
highly skilled workforces and strong intellectual property protections.
Most people formed their opinions about globalisation during the wave of offshoring in the
1990s and early 2000s, when factories shuttered in advanced economies and manufacturing
migrated to the developing world. Today, the labour arbitrage game appears to be coming
to an end. Only 18 per cent of today’s goods trade now involves exports from low-wage
countries to high-wage countries. That’s a far smaller share than most people assume —
and one that’s declining in many industries.
Automation and artificial intelligence technologies will continue to make labour costs a less
important factor when companies decide where to invest in new plants. Factors such as
infrastructure, workforce skills and, especially speed to market, are weighing more heavily
in the equation.
All of this could produce a movement away from offshoring, enabling advanced economies
to recapture a bigger share of share of the world’s production — albeit in a more digitised
form. This type of manufacturing will not put millions to work on assembly lines, but it does
support better-paying and more highly skilled jobs.
The shifts occurring in globalisation today reflect what companies are already doing. But
policymakers have been slow to recognise these tailwinds, in part because Europe and the
US are still confronting the legacy of the last era of globalisation. Many of the workers and
communities that suffered when western manufacturing moved to low-wage countries
years ago have soured on the idea of global trade. But the solutions they need involve
bolder domestic policies and reinvestment — not barriers that threaten to seal off the most
promising avenues of growth in the decade ahead.
This article appeared first in Financial Times.
ABOUT THE AUTHOR(S)
Susan Lund is a partner at the McKinsey Global Institute. James Manyika, chairman of the
McKinsey Global Institute, contributed to this article.
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