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Anger over tariffs obscures a shift in patterns of global trade

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.