The Business Times

Global connections are evolving, not retreating

In the past, globalisation was largely associated with goods trade, but today the fastest-growing types of global flows relate to the digital revolution, knowledge, and know-how, according to new McKinsey Global Institute research. Flows of services, international students, and intellectual property (IP) grew about twice as fast as goods flows in 2010-19.

Data flows grew at nearly 50 per cent annually. You only need to consider the sheer volume of data generated on social media and streaming services to understand why: Netflix's Squid Game achieved 1.65 billion viewing hours in the month after it premiered in September 2021. This rise of "intangibles" flowing around the world is a significant opportunity.

Singapore - regularly ranked first or second in indices that measure the intensity of such flows - is well positioned to capitalise on the trends. Data connections within Asia grew at a compound annual rate of 56 per cent from 2010 to 2020, more than 10 percentage points faster than connections within Europe, and Singapore and China are the key Asian hubs.

Overall, our world has never been so connected and those connections are dynamic and ever-changing. Global flows are resilient and promote resilience. Even in the face of significant disruption in recent years, they have proved remarkably robust. In the second quarter of 2020, trade volumes fell by more than they had at any time since World War II. But they continued to grow, and even accelerated, in both 2020 and 2021. When one region was locked down, another could fill in any gaps. Without data flow, the unprecedented switch to remote working could not have happened. Multinationals were able to keep operating even while travelling was impossible.

This is not to say that there are no risks in the system. The very fact that the world is so interconnected leaves economies and companies vulnerable to risks associated with dependency. No region in the world is close to being self-sufficient. Every region imports more than 25 per cent (and often more) of at least one important type of resource or manufactured good that it needs.

This dependency has the potential to be even more disruptive when products are highly concentrated in their origins and they are hard to replace at short notice. Highly concentrated products exist in every region. Brazil and the United States export 80 per cent of all soybeans. More than 60 per cent of graphite, which is used in batteries of nearly all electric vehicles, comes from China. The Democratic Republic of the Congo extracts nearly 70 per cent of the world's cobalt (also used in EV batteries).

Singapore relies on the rest of the world for resources and manufactured goods and many of those products are highly concentrated in their origins. It has made progress in reducing the concentration of its natural gas supplies, for instance building a liquefied natural gas terminal in 2012; however, it still relies on two countries - Australia and Indonesia - for two-thirds of its natural gas imports. Singapore relies on the United States and the United Kingdom for three-quarters of its imports of aircraft turbo-jets, turbo-propellers, and associated parts, which are needed to support its aerospace maintenance, repair and overhaul sector. It also relies on China for 95 per cent of its laptop imports and 85 per cent of its mobile phone imports.

The challenge is to manage risks arising from interdependency, particularly where products are concentrated in their origins, at the same time shoring up resilience and looking for new growth opportunities. In the case of semiconductors, many countries, including the United States, Japan, South Korea, and China, and the European Union, have announced commitments and funding to support local semiconductor manufacturing.

Diversification may be needed to build resilience, but it is not always straightforward. The International Energy Agency has estimated that it takes an average of 16 years to expand the supply of minerals in different geographies.

But there are alternatives. Multinational corporations, which account for two-thirds of global exports and are therefore the pivotal players in our globally interconnected world, could, for instance, seek to develop privileged supplier relationships and/or build strategic inventories.

Another option is redesigning products to substitute concentrated products. EV manufacturers are exploring a number of ways to diversify away from cobalt, for instance.

At the same time, there is an imperative to look for growth opportunities, not least from today's fastest-growing flows. The globally interconnected system has enabled billions of people to be raised out of poverty and consumers around the world to access more diverse and cheaper goods.

It is clear when looking at the entire range of global flows that the world is not defaulting to deglobalisation but rather that global connections are being reimagined to take account of the rapid growth in flows of services and those associated with the digital and knowledge economy. The challenge ahead is to harness the benefits of connection while managing the risks of interdependency.

This article originally appeared in The Business Times.

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