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Staying competitive in next round of globalization

To remain competitive, companies in China will need to look for opportunities in the fast-growing services trade, write Jonathan Woetzel and Jeongmin Seong in China Daily.

China needs to look for opportunities in the fast-growing services trade and take advantage of new technologies.

Manufacturing for export has been an important engine for China's economic development for decades. But today global trade patterns are shifting dramatically, and the landscape is taking on a new look. While China's ongoing evolution is the driving force behind many of these changes, this new world of trade will call for an entirely fresh approach.

Consider a few facts about what's already happening on the ground:

The world continues to turn out more goods every year, but now countries are trading a smaller share of them across borders. That's not a sign of a globalization in retreat, however. Instead, it is a sign of healthy growth and development of local markets - mostly in China and to a lesser degree in other fastgrowing emerging markets such as India. These countries are consuming more of what they make locally. China now accounts for 40 percent of global consumption in textiles and apparel, 28 percent in automotive, and 38 percent in computers and electronics. In 2018, about 76 percent of China's GDP growth came from domestic consumption, while net trade actually made a negative contribution to GDP growth.

Rising demand is only one side of what is driving down trade intensity. The supply side of China's economy is also evolving. As its domestic supplier industries mature, the country is becoming less reliant on imports - and because of the sheer size of China's economy, this shift registers at the global level. For example, in computers and electronics, worldwide trade in intermediate inputs fell by 5.1 percentage points as a share of global output between 2007 and 2017; China fully accounted for this drop. As it modernizes and digitizes multiple industries, China is honing its capabilities in areas such as design, engineering, and high-tech manufacturing. This evolution has now reached a stage that requires deeper recognition from the rest of the world.

But while the trade in goods has flattened, trade in services is booming. Some types of services trade - IT services, business services, and intellectual property royalties - are growing two to three times faster than the trade in goods. Services also play an important hidden role in goods production; they account for 30 percent of the value of exported goods. Digital technologies have paved the way for many new types of cross-border service flows, a trend that will only increase as ultrafast 5G networks come online.

Perhaps surprisingly, the world appears to be moving past the days of companies chasing low wages around the globe. Today only 18 percent of trade involves advanced economies importing from the lowest-wage countries. The calculus that goes into decisions about where to locate operations and where to invest in new capacity is changing. Factors such as proximity to customers, the quality of infrastructure, and the availability of a more highly skilled workforce are assuming greater weight than the drive to find the lowest possible global labor costs. Automation and artificial intelligence technologies will accelerate this trend.

At the same time, R&D, innovation, and high-skilled labor increasingly dominate industry value chains. Spending on intangible assets such as brands, software, operational processes, and intellectual property has more than doubled relative to revenue over the past decade. It now outpaces investment in physical plants and equipment. With increasing value attributed to intangibles, advanced economies are in a position to build on their long-established assets - and Chinese companies will have to play catch-up. China's IP exports still total less than one-fifth of its IP imports, and only one Chinese company is in the world's 100 most valuable brands.

Long-haul trade is now receding slightly as trade becomes more regionally concentrated. Companies are growing wary of the risks involved in relying on little-known suppliers located halfway around the world - and speed to market is becoming a key competitive battleground. Some companies are establishing discrete regional supply networks near each market they serve to improve coordination and resilience. In a recent McKinsey survey of CEOs, three-quarters say they are adjusting their strategies, and half of respondent reported that they plan to build out operations in one or more key countries.

These changes may not have attracted headlines, but they reflect how global companies are changing their operations. And because these shifts are an ongoing evolution, they will turn from subtle to seismic in the decade ahead.

Companies and policymakers alike need a longer-term view of how industry structures and the broader global economy are evolving. To remain competitive, companies in China will need to look for opportunities in the fast-growing services trade, deepen trade relationships with emerging markets, and reconfigure supply chains to take advantage of new technologies and demand patterns. Given that services and intellectual property are the real frontiers of trade growth - and the next chapter of globalization demands more attention to digital infrastructure, service capabilities, and workforce skills.

This article appeared first in China Daily.

About the author(s)

Jonathan Woetzel is the director of McKinsey Global Institute and Senior Partner of McKinsey & Company. Jeongmin Seong is the Senior Fellow of McKinsey Global Institute, McKinsey & Company. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.