On this view, globalisation is responsible for all the evils now besetting the developed world. But whatever it was in the 1990s and 2000s – malign or liberating – its nature has changed substantially. According to management consultants McKinsey, the world is now in the midst of what we might label ‘Globalisation 2.0’.
Not that too many have noticed. They’re too busy fighting a trade war whose aims seem to be to reclaim the past rather than capture the future. Yet, as to that future, according to McKinsey, for the UK’s global companies it will be about facing more ‘adapt-or-wither’ challenges. For the UK itself, whose forthcoming autumn of discontent has origins linked to Globalisation 1.0, the mark 2.0 model may be an even tougher challenge.
True, the UK starts off with useful advantages. “The structural shifts (of Globalisation 2.0) favour countries with skilled workforces, service capabilities, innovative ecosystems and lucrative consumer markets,” says the consultant in a major piece of research, Globalisation in Transition. Clearly that points towards the UK as well as other developed countries, although not all of them. Germany and Japan, with their focus on capital goods, may find it tougher because China will supply internally more of its needs for high-value goods.
That is part of a fundamental realignment driving Globalisation 2.0 – the world is becoming less ‘trade intensive’; a smaller share of global output is being exported. In 2007, 28 per cent of output moved across national borders, by 2017 that proportion had dropped to 22 per cent. Similarly, the rate at which the volume of trade is growing has slowed. Between 1990 and 2007, on average the volume of global trade grew 2.1 times faster than the growth in global output. Since 2011, that multiple has been only 1.1 times.
This trend, which is most pronounced in high-end capital goods, “does not signal that globalisation is over”, says McKinsey. “Rather, it reflects the development of China and other emerging economies, which are now consuming more of what they produce.”
Simultaneously, services, in which the UK is particularly strong, are playing a growing role; trade in services has grown 60 per cent faster than trade in goods over the past decade. Not just that, but the importance of services in the global economy may be underestimated. That’s partly because services contribute perhaps a third of the value that goes into manufactured goods anyway, and the distinction between goods and services is likely to blur further.
In addition, some services just don’t get reported in official trade statistics. These include the intangible assets – branding, design, software – that multinationals send to their affiliates around the globe. Then there are digital services free to end users – everything from Facebook to WeChat, YouTube and Wikipedia. McKinsey, perhaps being a touch creative, reckons that all of the unrecorded value of services might be worth £6,600bn a year. If that were included in the official stats, then the value of traded services would already be greater than the value of global trade in goods (about £10,500bn a year).
Less good from the UK’s perspective is that its particular specialisation in services – financial services – scores low on trade intensity. While 18 per cent of global output in IT services is exported, the figure for financial services is just 8 per cent. Granted, a far higher proportion of the revenue that the UK itself generates from financial services comes from overseas. Nevertheless, compared with the major export-earning industries of other countries, the export-earning capacity of the UK’s financial services is low. Worse, a further trend in Globalisation 2.0 might push it lower.
The flow of trade is becoming less global and more regional. While Globalisation 1.0 was in full flow, the share of goods traded within the same region declined – for example, from 51 per cent of global trade in 2000 to 45 per cent in 2012. This trend is now reversing and the share of intra-regional global-goods trade has risen almost three percentage points since 2013.
This may be an iron law of trade reasserting itself – that countries do most of their trade with their near neighbours. The 21st-century tweak on this longstanding rule is that, especially in high-value goods, companies need their suppliers to be close together to keep just-in-time sequencing as efficient as possible.
What’s ominous for the UK is that McKinsey says this trend is strongest in Asia and the EU28 countries, where east European component suppliers are increasingly integrating themselves with their western European customers. Ominous because when the block becomes the EU27 then the UK is less likely to be included in this process.
True, eastern Europe’s economies are not the most impressive performers in the developing world; that accolade still belongs to south-east Asia’s tigers and McKinsey’s comments relate mostly to goods rather than services. So it might be that the UK does not face losing too much here. It might even benefit from east Asia’s growing appetite for knowledge-intensive services.
Even so, a combination of rising regionalisation in trade plus – more than likely – barriers of trade with Europe mean that, for the UK, Globalisation 2.0 may end up being a brave new world indeed.