What hap­pens when global trade goes vir­tual

The Pak Banker - - OPIN­ION - Justin Fox

YOU re­mem­ber glob­al­iza­tion, right? It was yuge back in the 1990s and 2000s. World­wide trade in goods and ser­vices grew and grew. So did fi­nan­cial flows. The fi­nan­cial cri­sis of 2008 threw all that into re­verse. A par­tial re­cov­ery fol­lowed in 2010, but since then some­thing re­ally in­ter­est­ing has been hap­pen­ing. After 2010, glob­al­iza­tion stalled. Here's a nar­rower, but more up-to-date, view us­ing the fourth-quar­ter 2015 G-20 mer­chan­dise trade num­bers re­leased this week by the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment.

This chart shows a pro­nounced de­cline in trade in 2015, and there are a cou­ple of pretty ob­vi­ous causes for that: cheap oil (the price col­lapse started in fall 2014) and an eco­nomic slow­down in China, the world's No. 1 goods ex­porter and No. 2 im­porter.

Much of the de­cline in cross-bor­der fi­nan­cial flows since the 2008 cri­sis, mean­while, can prob­a­bly be chalked up to tougher reg­u­la­tors and more risk-averse lenders and in­vestors. The lack of over­all trade growth since 2010 is more of a puz­zle, though, and lots of econ­o­mists have been writ­ing lots of words (and mak­ing lots of charts and run­ning lots of re­gres­sions) in an at­tempt to ex­plain it. I've seen analy­ses from the In­ter­na­tional Mone­tary Fund, the World Bank, the Fed­eral Re­serve, the Euro­pean Cen­tral Bank and the Bank of Canada, plus a 349-page e-book from the Cen­tre for Eco­nomic Pol­icy Re­search in Lon­don. Two ex­pla­na­tions show up again and again: The global econ­omy is still re­ally weak, and for a va­ri­ety of rea­sons slow-grow­ing economies are less trade-in­ten­sive than fast- grow­ing ones. So the trade slow­down is cycli­cal. After years of build­ing globe-span­ning sup­ply chains with a heavy re­liance on China, multi­na­tional man­u­fac­tur­ers have changed di­rec­tion and be­gun mov­ing pro­duc­tion closer to con­sumers.

There's an­other pos­si­ble ex­pla­na­tion that I keep won­der­ing about, though: Maybe peo­ple just don't need as much stuff as they used to. A new re­port from the McKin­sey Global In­sti­tute -- from which the first chart is taken -- makes a re­lated ar­gu­ment. Global eco­nomic in­ter­ac­tion, the McKin­seyites write, is go­ing vir­tual:

Flows of phys­i­cal goods and fi­nance were the hall­marks of the 20th-cen­tury global econ­omy, but to­day those flows have flat­tened or de­clined. Twenty-first-cen­tury glob­al­iza­tion is in­creas­ingly de­fined by flows of data and in­for­ma­tion. So glob­al­iza­tion isn't done for. It's just go­ing to look dif­fer­ent go­ing for­ward. Here, for ex­am­ple, is the trend (and pro­jected trend) in cross-bor­der band­width use:

Now, you would ex­pect some of that cross-bor­der In­ter­net use to show up as trade in ser­vices, and some of it clearly does. Trade in ser­vices has kept grow­ing even dur­ing the over­all trade slow­down, and McKin­sey cites an es­ti­mate that about 50 per­cent of ser­vices trade is en­abled by dig­i­tal tech­nol­ogy. The re­port also ar­gues that cross-bor­der con­nec­tiv­ity is chang­ing the com­po­si­tion of the global goods trade, with e-com­merce al­low­ing smaller com­pa­nies to go global:

The in­creas­ing glob­al­iza­tion of small busi­nesses is start­ing to show up in na­tional sta­tis­tics. It is most clearly seen in the United States, where the share of ex­ports by large multi­na­tional cor­po­ra­tions dropped from 84 per­cent in 1977 to 50 per­cent in 2013.

Still, ser­vices only make up about 20 per­cent of global trade, and trade in goods isn't grow­ing. Maybe the is­sue is that a lot of cross­bor­der In­ter­net traf­fic just isn't show­ing up in trade data, at least not yet.

The McKin­sey re­port es­ti­mates, for ex­am­ple, that "914 mil­lion peo­ple around the world have at least one in­ter­na­tional con­nec­tion on so­cial me­dia." That could have eco­nomic sig­nif­i­cance -- and maybe po­lit­i­cal sig­nif­i­cance, too -- but it doesn't amount to a trade flow. Sil­i­con Val­ley boost­ers ar­gue that the value of the free ser­vices pro­vided by tech com­pa­nies is be­ing ig­nored by pro­duc­tiv­ity sta­tis­tics; some­thing sim­i­lar could be go­ing on with trade num­bers.

What are we to make of all this? The over­ar­ch­ing mes­sage of the McKin­sey re­port is sim­i­lar to the over­ar­ch­ing mes­sage of mul­ti­ple other re­cent McKin­sey Global In­sti­tute pub­li­ca­tions: This is a re­ally re­ally re­ally big deal. It's go­ing to cre­ate lots of new op­por­tu­ni­ties and new wealth around the world.

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