What happens when global trade goes virtual
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.