BoxE1
1
Digital globalization: The new era of global flows, McKinsey Global Institute, March 2016.
2
All of the structural trends described here are explored in Globalization in transition: The future of trade and value chains, McKinsey Global Institute, January 2019.
3
Defined as exports from a country where GDP per capita is one-fifth that of the importing country or less. Even if we vary the ratio of GDP per capita of the exporter
and importer, we continue to see a decline in labor-cost arbitrage in value chains producing labor-intensive goods.
4
See Globalization in transition: The future of trade and value chains, McKinsey Global Institute, January 2019.
Globalization before and after COVID‑19
Trade flows ultimately reflect where
countless companies decide to invest
and make, buy, or sell things—as well as
the intermediaries and arrangements
they set up to do this as productively as
possible. Trade in manufactured goods
soared in the 1990s and early 2000s,
propelled by China’s entry into the WTO
and the search by multinational
companies for lower-cost inputs and
wages. Digital communication lowered
transaction costs, enabling companies
to do business with suppliers and
customers halfway around the world.
Overall, goods trade grew at more than
twice the rate of global GDP growth
over this period. MGI’s analysis finds
that, over a decade, all types of flows
acting together have raised world GDP
by 10.1 percent over what would have
resulted in a world without any cross-
border flows.
1
The 2008 financial crisis interrupted
those trends, causing global trade flows
to plummet. When the global economy
recovered, they stabilized but did not
return to their past growth trajectory.
As described in MGI’s 2019 research,
this was largely because China and
other emerging economies reached
the next stage of their development.
2
They initially participated in global value
chains as assemblers of final goods, but
increasingly became the world’s major
engine of demand growth and started
to develop more extensive domestic
supply chains, decreasing their reliance
on imported inputs. As a result of
these developments, a smaller share of
the goods produced worldwide is sold
across borders.
The latest wave of manufacturing
technologies also meant shifting
dynamics within global value chains;
only 13 percent of overall goods trade
in 2018 involved exports from a low-
wage country to a high-wage country.
3
In all except the most labor-intensive
industries, companies started to base
location decisions on other factors,
including access to highly skilled talent,
supplier ecosystems, infrastructure,
business environment, and IP
protection. Another long-term evolution
is the regionalization of production
networks. Long-haul trade between
regions took off in the 1990s and
early 2000s as global supply chains
lengthened. But recently, trade has
become more regionally concentrated,
particularly within Europe and Asia–
Pacific. This has enabled companies
to serve major markets quickly and
responsively. With rising complexity of
global production, as well as concerns
over trade disputes pre-COVID, supply
chain risk and resilience have also been
emerging as increasing considerations
on companies’ radars.
In the wake of the pandemic, travel,
tourism, and migration may take years
to return to previous levels. Trade in
goods has taken a substantial hit,
falling by 13 percent in the first three
months of 2020. But much of this is
due to a sharp contraction in demand
that should eventually reverse when
the virus is contained and economies
recover. In the meantime, cross-border
digital flows continue to take on greater
importance as the connective tissue of
the global economy.
COVID19 seems to be accelerating
some of the trends that were already
manifesting within the world’s value
chains, including the regionalization
of trade and production networks,
the growing role of digitization, and
the focus on proximity to consumers.
4
The increasing use of automation
technologies in manufacturing is
lessening the importance of low labor
costs—and more automated plants
could be more resilient in the face of
pandemics and heat waves (although
potentially more vulnerable to
cyberattacks).
Companies and governments alike
are reassessing the way goods flow
across borders, and they may still
make targeted adjustments to shore
up the places where they see fragility.
But the pandemic has not reshaped
the world’s production networks in
dramatic ways thus far. After all, global
value chains took on their current
structures over many years, reflecting
economic logic, hundreds of billions
of dollars’ worth of investment, and
long-standing supplier relationships.
A major multinational’s supplier
network may encompass thousands
of companies, each with its own
specialized contribution.
Tariffs and tax policies are often
used by governments to try to
shift where things are made. But
many considerations go into where
companies place manufacturing and
where they source. These include
growth in consumer demand, speed
to market, changing labor and
input costs, new technologies, and
the availability of specialized workforce
skills. Risk and resilience now feature
prominently on that list as well—and
even though the costs of risk are
growing, they do not imply the end of
globalization’s opportunities.
3Risk, resilience, and rebalancing in global value chains