Global flows: The ties that bind in an interconnected world -- McKinsey Global Institute (MGI) [40 pages]
Ours is an interdependent world, connected by global flows of goods, services, capital, people, data, and ideas. Global value chains have been built on these flows, creating a more prosperous world. However, in light of the pandemic, Russia’s invasion of Ukraine, and years of rising tensions between the United States and China, some have speculated that the world is already deglobalizing. New MGI analysis finds a reality that is more nuanced. The globe remains deeply interconnected, and flows have proved remarkably resilient during the most recent turbulence. Furthermore, no region is self-sufficient. The challenge therefore is to harness the benefits of interconnection even while managing the risks and downsides of dependency—particularly where products are concentrated in their places of origin.
While global trade has stabilized, flows linked to knowledge and knowhow are driving global integration. Growth in global flows is now being driven by intangibles, services, and talent. They have picked up the baton from goods trade whose growth as a share of the global economy stabilized around 2008 after 30 years of rapid expansion. Flows of services, international students, and intellectual property grew about twice as fast as goods flows in 2010–19 while data flows grew at nearly 50 percent annually. Most flows have proved robust in the face of recent disruption. Goods flows hit a record high in 2021, despite the lingering impact of the pandemic. Capital flows grew by more than 50 percent a year in 2019–21.
No region is close to being self-sufficient. Every region imports more than 25 percent of at least one important type of resource or manufactured good that it needs, and often much more. Latin America, Sub-Saharan Africa, and Eastern Europe and Central Asia are net importers of manufactured goods; they import more than 50 percent of the electronics they need. The European Union and Asia–Pacific import more than 50 percent and 25 percent, respectively, of their energy resources. North America has fewer areas of very high dependency but relies on imports of both resources, notably minerals, and manufactured goods.
Products whose origins are concentrated in just a few geographies exist in all sectors and most notably in electronics and mining. Concentration is a two-sided coin. Concentration often reflects specialization that enables efficiency gains. However, interruption of concentrated trade flows can be particularly disruptive when they are harder to replace at short notice. China exports more than 60 percent of the most concentrated products in the electronics and textiles sectors. AsiaPacific contributes disproportionately to exports of concentrated minerals. Lithium, rare earths, and graphite are particularly concentrated, largely extracted from three or fewer countries and mostly refined in a single country: China. Latin America and North America account for the majority of the most concentrated agricultural products, notably soybeans. The majority of concentrated medical and pharmaceutical products come from Europe.
Global value chains have evolved gradually in the past but may be shaped by new forces in the coming decade. Global value chains have long been dynamic but with gradual shifts in composition. In the past, individual countries gained (or lost) no more than 2 percent of export share a year (annualized), and value chains cumulatively shifted by about 10 to 20 percent per decade. Between 1995 and 2008, the direction of change was almost uniformly toward less concentration and more interregional trade as truly global value chains were unleashed by trade liberalization and technological progress. After around 2008, patterns of trade flows diverged. Global value chains accounting for around 40 percent of trade, including energy resources, electric equipment, and pharmaceuticals, reversed course, becoming more concentrated. The remaining value chains either stabilized or continued to become less concentrated and more interregional. This was the case for many services value chains, including professional services. Now new forces are emerging that could shape and accelerate the next evolution of some value chains. Policy makers are taking active steps to reconfigure value chains deemed to have strategic importance, while resilience, national economic priorities, and stakeholder pressures join technology, demand, and factor costs as key drivers of companies’ decisions about their global footprint.
Multinational corporations play a pivotal role in managing global flows to deliver both growth and resilience in an interconnected world. Global flows are central to the functioning of economies and of businesses both big and small. Multinationals, which account for about two-thirds of global exports, play a pivotal role. They are confronting an increasingly contested global order in which operating in one market can create significant risks in others. They can consider (1) looking for growth opportunities by deepening participation in global flows that are growing in importance— services and intangibles stand out; (2) strengthening the resilience of their own organizations, for instance by diversifying, building stronger relationships with suppliers, and localizing operations; and (3) finding opportunities to use their central role to forge systemic resilience that benefits both their own and others’ organizations.