Trade intensity is declining

Supply chains are becoming increasingly regionalised, particularly in Asia and Europe, while trade intensity is in decline, according to new research on globalisation published today. While trade is still growing in absolute terms, cross-border goods have declined from 28.1% of the total share in 2007 to 22.5% in 2017, and volume growth has slowed from 2.1 times faster than GDP to 1.1, according to McKinsey’s Globalisation in Transition: the future of trade and value chains.

However, notes the report, this does not signal the end of globalisation – more that emerging economies are now consuming more of what they produce.

China counts for 40% of global textile and apparel consumption

Emerging markets will consume almost two-thirds of the world’s manufactured goods by 2025, McKinsey estimates, with China central to that change. In 2016, 40% more cars were sold in China than Europe, while China also accounts for 40% of global textiles and apparel consumption. And much of what it consumes, it makes.

China exported 17% of what it produced in 2007; in 2017, this was down to 9%, a fact hidden by China’s dramatic rise in manufacturing, according to McKinsey. However, according to DP-DHL’s Global Connectedness Index report, also out today, four of the top five economies where international flows exceed expectations the most are in South-east Asia: Cambodia, Malaysia, Singapore and Vietnam.

Automation increases importance of production sites

While between 2000 and 2012, the movement of goods between countries in the same region fell from 51% to 45%, that trend has now reversed. Intra-regional trade has grown 2.7 percentage points since 2013. The report says: “Regionalisation is most apparent in global innovations value chains, given their need to closely integrate many suppliers for just-in-time sequencing.

“This trend could accelerate in other value chains as well, as automation reduces the importance of labour costs and increases the importance of speed to market in company decisions about where to produce goods.”

Sourcing depending on low-cost labour

The report also myth-busts the idea that sourcing decisions are highly dependent on low-cost labour. In fact, only 18% of goods trade is based on labour cost – ie, more than 80% of the global trade in goods is not from a low-wage country to a high-wage country. Decisions are also based on access to skilled labour, natural resources, proximity to customer and quality of infrastructure.

And new technologies will continue to change the landscape. IoT, AI, blockchain and automation could help reduce shipping and customs processing times by 16-28%, and potentially boost overall trade by 6-11% by 2030. But the effect of 3D printing, once thought to be particularly harmful to the logistics industry, may not be significant after all.

What will be the influence of 3-D printing?

“While 3-D printing could reduce trade in some specific products substantially, the drop is unlikely to amount to more than a few percentage points across overall trade in manufactured goods by 2030. In some cases, additive manufacturing could even spur trade by enabling customisation.”

McKinsey advises companies to: reassess where to compete along the value chain; reconsider their operational footprint; prioritise speed to market and proximity to customers; be flexible; and build closer supplier relationships. Meanwhile DP-DHL warns that: “The policy environment for globalisation darkened in 2018 as trade conflicts escalated and countries raised barriers to foreign takeovers, immigration and other flows. However, supporters of open markets fought back with a wave of landmark trade agreements.”

©by Alex Lennane