Since the financial crisis, prospects for global trade have looked dim. For decades, global trade had grown at double or triple the rate of the world economy, but in the years after the Great Recession, the trend flipped. Trade in goods grew more slowly than the global economy overall, and cross-border flows of investment fell. Some began to argue that globalization was unraveling, or had reversed.
But a report released Thursday from consultancy firm McKinsey suggests that maybe we’ve just been thinking of globalization wrong. When you add the flow across borders of data and digital information in recent years, the picture starts to look a lot different.
Flows of data, videos and other digital information across borders was almost nonexistent a decade ago. But today, these flows have a larger impact on global economic growth than does the trade in goods, according to McKinsey.
“It’s grown in volume 45 times over the last 10 years. and it’s projected to increase another nine times over the next five years,” Susan Lund, an economist and partner at the McKinsey Global Institute, said about digital flows. “It’s a soaring new flow and connection between economies that no one has really looked at.”
For Lund and her colleagues, “data flows” refer to a wide variety of things. The category includes cross-border Skype calls, shopping online at a foreign store, or someone in Africa taking an online course from Coursera or Khan Academy. It includes someone emailing a colleague in another country, or a company sending its payment information abroad to be processed. It’s also the data signals sent by the Internet of things — for example, remote sensors on a company’s offshore oil rig sending the information they gather to a computer back home.
The consultancy estimates that international flows of goods, services, money, people and data together raised global gross domestic product by $7.8 trillion in 2014. Goods and investment made up about half of that, but $2.8 trillion of that economic boost was purely these digital flows.
Some of these digital flows are actually part of what we think of as “global trade” — either they support trade in goods, such as an email from a buyer to a supplier, or they are traded digital goods or services, such as a music file, an online course or financial advice dispensed to another country. But some of these flows may actually offset some of the cross-border trade in goods that we’ve seen in the past, dragging down the numbers for global trade altogether.
3D printing is one example. Instead of shipping replacement parts around the globe, some companies may soon send data around the world instead to print replacement parts in another country. Companies, such as GE and Siemens, are already using 3D printing to manufacture spare parts and components. In the longer run, this kind of activity means that cross-border trade in goods will decline, evaporating instead into global exchanges of data.
“I don’t think it explains the big slowdown in trade you’re seeing today, but if you project out 10 years, it could have a sizeable impact,” said Lund.
Lund and her colleagues argued that this new digital economy is mostly a force for global equality. While international trade in the past was often limited to large multinational companies, now small businesses can participate, and people in any country can find work online as a freelancer or take a course from Stanford. And digital technologies can help certain countries leapfrog ahead — such as Kenya, which has become a leading country in mobile payments, said Lund.
However, things don’t look egalitarian yet. The McKinsey data shows that nine countries, the United States included, stand out as relatively connected to the rest of the world in terms of flows of goods, services, finance, people and data. The rest fall far behind, as the chart below shows.
“There are some individual countries, like Brazil, Indonesia and India, their economies may have been 50 percent larger had they been more open over the last decade than they actually are,” Lund said.
The Asian powerhouses, such as China, Japan and Korea, also look stuck in the past. They have excelled in manufacturing and goods trade for decades, and received and sent out massive financial flows. But they’ve seen little movement of people across borders, and surprisingly low flows of data, suggesting they are ill-prepared for the next era of globalization.
The research suggests that flows of goods, people and data are relatively concentrated in certain parts of the world. Interestingly, the McKinsey data shows that California would rank fourth in the world in terms of flows of people, above Britain and France, while China’s southern Guangdong province sees more inflows and outflows of traded goods than does the entire United States.
When it comes to flows solely of data, the most connected countries in terms of data (the fifth blue column in the chart below) are all developed, and mostly Western. The Netherlands, which is a hub for Europe’s Internet traffic, ranks first, followed by Germany, Britain, France, Sweden, Singapore and the United States.
Still, the United States is strong in this regard, said Lund. The United States produces more than half of all the digital content consumed on every continent except Europe, and benefits hugely from being at the center of a global digital network.
Looking at trade and connectivity this way, there’s little truth to the narrative that America is losing competitiveness globally, Lund said. “When you look at what’s shaping the future of globalization, the U.S. is at the forefront,” she said.