Countries that once led the movement of the world toward economic openness, now falling into protectionism. Over the past two and a half years, the United States came out of the TRANS-Pacific partnership and imposed duties on steel, aluminum and a wide range of other Chinese goods. The United Kingdom is gradually emerging from the world’s largest free trade zone. And the growth of nationalist sentiment threatened by the fact that such self-destructive behavior will be repeated in other places. The rich world unfolding inside.
The worst moment for this hard to imagine. Although it is now gaining momentum, criticism of free trade, globalization itself becomes in favor of the rich countries. Economic growth in developing countries stimulates demand for products produced in developed countries. Trade in services is on the rise. Companies locate production closer to its customers, to respond faster to changes in demand. Production automation lowered the pace constant search of people willing to work for lower wages. And then, what becomes of complex modern products means that the development, design and maintenance become more important than the production itself.
All of these trends play into the hands of the strengths of developed countries, where skilled labor, big investments, huge customer base and entire clusters of high-tech companies are working together on a modern economy. Countries with a medium level of income, such as China and Mexico, can also benefit from the next phase of globalization (although the change in the structure of trade and investment may leave behind part of their workforce, as it happens in rich countries the last two decades). The main advantage of most poor countries is cheap labor — in the eyes will lose its value.
Rich countries have chosen an extremely unfortunate time to begin to isolate themselves from trade, investment and immigration. Instead of burning bridges now that the benefits of globalization began to return to the developed world, they would have to learn to benefit from these changing patterns of globalization. To do so, so that was beneficial to all, not just those who are already successful will be challenging. But there is one sure way to make sure that will lose everything — the rich countries just have to turn away from the open world when they become his masters.
IN THE OLD DAYS…
In the 1990s and in the beginning of this century is rapidly developing trade, especially in manufactured goods and natural resources. China’s accession to the world trade organization in 2001 helped to create a huge new centre for the production of labour-intensive goods. The digital revolution has enabled multinational companies to expand the supply chain around the world. This surge of globalization was partly the result of trade in intermediate goods such as raw materials and computer chips, the nominal value had tripled from $ 2.5 trillion in 1995 to 7.5 trillion in 2007. During this period, the total cost of goods sold each year grew more than twice as fast as world GDP.
Then came the Great recession. Global trade flows fell sharply. Most analysts assumed that as soon as you begin a gradual recovery of the global economy, trade will resume. They were wrong. From 2007 to 2017, the exports declined from 28% to 23% of global gross domestic product. The decline was most noticeable in respect of foreign trade of goods with complex global value chains, such as computers, electronics, vehicles and chemicals. A decade after the Great recession, it becomes apparent that trade is not returned to his previous models and growth rates.
Trade in services is unprecedented share of the world economy.
Partly this is because the balance of power in the world economy is changing as China and other emerging markets reach the next stage of development. After a few decades developing countries participate in world trade mainly as producers, they have now become the main demand drivers in the world. For example, in 2016, automakers have sold 40% more cars in China than in Europe. It is expected that by 2025, emerging markets will consume two-thirds of the world’s industrial goods, and by 2030 they will consume more than half of all goods.
China’s growing demand means they sell more local products. In 2007, China exported 55% of consumer electronic goods and 37% of manufactured textiles; in 2017, these figures were 29% and 17%, respectively. Other emerging economies are following the same path.
In addition, developing countries are now less reliant on intermediate imports. China first entered the global trade arena in the 1990-ies by importing raw materials and components, which are then processed into finished products for export. But things have changed. In some sectors, including computers, electronics, vehicles and equipment, China is now producing far more complex components in a much wider range than two decades ago.
Trade is increasingly concentrated in certain regions, particularly in Europe and Asia. This is partly the result of higher domestic demand from the emerging markets, but it is also caused by the increased importance of speed. The proximity to customers enables companies to respond faster to changing demand and new trends. Many companies are establishing regional supply chains next to each of its major markets. For example, the company “Adidas” (Adidas) chose to place the automated factory (so-called Speedfactories) for the production of new footwear in Germany and the United States, not in its customary places in Indonesia. Company “Zara” (Zara) — a pioneer in the industry of “fast fashion”: it updates the range of goods in the shops twice a week. More than half of the several thousand suppliers of the company are concentrated in Morocco, Portugal, Spain and Turkey, where they can serve European and American markets. The path of the new design, “Zara” from the drawing Board to the store in Manhattan is 25 days.
The development of new technologies, the increasing levels of Internet penetration and the emergence of artificial intelligence (AI) will also change the structure of trade. From 2005 to 2017 the amount of data transferred across borders every second, increased 148 times. The availability of cheap and fast digital communication contributed to the growth of trade. E-Commerce platform enables buyers and sellers easier to find each other. Device with smart technology, everyday products with a connection to the Internet allow companies to track their supply chains around the world and to control them.
However, not all new technologies should lead to increased trade. Some, such as robotics, automation, artificial intelligence and three-dimensional printing, will change the nature of trade flows, but do not increase the total volume of trade. Factory used decades of robots, but only to perform routine tasks. Now, new technological advances, such as vision-based artificial intelligence, language comprehension and fine motor skills, allow industrial robots to perform tasks that were previously unavailable to them. They can assemble complex components and start working with delicate materials such as textiles.
The rise of automation means that companies don’t need to worry about the cost of the workforce when choosing where to invest. In recent decades, companies sought to find low-paid labor, even if it had to create long and complex supply chains. This model is no longer dominant today only 18% of all trade in goods includes exports from countries with low wages in a country with high wages. Now the important other factors such as access to resources, the speed with which firms can deliver their products to consumers, and the skills available to workers. Companies are building a fully automated factory for the manufacture of textiles, clothing, shoes and toys — labor-intensive goods which enabled China and other developing countries to take their place in world production. Exports from countries with low wages to countries with high wages has declined from 55% of total exports these types of cheap labour-intensive goods in 2007 to 43% in 2017.
Trade goods, perhaps, is slowing down relative to global economic growth and trade in services no. Since 2007, global trade in services grew more than 60% faster than world merchandise trade. Trade in some sectors, including telecommunications, information technology, business services and intellectual property, currently growing at two to three times faster than trade in goods. In 2017, the volume of world trade in services amounted to USD 5.1 trillion, which is much smaller than the 17.3 trillion dollars are sold all over the world products. However, these figures are understated. The national accounting system, for example, do not separate research and development, design, sales and marketing, as well as services on processing of documents from the physical production of goods. Taking into account these elements constitute almost a third of the cost of selling industrial products. And companies are increasingly turning to foreign suppliers of these services. Although services that are directly measurable, account for only 23% of the total volume of trade, currently, services account for 45% of the added value of goods sold.
Trade in services will take an increasing share in the global economy, as manufacturers and retailers are now ready to provide consumers with a range of new services and not just products. For example, manufacturers of cars and trucks is partnering with companies that are developing Autonomous driving technology, rent cars or offer car sharing, anticipating the departure from the traditional model of one-time purchases of vehicles. Cloud computing popularized by payment model based on consumption and subscription storage and software, freeing users from major investments in its own equipment. Ultrafast wireless 5G network will give companies new ways of providing services, such as surgical operations performed by robots with remote control and remote maintenance of infrastructure, which became possible due to the reconstruction of the virtual model of the place.
For decades manufacturing companies have created physical objects. Today it is not necessarily. Some multinational companies, including Apple (Apple) and many pharmaceutical companies have become “virtual manufacturers” — companies that develop, sell and distribute the product, but rely on the contractors who actually produce.
These changes reflect a broader shift towards intangible goods. In many branches of research and development, marketing, distribution and after-sales service at present creates greater value than real goods, and they grow faster. Economist Carol Corrado (the Corrado Carol) showed that annual investment of firms in intangibles such as software, brands and intellectual property, exceed their investment in buildings, equipment and other physical assets. This is partly due to the fact that products have become more complex. For example, now software accounts for 10% of the cost of new vehicles and, according to the forecast of McKinsey & company (McKinsey) it is expected that this proportion will rise to 30% by 2030.
The goods still have value. Companies still have to move goods across borders, even in their production of services began to play a more significant role. Duties on goods violate and distort these flows and decrease performance. This means that they also work as duties on relevant services. Duty on intermediate products increase costs for producers and lead to a kind of end to double taxation of exports. In short, the arguments for free trade today are as strong as they were three decades ago.
GOOD NEWS FOR THE WEST
Americans and Europeans of the middle class has suffered the brunt of the job losses caused by the recent wave of globalization. For such significant exceptions, such as Germany, in the advanced economies over the past two decades has dramatically decreased employment in manufacturing. In the United States the number of people employed in manufacturing has declined from 17.6 million in 1997 to 11.5 million in 2010, and today again grew, but not much — to 12.8 million.
However, the advanced economies will benefit from the next phase of globalization. A future that depends on innovation, digital technologies, services and proximity to consumers, clearly coincides with their strengths: a skilled work force, reliable protection of intellectual property, lucrative consumer markets, as well as leading high-tech firms and system platforms for startups. Developed countries, which will reap the benefits, would flourish. Those who fail to do so will not.
Jobs in manufacturing have not returned to the rich countries of the world in huge quantities, but there were some encouraging signs. In recent years, several large companies such as Adidas (Adidas), “Fast radius” (Fast Radius) and Lincoln electric (Lincoln Electric), opened production facilities in the United States. Apple (Apple) announced a significant increase in operations in Austin, Texas, and plans to build new data centers and research centers in other U.S. cities. Companies from developing countries have also begun to invest more in the United States and Europe.
The growth of trade in services adds momentum to the advanced economies. The annual balance of trade in services of the United States, Europe and other developed countries combined is nearly $ 480 billion, twice more than ten years ago — it demonstrates their competitive advantage in these industries. New technology will allow companies to provide more services remotely, in such fields as education and health. Countries that have already spetsializiruyutsya on services exports, such as France, Sweden, the United Kingdom and the United States are able to benefit from these trends.
Emerging markets are the main engines of global demand.
Finally, as the developing world becomes richer, he would buy more cars, computers, aircraft and equipment from developed countries. The developed countries allocate over 40% of its exports to emerging markets, which is almost twice more than 20 years ago. Only in 2017, it exported goods worth more than $ 4 trillion.
However, the picture for advanced economies is not always equally bright. Some industries will face tough new competition from developing countries. A local company in Brazil, China and other countries with the average level of income develop and turn into the industry with higher added value, such as the production of supercomputers, aerospace, and solar panels, and less dependent on imported components from developed countries. Chinese companies are starting to produce computer chips that were previously purchased abroad. (Although chips for smartphones China still imports.) The total annual volume of intermediate goods, which China purchased in Germany for vehicles, machinery and other sophisticated products, peaked in 2014, reaching $ 44 billion; for 2017, this figure amounted to 37 billion dollars. Japan and South Korea also faced with reduced exports of intermediate goods to China. The initiative “Made in China 2025” aimed at strengthening the strengths of the advanced countries in such fields as artificial intelligence, wireless systems 5G and robotics.
STUCK IN THE MIDDLE
Countries with a medium level of income, such as Brazil, China, Hungary, Mexico, Morocco, Poland, South Africa, Thailand and Turkey, will receive some benefits from the new wave of globalization, but they will also face new challenges. Such countries play an important role in the complex chain for the production of vehicles, automobiles, electronics, chemicals and transport equipment. They are both suppliers and competitors of the advanced economies that have traditionally dominated these industries.
A number of countries with average income have a strong advantage: they are located close to major consumer markets in developed economies. As automation makes labor costs less important, many multinational companies prefer to build new factories not in the countries with the lowest wages, and in countries that are closer to the main consumer markets, and are still ready for lower wages than the rich countries. Mexico meets all the requirements of the United States; Morocco, Turkey and the countries of Eastern Europe are great for Western Europe, as well as Malaysia and Thailand for the more affluent Asian countries such as Japan and the richer regions of China.
Other countries with average income can also benefit from the shift from goods to services. For example, Costa Rica currently is a major exporter of business services such as accounting, Analytics and information technology support. Over the past ten years, the country’s exports in these sectors grew on average by 34% per year, and today its volume is estimated at $ 4.5 billion, or 7.6% of GDP of Costa Rica. The annual turnover of world trade in business services provided by third parties — from accounting to customer support — is estimated at $ 270 billion and continues to grow. This opens up new opportunities for countries with medium income such as Costa Rica. However, because the tools of artificial intelligence able to perform most of the work related to these services, workers should be able to help customers with Troubleshooting more complex issues or sales if they want to get ahead of the machine.
The countries with the average level of income also has all the chances to benefit from new technologies — not only implementing, but also developing them. For example, China is a world leader in the field of mobile payments. Applications such as “Vichat Pey” (WeChat Pay) and “Alipay” (Alipay), has allowed Chinese consumers to switch from using cash to payment via smartphone, bypassing credit cards. According to consulting company “Irises” (iResearch), in 2017, the third-party payment platforms China has processed mobile payments in the amount of about 15.4 trillion, and is 40 times more than in the United States. In addition to reducing the cost and increasing the efficiency of the transaction payment applications create huge pools of data that their creators can use to provide individually designed loans, insurance and investment products. In each country, the growth of overmassive data raises complex legal and ethical issues; particular attention was drawn to the use of such data by the state in China. It is likely that each country will come to its conclusion, but all will have to solve these problems.
In addition, e-Commerce, mobile Internet, digital payments and financial services contribute to economic growth, contributing to the solution of social problems. Report of the Academy of the Lohan (Luohan Academy), the research group set up by the company, Alibaba (Alibaba) in 2019, showed that the benefits of the current digital revolution are more evenly distributed than the benefits from previous technological revolutions. This is due to the fact that digital technologies no longer belong only to the rich people of rich countries. Modern technology has allowed people around the world to start a business, attract customers and get access to Finance. The report says that in China, digital technology has accelerated economic growth in rural areas and inland provinces, areas that have traditionally lagged behind the coast.
Even when a country with the average income moving to production and services with higher value, their employees are likely to face difficulties similar to those which the experience of American and European workers who are forced out of digital technology. Factory workers in China, Mexico and Southeast Asia can feel the effects of the displacement of jobs as wage growth and the development of automation. Economist Robert Atkinson (Robert Atkinson) showed that China, Czech Republic, Slovenia and Thailand are implementing industrial robots faster than expected, according to the wage levels. Although automation will boost productivity and product quality, these countries will have to help the workers who are replaced by machines, and avoid the mistakes made by the West.
DEVELOPING COUNTRIES WILL HAVE A HARD TIME
In a world of increasing automation the prospects of countries with low income levels are becoming increasingly uncertain. In the short term in some countries low-wage labour-intensive manufacturing-based exports can still grow. Bangladesh, India and Vietnam to achieve a sustainable growth in exports of labour-intensive industries, taking advantage of the fact that China’s rising wages, and the country is focusing on more complex and profitable products. To the old model of growth of production, export-oriented, work, countries will need to invest in roads, Railways, airports and other logistics infrastructure, and, ultimately, in a modern high-tech plants that can compete with other global companies. Bangladesh, India and Vietnam has taken some positive measures, but they need to do much more.
Will trade services to cause the same rapid growth, as it once did production in countries at an early stage of development, is still unknown. In some countries with low income, such as Ghana, India and the Philippines, a thriving service industry to serve enterprises worldwide. But even in these countries, in the sector of services exports employs few people, and it makes a small contribution to GDP. As a middle-income country with low income will have to go to more expensive types of activities to stay ahead of automation. With demand in the world market of services such as transport, financial and business services, have high productivity and can raise the standard of living, but less commercially attractive services, such as cooking, health and education, which employed millions of people, yet show low productivity growth, therefore, can hardly serve as a basis for long-term prosperity.
Technology can allow some people in countries with low income to move forward in economic development without repeating the path traveled by the advanced economies. Internet access allows employees around the world use online platforms for freelance work, such as “Apwork” (UpWork), “Fayver” (Fiverr) and “Samasource” (Samasource) to get additional income. The majority of freelancers working on these platforms, in developing countries. Khan Academy (Khan Academy) and “Coursera” (Coursera) taught languages and other competencies. Translator of “Google” (Google Translate) eliminates language barriers. “Kiva” (Kiva) and Kickstarter (Kickstarter) help budding entrepreneurs to get funding for their startups. And remote medical services to make the best medical care available to people in remote corners of the world. However, the use of these services requires broad access to cheap high speed Internet. Countries need to invest in digital infrastructure and education to succeed in the global digital economy. Although many countries have been able to make primary education is almost universal, yet are having difficulty, so that students can finish high school and receive a quality education at the next stage.
The trade played a major role in reducing poverty around the world. If developing countries change strategy to take advantage of the next wave of globalization, trade, possible, and will continue to bring people out of poverty into the middle class. But the advanced economies have to dramatically change your Outlook. They are fenced off from the rest of the world at the very moment when they should meet him open his arms.
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