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Globalization in Transition: the Future of Trade and Value Chains

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Globalization in Transition: the Future of Trade and Value Chains GLOBALIZATION IN TRANSITION: THE FUTURE OF TRADE AND VALUE CHAINS JANUARY 2019 AboutSince itsMGI founding in 1990, the McKinsey Global Institute (MGI) has sought to develop a deeper understanding of the evolving global economy. As the business and economics research arm of McKinsey & Company, MGI aims to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGI’s in-depth reports have covered more than 20 countries and 30 industries. Current research focuses on six themes: productivity and growth, natural resources, labor markets, the evolution of global financial markets, the economic impact of technology and innovation, and urbanization. Recent reports have assessed the digital economy, the impact of AI and automation on employment, income inequality, the productivity puzzle, the economic benefits of tackling gender inequality, a new era of global competition, Chinese innovation, and digital and financial globalization. MGI is led by three McKinsey & Company senior partners: Jacques Bughin, Jonathan Woetzel, and James Manyika, who also serves as the chairman of MGI. Michael Chui, Susan Lund, Anu Madgavkar, Jan Mischke, Sree Ramaswamy, and Jaana Remes are MGI partners, and Mekala Krishnan and Jeongmin Seong are MGI senior fellows. Project teams are led by the MGI partners and a group of senior fellows, and include consultants from McKinsey offices around the world. These teams draw on McKinsey’s global network of partners and industry and management experts. The MGI Council, which includes leaders from McKinsey offices around the world and the Firm’s sector practices, includes Michael Birshan, Andrés Cadena, Sandrine Devillard, André Dua, Kweilin Ellingrud, Tarek Elmasry, Katy George, Rajat Gupta, Eric Hazan, Acha Leke, Scott Nyquist, Gary Pinkus, Sven Smit, Oliver Tonby, and Eckart Windhagen. In addition, leading economists, including Nobel laureates, advise MGI research. The partners of McKinsey fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit mckinsey.com/mgi. Copyright © McKinsey & Company 20182019 GLOBALIZATION IN TRANSITION: THE FUTURE OF TRADE AND VALUE CHAINS JANUARY 2019 Susan Lund | Washington, DC James Manyika | San Francisco Jonathan Woetzel | Shanghai Jacques Bughin | Brussels Mekala Krishnan | Boston Jeongmin Seong | Shanghai Mac Muir | Atlanta PREFACE In 2014, the McKinsey Global Institute proposed a new way of looking at globalization: by measuring global flows of goods, services, finance, and people. In 2016, we returned to the topic, highlighting the contrast between flattening trade in physical goods and soaring cross-border data flows. That report described a more digital form of globalization that has opened the door to new participants, created new sources of value, and introduced new opportunities and risks.*1 Today we take another look at how globalization is evolving, this time viewing it through the lens of global value chains. Trade patterns are shaped by myriad business decisions within these production networks, not by the simple act of one country choosing to buy less from another. Using MGI’s signature “micro-to-macro” approach, we look at how companies participating in 23 different industry value chains are responding to global opportunities and pressures. We examine both goods-producing and service industries across 43 countries. Our work also draws on interviews with dozens of industry experts, proprietary industry data, and national accounts trade data. In addition to extending our previous work on global flows and digital globalization, this report builds on a multiyear body of research by MGI on topics that include manufacturing, corporate competition, global consumption trends, technology, and automation as well as economic and labor market trends in specific regions of the world. This research was led by Susan Lund, an MGI partner based in Washington, DC; James Manyika, MGI’s chairman, based in San Francisco; Jonathan Woetzel, an MGI director based in Shanghai; Jacques Bughin, an MGI director based in Brussels; Mekala Krishnan, an MGI senior fellow based in Boston; and Jeongmin Seong, an MGI senior fellow based in Shanghai. The project team, led by Mac Muir, included Colin Britton, Joana Carreiro, Diana Goldshtein, Rensyn Hooi, Sophie Jewsbury, Sue Jia, Prakriti Mishra, Carlos Molina, Khalid Nadiri, Simisola Oyesanya, Jose Maria Quiros, and Saurav Tripathy. We are also grateful to MGI partner Sree Ramaswamy for his thoughtful comments on the manuscript and to Dileep Birur, Jeffrey Condon, Badri Gopalakrishnan, Vivien Singer, and Soyoko Umeno of McKinsey’s Economics Research team. Our academic advisers challenged our thinking and added new insights. We extend sincere thanks to Matthew J. Slaughter, the Paul Danos Dean of the Tuck School of Business and the Earl C. Daum 1924 Professor of International Business at Dartmouth; Michael Spence, Nobel laureate and William R. Berkley Professor in Economics and Business at the NYU Stern School of Business; and Laura Tyson, distinguished professor at the Haas School of Business, University of California, Berkeley. For their invaluable discussions and insights, many thanks go to: Richard Baldwin of the Graduate Institute, Geneva; Carol Corrado of the Conference Board; Jonathan Haskel of the Imperial College Business School; Michael Mandel of the Progressive Policy Institute; Sebastien Miroudot of the OECD; Hal Varian of Google; Stian Westlake of Nesta; and Wilkie Wou of Esquel. We are very grateful for the collaboration and discussions we had with Michael Mann, Kristy Howell, James Fetzner, and Ryan Noonan of the Bureau of Economic * See Global flows in a digital age: How trade, finance, people, and data connect the world economy, McKinsey Global Institute, April 2014, and Digital globalization: The new era of global flows, McKinsey Global Institute, February 2016. Analysis; and with Caroline Freund, Aaditya Mattoo, and Daria Taglioni of the World Bank Group and Chris Papageorgiou of the IMF. This project benefited immensely from the industry expertise of many McKinsey colleagues. We thank Wouter Aghina, Knut Alicke, Karla Arias, Munmun Baishya, Urs Binggeli, Adam Bird, Pascal Bornet, Jörg Bromberger, Alexander Brotschi, Charles Carcenac, Aarav Chavda, Hiren Chheda, Michael Chui, Alain Cohen, Tim Ecker, Hauke Engel, Enrico Furnari, Katy George, Madhav Goparaju, Ezra Greenberg, Jonathan Harris, Saskia Hedrich, Matt Higginson, Martin Hirt, Forest Hou, Rahil Jogani, Anuj Kadyan, Greg Kelly, Tim Koller, Brian Ledbetter, Richard Lee, Ying Li, Randy Lim, Anna Littmann, David Mendelsohn, Mehdi Miremadi, Detlev Mohr, Timo Möller, Thomas Morel, Rachel Moss, Florian Neuhaus, Jesse Noffsinger, Alpesh Patel, Lucy Pérez, Grant Riewe, Ingmar Ritzenhofen, Kimberly Rubenstein, David Sayah, Dennis Schwedhelm, Bram Smeets, Eugéne Smit, Jaron Stoffels, Jonathan Tilley, Yury Troshchenko, Michel Van Hoey, Arthur Wang, Nina Wittkamp, Tobias Wölfel, Katherine Wolosz, Ting Wu, and Josie Zhou. This report was produced by MGI executive editor Lisa Renaud, editorial production manager Julie Philpot, and senior graphic designers Marisa Carder and Patrick White. We also thank our colleagues Tim Beacom, Nienke Beuwer, Cathy Gui, Deadra Henderson, Richard Johnson, Lauren Meling, Rebeca Robboy, and Margo Shimasaki for their valuable contributions and support. This report contributes to MGI’s mission to help business and policy leaders understand the forces transforming the global economy and prepare for the next wave of growth. As with all MGI research, this work is independent, reflects our own views, and has not been commissioned by any business, government, or other institution. We welcome your comments on the research at [email protected]. Jacques Bughin Director, McKinsey Global Institute Senior Partner, McKinsey & Company Brussels James Manyika Director and Chairman, McKinsey Global Institute Senior Partner, McKinsey & Company San Francisco Jonathan Woetzel Director, McKinsey Global Institute Senior Partner, McKinsey & Company Shanghai January 2019 © Moodboard/Brand X Pictures/Getty Images CONTENTS In brief Page vi Executive summary Page 1 1. Moving parts: The evolution of global value chains Page 25 2. A new lens for valuing trade in services Page 41 3. Shifting global demand and the new China effect Page 57 4. The next wave of technologies in global value chains Page 71 5. How companies are responding to value chain disruption Page 91 6. The road ahead for countries and workers Page 103 Appendix: Technical notes Page 117 Bibliography Page 127 IN BRIEF GLOBALIZATION IN TRANSITION: THE FUTURE OF TRADE AND VALUE CHAINS Although trade tensions dominate the headlines, deeper China and other developing countries are consuming changes in the nature of globalization have gone largely more of what they produce and exporting a smaller unnoticed. We analyze 23 industry value chains spanning share. Second, emerging economies are building 43 countries to understand how trade, production, and more comprehensive domestic supply chains, participation changed from 1995
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