The new globalization is measured not by the movement of shipping containers, but by the flows of ones and zeroes
Like voices in an echo chamber, many commentators appear increasingly concerned that the long era of globalization, and the prosperity that it engendered, are coming to an inglorious end. To us, such concerns are akin to those of a hypothetical observer in the year 2000 looking at declining sales of camera films and bemoaning the end of photography. Rather than fading away, globalization is morphing – from connectedness via atoms to that via bits.
Going back to first principles, globalization refers to connectedness among nations. This is built in many ways: trade in physical goods, trade in services, cross-border ownership of assets, movement of people, scientific collaboration, diffusion of ideas, sharing of design blueprints, or even simple communication. What’s happening today – and has been going on for the last 30 years – is the phasing out of the old globalization, which rested primarily on trade in physical goods. In its place, we are witness to the rapid rise of a new and more powerful globalization, the core pillars of which are flows of data, digital services, and know-how.
The shift from atoms to bits
The slowdown in merchandise trade long predates the US-China trade war and the Covid-19 pandemic, and is being driven by a number of irreversible factors. Merchandise exports peaked at 25.4% of world GDP in 2008 and have been slowly but steadily declining since then, to 22.5% in 2023 (Figure 1).
Analyzed differently, merchandise trade has actually been a declining factor in the global economy for the last 25 years. In the mid-1990s, merchandise trade grew almost three times as fast as world GDP. Ten years later, it grew only one time as fast. By 2015-2020, the ratio had fallen to half and continued its downward slide (Figure 2).
A number of factors are propelling the decline of trade in physical goods.
1. The commodities boom has come to an end. China is past the point of a hyper buildup of infrastructure. Given the shale revolution, the US will never be the oil and gas importer it used to be. Plus, renewable energy is now starting to substitute for fossil fuels. In 2008, trade in primary commodities was 8% of GDP. By 2019, it had dropped to 6%. It has continued declining since then.
2. The rise of wages in China and other emerging economies, coupled with growing automation, is reducing the importance of labor cost arbitrage.
3. The rise of e-commerce and the resulting push for quick deliveries and cost efficiencies is resulting in a shift from long supply chains to shorter ones. This means more regional or local production, rather than imports from farther away.
4. The pandemic and growing tensions between China and the US have led political leaders to place far greater emphasis on reducing supply chain risks and avoiding over-dependence on foreign suppliers for critical goods.
All of these trends appear secular and are unlikely to reverse.
An accelerating trend
The data on merchandise trade tells one story. Looking through a multidimensional lens, however, reveals that globalization is not only strong, but becoming stronger. As Figure 1 shows, services exports grew from 5% of world GDP in 2000, to 7.5% by 2023. The stock of foreign direct investment has grown even more rapidly – from about 10% of world GDP in 1990, to over 45% by 2023. Even by many of the traditional measures, one can hardly view the current situation as the end of globalization.
The most interesting and powerful development, however, is the morphing of globalization from connectedness via atoms to that via bits. Exports of digital services are growing rapidly, from 5.3% of all services in 2000, to 14.6% in 2023 (Figure 3). This is particularly remarkable since, as we saw in Figure 1, worldwide exports of all types of services are growing much faster than either merchandise exports or GDP.
Since large chunks of digital services are free – think of Google search, Facebook posts, YouTube videos, messaging platforms such as WhatsApp and WeChat, and many videogames – it’s clear that cross-border flows of digital services are in fact much larger than these figures suggest. Data from International Telecommunications Union indicate that international bandwidth usage is growing at over 25% annually.
The multifaceted nature of digital globalization
The new globalization manifests itself in a number of different ways.
First, it is evident in the rise of the global clouds that serve as the foundational platforms for all other types of digital connectivity. On a global basis, the total revenue of cloud services is growing at over 15% a year – and Gartner forecasts that growth will be even faster over the next three years. The biggest cloud services – Amazon, Microsoft, Google and IBM – are all global, with a combined market share above 60%.
Second, the biggest multinational corporations of the new era are companies such as Nvidia, Apple, Microsoft, Amazon, Google, Facebook, Alibaba and Tencent, all of whom are either digital enablers or purely digital companies. TikTok, a service of the Chinese company Bytedance, is just the latest example of a digital global enterprise.
Third, many products that historically were purely physical are now becoming digitally connected. A wind turbine, a Tesla car, an iPhone, even a connected Nike sneaker are not just physical goods that require global supply chains. When the physical product is purchased, installed, and in use, digital services ride on top of the sensors and software embedded in these products. These digital services are produced and delivered globally, and account for a greater share of the economic value created by the product.
Fourth, consumers are spending a greater share of their money on products that are purely digital and are purchased and consumed via streaming, mostly on a cross-border basis. As examples, look at movies, music and videogames. Every time someone in India watches Squid Game or a Taylor Swift video, it represents an instance of cross-border flows of data.
Fifth, cross-border collaboration is growing rapidly among both scholars and multinational corporations’ R&D units. According to a recent Brookings report, the vast majority of US patents with at least one co-inventor in China or India are the result of cross-border collaboration. Even for US-based inventors, the share of patents with a non-US co-inventor doubled from 5.9% in 2000, to 11.8% in 2017. The Covid pandemic added further impetus to the ongoing trend towards collaborative science across borders. In 2020, there were over 100 different vaccine development efforts, most involving cross-border collaboration.
Sixth, as global supply chains shrink, manufacturing is increasingly becoming local-for-local or regional-for-regional. This has always been true for fast-moving consumer goods, such as shampoos, detergents, or baby diapers. However, it’s now also becoming true of many more products. Take Tesla, which runs gigafactories in Shanghai and Berlin, in addition to those in the US. Tesla’s manufacturing operations are becoming more local-for-local. However, algorithms, digital blueprints, factory designs, manufacturing technologies and best practices continue to flow across borders.
These are still the early days in the mass adoption of additive manufacturing in the form of 3D printing. However, the trend line is very clear. As additive manufacturing becomes more common, the flow of atoms will become more local and the flow of bits and bytes more global.
Last, but no less important, look at the globalization of ideas. Every scientist working on an AI algorithm is scouting the world for the latest ideas on which to build his or her work. Budding tech entrepreneurs everywhere in the world routinely track the types of ventures that are launched and funded in Silicon Valley. It’s often a matter of weeks before the idea gets replicated far from its country of origin. Consider also online learning platforms, such as Coursera and EdX. The moment a professor anywhere in the world develops a new course on these platforms, it becomes available to viewers worldwide.
The prospects for Asia’s powerhouses
The ongoing transformation of global trade creates differing prospects for China and India.
As the world’s preeminent manufacturing power, the current shift makes China’s reliance on merchandise exports unsustainable. It is difficult to imagine that the major importing countries – notably the US, Europe, and India – would choose to commit economic suicide. As China’s export machine slows down, it is likely to add to the economic challenges already facing the country.
In contrast, India appears well-positioned to emerge as one of the world’s largest digital hubs. India enjoys several durable advantages: a large pool of highly educated professionals, especially in STEM fields; fluency in the English language; relatively lower wages compared to the rich countries; huge investments by Amazon Web Services (AWS), Microsoft and Google in data centers; and high-speed, increasingly inexpensive, satellite communication channels.
Last but not least, geopolitically, India is viewed by the world’s rich economies as an ally. Hundreds of the world’s multinationals (including JP Morgan Chase, Walmart, Microsoft, Google, Vodafone, Deutsche Bank – you name it) have built global capability centers in India to serve the digital needs of their globally dispersed clients and internal operations. As just one example, take JP Morgan Chase, the world’s most valuable bank. It employs 316,000 people worldwide. Of these, 55,000 are based in India – almost all of them serving operations and customers outside India.
A new playbook for multinationals
The new era will continue to offer robust opportunities to multinationals. Capital markets bestow greater rewards on companies that deliver faster growth. For even the biggest companies from the biggest economies, 75-80% of market opportunities reside outside the home region. To grow, they must go where the markets are. Further, in an increasingly technology-intensive economy, global scale will become even more important for competitive advantage.
This is why, in industry after industry, we see rising global concentration. The winning multinationals of tomorrow will be those companies that have a global footprint and are managed as tightly-integrated global knowledge networks, even when they produce in-region, for-region. Product and process technologies, as well as other types of know-how, will become even more important sources of global advantage.
The new era also offers abundant opportunities to young companies. Global cloud services, automated and excellent translation systems, inexpensive and high-fidelity video communication platforms, and global payment services such as PayPal (and, in future, perhaps Bitcoin) are becoming ubiquitous enablers of born-global companies. This is why venture capital is now a global industry, and the list of unicorns – that is, startups valued at over $1 billion – exceeds 500. For every startup, going global early helps build scale, making it an important consideration for becoming a unicorn.
Economic theory tells us that, because innovation boosts productivity, it is the single biggest contributor to growth. One can think of the old globalization as nations trading in fish. In contrast, the new globalization refers to diffusion of ideas about how to fish. Obviously, both types help boost productivity. However, if we had to choose, we should pick the new over the old any day.
The last thing we should do is bemoan the decline of trade in physical goods and say that globalization is dead. What is slowing is the ‘old’ globalization of trade in physical goods. To paraphrase the old saying about monarchs: “The old globalization is dead. Long live the new digital globalization.”
Anil Gupta is the Michael Dingman Chair and professor of strategy and globalization at the Smith School of Business, University of Maryland. Haiyan Wang is managing partner, China India Institute
