We are now at the start of the fourth phase of globalization. To understand this, it is necessary to understand the new forces shaping the global economy.
The growth of digital is transforming global trade. Digital technologies are shaping global trade in three significant ways. First, they are altering productivity and competitiveness. By our estimation, the adoption of digital technology in manufacturing will increase output per worker by 30% and decrease labor costs by as much as 30% over the medium term in countries including South Korea, Germany, the US, and China. This means that companies will need to reconsider the decisions they made during the third phase of globalization about the location and design of their plants and supply chains. As the COO of a global industrial company told us, “Scale curves are flattening, and the cost advantage of low-cost labor evaporates if you calculate the total cost of ownership of shipping goods around the world from a low-cost factory.”
Adidas is already responding to these shifts: it recently announced that it is moving some of its production from China back to Germany because advances in robotics make it cost-effective to do so. In the medium term, Adidas plans to use this digital advantage to build factories in all major markets, thereby enabling faster delivery to customers.
As other companies follow suit, the shift will have a major effect on the trade of global goods—especially between developed economies and emerging markets, which was a hallmark of the third phase of globalization.
Second, while the trade in goods (which drove the earlier phases of globalization) is stagnating, the trade in global services—especially digitally enabled services—is growing. In 2014, services constituted 25% of total exports from OECD countries—up from 17% in 1980. This shift reflects the growing value of services in many industries, driven by the growth of digital technologies, which are blurring the boundary between products and services, as the leader of a global durables company told us. In aeronautics, the detection of problems in aircraft engines by remote digital sensing technology is transforming the economics of aircraft maintenance, reducing the need to station large teams of mechanics in all the airports a given aircraft visits.
Finally, the rapid growth of digital platforms has started to make national borders and traditional country-based business models redundant. Today, goods worth $700 billion are traded through Alibaba and Amazon—an amount that represents a compound annual growth rate of more than 33% since 2012.
In effect, these global market platforms and their associated supply and delivery systems are replacing the complex supply chains that were a common feature of the first three phases of globalization, making it much easier for even small companies
to compete in a global market. For example, a Chinese mobile-phone company entered India by leveraging one such platform, and it did so more quickly and with much less investment than one of its competitors did just a few years earlier. The future could well include a proposal from Jack Ma, the founder of Alibaba, for a global e-commerce platform that would enable small and midsize enterprises to reach out to customers and source from suppliers all over the world, thereby eliminating the need to set up independent supply chains.
The impact of digital technologies means that the fourth phase of globalization will not look the same as the earlier phases. For a start, there will be no new economic pole, because digital technologies are not dominated by one country (or a few countries) that can leverage their benefits. And whereas in past phases new technologies supplanted the old, digital technologies will be unlikely to replace mass and low-cost manufacturing altogether—at least in the foreseeable future. This is not only because of the lack of skilled workers such as robot programmers but also because of the political need to protect jobs through the introduction of stringent regulations that will slow the adoption of new technologies.
But although digitization will not supplant old technologies, it will transform competitive rules and supply chains for companies; and it will affect industries such as logistics and international banks that have built significant businesses funding global trade.
The decentralization of global governance is changing the rules of the game. A stable set of rules and regulations, established and governed by the G7 group of leading economies, was central to the old model of globalization, facilitating the movement of goods and services around the world. Now, however, the value of openness is being questioned, even among the G7 countries—as shown by the Brexit poll.
The creation in 1999 of a G20, which incorporates the large emerging-market countries, signaled a seismic shift in the global economic power structure. These new members are not at the same stages of economic development as the G7 countries, and they have very different economic structures (for example, state domination of their financial systems and a majority of family-run businesses) and philosophies (for example, an emphasis on state regulations, as opposed to market efficiency, in policy design). This means that achieving consensus on economic policies and rules of engagement for global financial and trade flows is challenging and complex.
Along with the shift in the global governance role from the G7 to the G20, some structural shifts are leading to the decentralization of financial and trade institutions and the undermining of the common rules of the game. On the trade front, the free trade regime, as governed by the World Trade Organization, is changing, with the development of regional and subregional trade agreements such as the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), which is under negotiation. Indeed, the number of active regional trade agreements has increased from 50 in 1995 to 280 today.
On the financial front, there are several newly powerful institutions dominated by China and some emerging-market countries, such as the Asian Infrastructure Investment Bank (AIIB) and the National Development Bank (NDB), each with a starting fund of $100 billion. The AIIB plans to lend $10 billion to $15 billion annually, an amount large enough to signal a shift in power away from institutions such as the Asian Development Bank, the World Bank, and the International Monetary Fund.
Moreover, the influence of individual governments on financial flows and competitive rules is increasing as a result of the direct acquisition of private companies, investments in sovereign wealth funds, and loans and subsidies for the development of high-priority domestic industries. The total value of sovereign wealth funds has more than doubled since 2008 (despite crashing oil prices), from $3 trillion to $7.2 trillion, and the share of state-owned enterprises (those in which governments have a majority stake) in the Fortune 500 increased from 9% in 2005 to 23% in 2014. Thus public capital has become as important as private capital.