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Over the past 40 years, our world has become ever more interconnected. But an unsettling cluster of turbulent events—from the pandemic to rising geopolitical tensions and Russia’s invasion of Ukraine—has prompted speculation that the world is on a deglobalising trajectory.
The reality is more nuanced. New McKinsey Global Institute research suggests that global integration is evolving rather than retreating, and that global interconnections have proved remarkably resilient in the face of successive shocks. Indeed, they have helped economies and businesses to be more resilient.
Every region imports more than 25% of at least one important type of resource or manufactured good that it needs, and often much more.
To understand where we may be headed, we need to have a good understanding of where we are now. Using OECD data for trade in value added, we took a three-decade view tracing the evolution of global value chains over time. This reveals a deeply interconnected world. Compared with the 1990s, when global value chains emerged due to trade liberalisation and technological progress, the world today is more intensely connected. More than 20% of all the value consumed in a given country originates from outside its borders, and this is over 35% in the case of goods and resources. Around two-thirds of cross-border flows cross regional boundaries.
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After decades of building connections, these flows of value reveal that no major region in the world is close to being self-sufficient. Every region imports more than 25% of at least one important type of resource or manufactured good that it needs, and often much more. Among many other interdependencies, North America relies on basic metals and electronics from Asia–Pacific, while Asia–Pacific relies on Europe for pharmaceuticals, the Middle East for energy and Latin America for key crops. Europe relies on flows for more than 50% of its energy and mineral needs. Sub-Saharan Africa relies on flows to meet well over 50% of its electronics consumption and around 20% of key crops.
Clearly interconnections offer a hedge against turbulence, but they also create interdependency.
Of course, patterns of global integration can shift, and are already doing so. We highlight two key changes.
First, over the past decade trade of goods has stabilised while flows associated with knowledge and know-how have picked up the baton. Flows of services, international students and intellectual property (IP) grew about twice as fast as goods flows in 2010–19.
Despite the deep disruption triggered by the COVID-19 pandemic, most global flows continued to grow or even accelerated in 2020 and 2021. And the resilience of flows of intangibles (such as IP and data), trade and capital was essential to keeping companies and economies whirring. Data flows enabled the unprecedented shift to remote working, for instance. Asian supply chains were able to bridge the drop in output of Western supply chains in 2020 and 2021.
Clearly interconnections offer a hedge against turbulence, but they also create interdependency. This brings us to a second key change. Interdependency has increasingly come into focus against a background of rising global tension and unpredictable stresses on supply chains. Increasingly, policy makers and companies are endeavoring to build additional resilience. These initiatives are especially visible in the case of trade corridors that involve products that originate only in a few places—so-called concentration. The fear that these flows are both hard to replace at short notice and potentially vulnerable to disruption is leading to a wave of debate about the merits of such concentration.
MGI analysis of about 6,000 globally traded products suggests that products with concentrated origins are found in every sector and region and at every stage of the production process. Minerals stand out, where Australia and Chile contribute more than 75% of lithium; the Democratic Republic of Congo extracts 69% of the world’s cobalt supply. In electronics and textiles, China supplies over half of products most exposed to concentration risks.
Where policy can create new incentives, shifts could accelerate in some value chains regarded as having strategic importance.
To address these interdependencies, companies are having to debate the merits of decoupling, diversifying and doubling down, all in the context of policy maker incentives.
New hubs in electronics and textiles have already started emerging. Services value chains still have considerable scope to further liberalise services trade, and continued advances in technology may enable more seamless digital services trade, including telemigration.
As a result, it is likely that value chains will reconfigure. However, our analysis of value added flows suggests this will likely be gradual. In the past 25 years, individual countries gained (or lost) no more than 2% of export share a year (annualised), and value chains cumulatively shifted by about 10% to 20% per decade. But where policy can create new incentives, shifts could accelerate in some value chains regarded as having strategic importance. Recent initiatives by China, Japan, South Korea and the United States to build domestic semiconductor production is one example.
Innovation is another diversification option to boost resilience. Electric vehicle manufacturers are exploring technologies that use less or no cobalt. One major chemical multinational has developed a new catalyst technology that partly substitutes palladium, which has been in short supply, with platinum.
There are no simple solutions, but these approaches are a good starting point to reimagine our global connections instead of retreating from them.