Global flows: The ties that bind in an interconnected world

Ours is an interdependent world, connected by global flows of goods, services, capital, people, data, and ideas. Global value chains have been built on these flows, creating a more prosperous world. However, in light of the pandemic, Russia’s invasion of Ukraine, and years of rising tensions between the United States and China, some have speculated that the world is already deglobalizing. New MGI analysis finds a more nuanced reality. The world remains deeply interconnected, and flows have proved remarkably resilient during the most recent turbulence. Furthermore, no region is self-sufficient. The challenge therefore is to harness the benefits of interconnection while managing the risks and downsides of dependency—particularly where products are concentrated in their places of origin.

This new research paper offers a view of the flows driving global integration and an assessment of interdependency and concentration risks and the important role of multinational corporations. The research is based on a comprehensive assessment of trade (30 global value chains spanning resources, manufactured goods, and services), capital, people, and intangibles flows as well as an analysis of about 6,000 globally traded products.

Flows of trade, people, capital, and data bind the world together, as MGI has documented since the early 2010s. Over the past decade, newer flows linked to knowledge and know-how have come to the fore.

Growth in global flows is now being driven by intangibles, services, and talent. They have picked up the baton from goods trade, whose growth as a share of the global economy stabilized around 2008 after 30 years of rapid expansion. Flows of services, international students, and intellectual property grew about twice as fast as goods flows in 2010–19. Within services, flows of knowledge-intensive services—including professional services, government services, IT services, and telecommunications—are growing the fastest. Data flows grew at nearly 50 percent annually (Exhibit 1).

1

Despite the disruption caused by the COVID-19 pandemic, most global flows continued to grow—or even accelerated—in 2020 and 2021. Overall, flows of intangibles, trade, and capital increased, and their relative resilience was essential to navigating the turmoil of the pandemic. Flows of data reached all-time highs and, crucially, enabled remote working and the continued operation of businesses at a time when travel was largely impossible. Trade in manufactured goods enabled regions to retain consumption while navigating disruptions in local production bases. For example, Asian supply chains were able to bridge the drop in output of Western supply chains in 2020. Trade in manufactured goods reached a record high in 2021 despite new disruptions to supply chains even as growing consumer spending placed more demands on them. Indeed, demand for goods hit all-time highs as consumers shifted spending toward goods and away from services during lockdowns and social distancing. In 2022, trade in goods is projected to continue to grow faster than GDP despite new disruptions.

Every region has been importing 25 percent or more (in value-added terms) of at least one important type of resource or manufactured good that it needs, and often much more (Exhibit 2).

2

• Asia–Pacific, including China, is the leading global manufacturing exporter overall and the largest supplier of electronics, but it imports more than 25 percent of its energy resource needs as well as critical intermediate goods. Energy resources from the Middle East and Russia power China and India. China also imports more than 25 percent of its mineral needs; the largest minerals corridors in the world run from Australia, Brazil, Chile, and South Africa to provide the inputs for China’s manufacturing hub. Europe and North America provide much of the advanced machinery and the intangible know-how that supports production of advanced electronics such as semiconductors.
• Europe 30 is also a strong manufacturing region but imports more than 50 percent of its energy resource needs. Prior to 2022, Europe 30’s largest source of energy resource imports was Russia. Since Russia’s invasion of Ukraine in early 2022, European economies have been attempting to diversify sources of natural gas away from Russia. Europe also depends on others for specific inputs to its manufacturing. For instance, while Europe 30 is a significant net exporter of pharmaceuticals, it relies on Asia–Pacific for crucial inputs of active pharmaceutical ingredients.
• Resource-rich regions, namely Eastern Europe and Central Asia, Latin America, the Middle East and North Africa (MENA), and Sub-Saharan Africa, tend to be net importers of manufactured goods and services. These regions import manufactured goods roughly equally from Asia–Pacific and Europe 30. Asia–Pacific is the largest partner of these regions for flows of electronics, textiles, and basic metals, while Europe 30 is the largest partner for pharmaceuticals and machinery. Resource-rich regions are often also net importers of some types of resources. For example, MENA is the largest net exporter of energy resources, but it depends on other regions for more than 60 percent of the key crops it needs for food. Prior to the invasion of Ukraine by Russia, large corridors flowed into the region from these two countries. In Latin America, Brazil and Argentina are two of the world’s largest grain exporters, but they rely on flows of fertilizers from the rest of the world. Notably, they have been sourcing more than 50 percent of their potash imports from Russia and Belarus.
• North America is a net importer of both manufactured goods and mineral resources; Asia–Pacific is its main partner for both. North America imports about 15 percent of its electronics consumption needs, and Asia–Pacific accounts for about 85 percent of these imports, roughly split between China and other economies in the region. North America also imports about 10 percent of its mineral consumption, again with Asia–Pacific as its largest partner. North America’s reliance on imports of minerals is even more pronounced when looking at a granular level. For example, the United States imports more than 70 percent of its consumption needs for more than 30 mineral commodities.

Concentration is a two-sided coin. Concentration often reflects specialization that enables efficiency gains. However, interruption of concentrated trade flows can be particularly disruptive when they are harder to replace at short notice.

MGI analysis of about 6,000 globally traded products (including resources and manufactured goods) suggests that products whose origins are concentrated in only a relatively few geographies are found in every sector and region and at every stage of the production process. This research defines concentrated products as those in the top quintile of concentration where up to three countries account for almost all supply (Exhibit 3).¹This research defines concentrated products as those in the top quintile of export concentration as measured by the 2019 Herfindahl-Hirschman index (HHI), a common measure of market concentration. The top quintile of global export concentration is an HHI of 3,170. This is roughly equivalent to three countries accounting for one-third of exports of a given product.

3

Some products are supplied by only a few places around the world—“global concentration hotspots.” These account for a small but important share of global trade—less than 10 percent of global traded value—and originate in all regions and sectors.

China exports more than 60 percent of the most concentrated products in the electronics and textiles sectors. Asia–Pacific contributes disproportionately to exports of concentrated minerals. Lithium, rare earths, and graphite are particularly concentrated, largely extracted from three or fewer countries and mostly refined in a single country: China. Latin America and North America account for the majority of the most concentrated agricultural products, notably soybeans. The majority of concentrated medical and pharmaceutical products come from Europe.

Beyond these global hotspots, some countries and companies have concentrated dependency on only a few sources even in the case of products that are widely available around the world. Wheat is an example. Its production is fairly globally distributed, with the top three suppliers accounting for less than 45 percent of supply. However, for individual countries, flows are highly concentrated. Türkiye and Egypt imported more than 75 percent of their wheat from Ukraine and Russia prior to 2022, for instance.

To manage potential risks from concentration—arising at the global, country, or company level—economies and companies may pursue resilience measures. For some products, diversification of sources of origins may be possible, although it may involve substantial up-front investment, time, and, in some cases, higher operating costs. For many concentrated products, however, current availability will constrain supply in the short to medium term, suggesting that pronounced interdependencies are likely to continue to be a feature of the global economy in the foreseeable future (see sidebar, “Diversifying the footprint of modern minerals value chains requires major investment over time”).

Global value chains have long been dynamic but with gradual shifts in composition. In the past, individual countries gained (or lost) no more than two percentage points of export share a year (annualized), and value chains cumulatively shifted by about 10 to 20 percent per decade (Exhibit 4).

4

Between 1995 and 2008, the direction of change was almost uniformly toward less concentration and more interregional trade as truly global value chains were unleashed by trade liberalization and technological progress. After around 2008, patterns of trade flows diverged. Global value chains accounting for about 40 percent of trade flows, including mining, electronic equipment, and pharmaceuticals, reversed course, becoming more concentrated. The remaining nearly two-thirds either stabilized or continued to become less concentrated and more interregional, most notably those tied to many services, such as professional services.

Now new forces are emerging that could shape and accelerate the next evolution of some value chains, including semiconductors and pharmaceuticals. Spurred by considerations of national security, competitiveness, or resilience, many governments have signaled that they aim to influence the reconfiguration of some value chains. In the case of semiconductors, for instance, the United States, the European Union, South Korea, China, and Japan have all announced measures to bolster domestic value chains. Further moves to decouple technologies and restrict data flows could also influence value chains, especially those that are deemed critical to national strategic priorities.

Efforts to both boost resilience in sourcing and improve responsiveness to demand may shorten some supply chains, making them more regional. Manufactured goods value chains also will be influenced by increasing automation, the evolution of wages, and the development of new intangibles hubs. Services value chains, particularly for intermediate services, may deepen and expand. There is considerable scope for unbundling as more economies transition to services. Significant wage differentials between developed and emerging markets persist in services sectors. Considerable scope remains to further liberalize services trade—barriers to trade in most services are two or three orders of magnitude higher than those for goods. Continued advances in technology may enable more seamless digital services trade.

Significant shifts may not materialize in some value chains where the incentives and potential for relocation are lower, for instance when they are less concentrated, already highly regionalized, and highly capital-intensive. Any evolution that does play out may be slower and shaped largely by a rising share of demand from emerging markets. Examples could include food and beverages manufacturing.

Global flows are central to the functioning of economies and of businesses both large and small. Firms rely on the ability to sell in foreign markets, smooth-running global supply chains, and access to the capital, talent, and intangibles they require. Even the smallest firm can find new opportunities to expand its integration with the world, enabled by technological advances, new forms of cross-border finance, and regulation. Multinational corporations can have disproportionate influence on flows because they are the current center of the system. They account for about two-thirds of exports, and they are overrepresented in sectors where intangibles are the most relevant and where concentration is the most pronounced.

This puts them in the eye of the current storm. They are confronting an increasingly contested global order in which operating in one market can create significant risks in others. They have significant value at stake from ensuring that global flows are working well. The amount at risk depends on both the sector and the type of company, but is likely to be substantial for all. To give an example, should a typical manufacturing multinational in the automotive sector experience simultaneous shocks that prevent it from securing the global flows it needs, as much as 40 to 60 percent of its enterprise value could be at risk.

As the pivotal players in global flows, multinationals are in the pole position to shape the future in favor of growth and prosperity. They can consider action in three areas:

• Look for growth opportunities. Companies that remain heavily invested in global flows can find new growth opportunities. The upside is proportionately higher for multinationals but also exists for smaller firms. For knowledge-intensive multinationals, further engagement with new sources of intangibles flows and human capital can unlock deeper competitive advantage. In some cases, these flows can unlock new business models in sectors that were previously less driven by knowledge flows, thereby transforming goods into services business models.
• Build resilience of their own organizations. Firms can explore ways to strengthen the resilience of their organizations not only in having stable supply chains to access the inputs they need but also in their ability to operate in multiple foreign markets. On the former, transparency in supply chains and scenario planning can enable firms to understand potential areas of risk where diversification could be a priority. In some cases, diversification may not be feasible and firms might instead consider developing privileged supplier relationships, building strategic inventories, or both. In other cases, developing capabilities to redesign products to substitute required inputs may be the best protection against exposure to risk from disruption. Electric vehicle manufacturers, for instance, are increasingly shifting away from batteries based on cobalt and vertically integrating some sources of minerals. In serving foreign markets, localization of operations, innovation, data, and technology or even spin-offs may be required.
• Find opportunities to forge system-level resilience. Multinational corporations can use their central role in global flows to forge systemic resilience through public-private or private-sector partnerships that may enable systems to become more resilient than if companies were to act on their own. Smaller companies can consider acting in conjunction with trade associations or other groups. These partnerships can help prevent and respond to shocks.

To negotiate an era that may be more complex and challenging requires a deeper understanding of the full picture of global flows, their networks and evolution, and potential scenarios for the future. Looking at the entire range of global flows, it is clear that the world is not defaulting to deglobalization, but that global connections are reconfiguring. Firms that reimagine rather than retreat from interconnection can reshape value chains in ways that contribute to both growth and resilience.