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The New Upheaval in the World Economy

By John Zarocostas - The Geneva Observer

January 28, 2021


A new report by McKinsey, the business consultancy, entitled “The next normal arrives: Trends that define 2021—and beyond,” predicts that up to a phenomenal 25 percent of global trade in goods could shift by 2025 as a result of supply chain rebalance and shift. The deadliest pandemic in over a century has helpedexpedite this shift by the supply shortages and bottlenecks of vital materials including PPEs, medicines, critical parts and components, and electronics, and now shortages in vaccine production capacity and supplies.

The G|O asked Robert Koopman, Chief Economist and Director of Economic Research and Statistics at the World Trade Organization, to give us his perspectives on the changes underway and how they may impact global trade. Before his WTO appointment in November 2014, Mr. Koopman served as Director of Operations and Chief Operating Officer for the United States International Trade Commission. He holds a Ph.D. in economics from Boston College and is also an Adjunct Professor of Economics at the Graduate Institute, Geneva.

A new report by McKinsey, the business consultancy, says that as a result of supply chain rebalance and shift—accelerated by the complications witnessed during the ongoing COVID-19 pandemic, as much as a quarter of goods exports, or $4.5 trillion, could shift by 2025. Which export sectors may be more affected by trade diversion in this initial period?

We have seen supply chain realignments for a number of years, even prior to the pandemic. Those sectors that have been shifting to new countries have typically been ones that can be taken up by the capability levels of the new countries. The pandemic has led to some companies looking for multiple suppliers of parts and components, but again, driven by those parts and components where other countries have those capabilities. Given the way global trade data is harmonized at fairly aggregate sectoral levels, it is hard to determine specifically those parts and components whose sourcing is shifting to other countries.

The study clarifies multinationals are not going to ship all or most of their production back to their home markets (reshore) and will take advantage of regional expertise to tap fast-growing consumer markets. How much will this shift intensify regional and intra-regional competition to attract these manufacturing entities?

Thus far, global data trends do not support major shifts to onshoring. In the trade data we see substantial trade diversion to other countries, and perhaps some benefits to “nearshore” countries.

How much will these rapid developments put the WTO's poorest members at a disadvantage and can Aid for Trade by the WTO, multilateral agencies, and bilateral donors, help?

It appears that a number of poorer countries have been benefiting from supply chain diversification—even prior to the health crisis. The WTO’s poorest members often face challenges integrating into global supply chains related mainly to how modern businesses are run—the need for good data connections, good logistics and trade infrastructure, and institutional arrangements that facilitate cross border commerce. A number are clearly making progress, but more remains to be done and WTO programs such as Aid for Trade can help.

Aside from the pandemic complications and concerns about security and resiliency, how much of this shift is likely to also be driven by rapid technological changes in manufacturing that are also narrowing the cost differential among developed countries and many emerging developing economies? McKinsey highlights, for example, that companies that adopt industry 4.0 principles (i.e., the application of data, analytics, human-machine interaction, advanced robotics, and 3-D printing ) can offset half of the labor-cost differential between China and the United States.

Technological change is playing a big role in changing the economic relationship between sectors withincountries, but also in trade between countries. Labor costs have been rising rapidly in China for some time, which has driven some of the offshoring of Chinese production to nearby countries. These trends will continue. And labor costs are only a part of the equation. Finally, technological changes tend to affect all countries, not just one or a few. How they sort out depends on many factors.