Globalization is not over yet. A new age of service exports should seduce investors.
Illustration by Rose Wong
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About the author: Christopher Clever is Chief Global Strategist and Director of the Barings Investment Institute and a former senior economic official at the US Treasury Department and the White House.
Even as pandemic restrictions ease, the world still feels like it’s shutting down. The promise of globalization – that heady 1990s vision of a more integrated world economy, sustained by increasing flows of goods, money and people – is a distant memory. Global trade today seems more defined by tariffs, financial sanctions and Covid test results.
But where politics and business can curb gains from larger and more open markets, technological advances have rather hastened the beginning of a new chapter. Markets look deeply uncertain for the next few months amid inflationary pressures, coronavirus variants and a possible war in Ukraine. A decade from now, however, we will all regret that we have not fully appreciated the dawning age of global services.
In most countries, services account for only 10% to 20% of total exports. For a postcard destination like Thailand, tourism contributes 20% to gross domestic product. For the US, tourism and financial services exports account for 1% and 0.6% of GDP, respectively. Economists like to interrupt overzealous globalists with a sarcastic reminder that much economic activity is personal and local. “You can’t export haircuts!” is a favorite line.
But when surgical instruments and mining equipment from many time zones can be expertly handled, the lines between goods and services become blurred. The opportunities offered to us to outwit geography have multiplied as business models increasingly rely on the combined tools of remote sensors, cheap data storage, cellular networks, and analytics algorithms.
What we call the Internet of Things is indeed driving a new age of global services. Jet engine manufacturers now monitor their products in real time and provide detailed reports on how to improve efficiency and schedule maintenance appointments. Excavators are closely tracked so drivers can be trained to operate them more safely and efficiently—unless they don’t need a driver at all.
In fact, if you can now shop online for new glasses, why couldn’t a remote controlled trimmer give you a haircut? Add real-time language translation algorithms and your stylist could be in France. Add in a 3D printer and one day they might even sell you the latest hair product.
Global trade has expanded for most of the past two centuries, shaped by economic opportunity, transportation technology, and of course politics.
The most recent upswing came in the early 1990s with China emerging from decades of isolation, the collapse of the Soviet Union and the opening of emerging economies from India to Brazil. The gains from this wave of globalization naturally slowed as competition began to erode gains. Wage differentials narrowed, transportation costs stopped falling, and multinational companies faced increasing threats from more nimble local competitors.
As is well known, political pressure has also conspired against further integration. The 2008-09 financial crisis sparked outrage at rising inequality, which was blamed on Wall Street excesses and global hyperbole. The manufacturing job losses attributed to China’s rise eventually stalled in a U.S. trade deal with key Pacific economies. President Donald Trump’s tariffs on Chinese imports have been maintained by President Joe Biden while the World Trade Organization nervously monitors the level of protectionism.
Climate concerns pose new policy challenges for trade, as plans for carbon taxes will increase the cost of producing and transporting goods. Europeans insist their proposed carbon border adjustment mechanism is not protectionist, but it will obviously increase the costs of supply chains that extend to zero-carbon countries. Meanwhile, a key lesson from the pandemic seems to be that inventories can’t run so lean.
None of this means borders will be closed, but there are strong headwinds to further growth that may at least lead to more regionalization of supply chains. The Trump administration’s ratification of the US-Mexico-Canada agreement will boost trade flows in North America. The Regional Comprehensive Economic Partnership represents an attempt to do something similar, albeit less ambitious, in Asia.
The investment implications of these trends are already in sight. Companies that benefit from more regional trade flows and shorter supply chains appear to be well positioned. Innovators who can offer clean delivery and logistics services will also benefit.
But even as global flows of goods stabilize, cross-border data flows continue to explode, even amid intensifying debates about how to stay secure and protect privacy. You don’t have to delve into a breathless vision of the metaverse to envision how traditional services will increasingly move across borders in ways we never thought possible. Education, financial advice and design are in the early stages of international experimentation. If your business has seamlessly transitioned to remote operations during the pandemic, you should look closely in the mirror and ask yourself why a competitor on the other side of the world isn’t sneaking up on you.
It will be an exciting and disruptive next chapter. And it won’t be long before your far away “barber” knows where to part your hair.
Opinions like this one are written by writers outside of the newsrooms at Barron’s and MarketWatch. They reflect the perspective and opinion of the authors. Send suggested comments and other feedback to [email protected].
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