HAMISH MCRAE: Next great change in globalisation will be from trading goods to trading services – it is a seismic shift in Britain’s favour
The next great change in globalisation will be from trading goods to trading services – from moving physical objects around to moving the knowledge to make those objects and the funds to support the local production.
It is one of those seismic shifts in direction the world economy takes every generation, and this one has been running for about a decade. And it is one that benefits the UK, as the world’s second-largest exporter of services after the US. That is why the initiative sketched on page 121 matters so much.
To see why take a simple measure. Trade in goods has not risen as a proportion of world output over the past ten years – it is stuck at around 20 per cent of global GDP. Trade in services, while smaller, has grown steadily. In 2010, it accounted for less than 4 per cent of global GDP; in 2019 it was 7 per cent.
New direction: Increased trade in services benefits the UK, as the world’s second-largest exporter of services after the US
What has happened is that after the great surge in physical trade as China entered world markets from 2000 onwards, there has been more and more resistance. That is partly politics. Donald Trump’s push against China looks like continuing under Joe Biden. But it is also economics. The cost advantage of making something in China and then shipping it to the US or Europe has narrowed as Chinese and other emerging market pay rates have risen. So manufacturing has started to shift closer to the market, as expressed by that awkward word ‘reshoring’ in contrast to ‘offshoring’.
Finally, more nebulous, there is consumer choice. People, often for environmental reasons, have started to prefer local produce. Think of the concern about fast-fashion, or about ‘food miles’.
But if goods are to be made locally someone has to invest in the plant, and pass over the knowhow – the so-called ‘intellectual property’ – of how to do so. So financial flows and exchange of knowledge will go on growing, and that will take globalisation in a quite different direction.
The potential is huge. Roughly two-thirds of global output is in services rather than goods. In developed countries such as the UK, the proportion is even higher, some 80 per cent.
But trade is much more restricted. Some services are naturally local and will remain so: a haircut, for example. But there are many areas where the barriers to cross-border trade services hold back demand.
Take medical services, one of the fastest-growing of all. American doctors cannot practise in the UK or Europe without qualifying locally, and vice versa. Take education. If a university wants to hire a US professor it has to show it cannot find a Briton who could do the job – though I assume that the new visa arrangements the UK is introducing will fix that problem.
Or take finance. Look at the way the EU is using regulation to stop London selling financial services to European companies, or forcing some UK banks to close the accounts of Britons living abroad.
Or take entertainment, another area where English-speaking countries seem to have a competitive advantage. There are all sorts of barriers curbing entertainers operating in foreign countries, a new problem for the UK music industry in Europe post-Brexit. You can get round the barriers to trade in services, just as you can get round the barriers to trade in goods. But the effect is that the cost to the consumer rises.
So we should all welcome anything that makes global trade in services easier. It is going to go on growing solidly anyway, faster, I am sure, than trade in goods. But giving services trade new emphasis is a great mission for the World Trade Organization, now with a new director-general, Ngozi Okonjo-Iweala. And it is a project where the two biggest service exporters, the US and UK, can cooperate for the good of all.
Thinking of new barriers to trade, I am sure I am not alone in being outraged by the blocking of vaccine exports from Europe to Australia, after a phone call between Mario Draghi, the new Italian Prime Minister and Ursula von der Leyen at the…