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#153 The Future of Global Trade


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Although trade tensions dominate the headlines, deeper changes in the nature of globalization have one largely unnoticed. We analyze 23 industry value chains spanning 43 countries to understand how trade, production, and participation changed from 1995 to 2017. Grouping these value chains into six archetypes based on their trade intensity, input intensity, and country participation reveals diverging pathways. We see that globalization reached a turning point in the mid-2000s, although the changes
were obscured by the Great Recession. Among our key findings:
ƒƒ First, goods-producing value chains have become less trade-intensive. Output and trade both continue to grow in absolute terms, but a smaller share of the goods rolling off the world’s assembly lines is now traded across borders. Between 2007 and 2017, exports declined from 28.1 to 22.5 percent of gross output in goods-producing value chains.
ƒƒ Second, cross-border services are growing more than 60 percent faster than trade in goods, and they generate far more economic value than traditional trade statistics capture. We assess three uncounted aspects (the value added services contribute to exported goods, the intangibles companies send to foreign affiliates, and free digital services made available to global users). National statistics attribute 23 percent of all trade to services, but including these three channels would increase their share to more than half.
ƒƒ Third, less than 20 percent of goods trade is based on labor-cost arbitrage, and in many value chains, that share has been declining over the last decade. The fourth and related shift is that global value chains are becoming more knowledge-intensive and reliant on high-skill labor. Across all value chains, investment in intangible assets (such as R&D, brands, and IP) has more than doubled as a share of revenue, from 5.5 to  13.1 percent, since 2000.
ƒƒ Finally, goods-producing value chains (particularly automotive as well as computers and  electronics) are becoming more regionally concentrated, especially within Asia and Europe. Companies are increasingly establishing production in proximity to demand.
ƒƒ Three forces explain these changes in value chains. First, emerging markets’ share of global consumption has risen by roughly 50 percent over the past decade. China and other developing countries are consuming more of what they produce and exporting a smaller share. Second, emerging economies are building more comprehensive domestic supply chains, reducing their reliance on imported intermediate  inputs. Lower global trade intensity is a sign that these  countries are reaching the next stage of economic development. Finally, global value chains are being reshaped by cross-border data flows and new technologies, including digital platforms, the Internet of Things, and automation and AI. In some scenarios,  these technologies could further dampen goods trade  while boosting trade in services over the next decade.
ƒƒ Companies face more complex unknowns than ever before, making flexibility and resilience critical. With  the costs and the risks of global operations shifting,  companies need to decide where to compete along  the value chain, consider new service offerings,  and reassess their geographic footprint. Speed to mark e next-generation technologies on trade flows is unclear, but in some scenarios, they could dampen goods trade and further boost flows of services and data. As they diffuse through global value chains, they will create openings for new players and opportunities for incumbents to shift their business models. Different regions of the world may also be able to develop new competitive advantages.

The history of globalization can be seen as waves of “unbundling.”  The first wave came after the Industrial Revolution, when the introduction of steamships and railroads reduced the cost of moving goods. This changed the economics of buying things made halfway around the world. This trend continued through the 20th century. From 1930 to 2000, the price of shipping fell by approximately two-thirds. Production could now occur far from the final consumer.

The second great unbundling was the more recent ICT revolution, which made it possible for companies to disaggregate linear production processes—that is, breaking them into discrete steps and outsourcing some of those steps to external suppliers. Global value chains existed before the internet, but the internet helped to fuel further fragmentation and realignment. Many more countries began participating in all types of value chains, and networks of specialized suppliers and assembly plants sprang up worldwide.

During this state there will be widespread reduction in manufacturing employment in all advanced economies:

The reductions in manufacturing employment cannot be reversed, with the exception Germany that has meanwhile become an export leader in automobiles. There is no way how Italy, US, France, Japan and the UK can create the manufacturing and human capital that would reconstitute industrialization. 

The ICT revolution also paved the way for the explosive growth of cross-border data flows noted in progress of digital globalization. According to World Bank data, 46% of the world is online, up from 20%a decade ago. The number of cellular subscriptions worldwide now exceeds the planet’s population. From 2005 to 2017, the amount of cross-border bandwidth in use grew 148 times larger.  Some of the traffic being carried reflects companies interacting with their foreign operations, suppliers, and customers.

While ICT and the internet accelerated trade by reducing transaction costs, the next wave of technologies will have a more varied and complex effect:

1. Reducing transaction costs.  Some new technologies will smooth transportation   logistics, financing, and search and coordination—all of which enables increased trade in goods, services, commodities, and digital flows.
2. Altering production processes. Advanced robotics, AI, and analytics are the building blocks of a more automated and efficient form of digitized manufacturing—and because they substitute for labor, they may reduce the importance of wage differentials in location decisions. Additive manufacturing makes it possible to produce goods even closer to the end consumer; it also supports speed and customization.
3. Creating and transforming products.  From renewable energy and electric vehicles to music streaming, technology is transforming some existing products and services as well as creating entirely new ones.

Digital Platforms Create New Markets and Reduce Coordination Costs

The costs of transportation and logistics, financing, and search and coordination, as well as time in transit, are among the biggest barriers to trade. But digital platforms, logistics technologies, and data-processing technologies reduce these frictions. Digital platforms create new markets and reduce coordination costs. Digital platforms for e-commerce, social media, payments, travel, learning, and labor services connect buyers and sellers directly, lowering the costs of search and coordination   between buyers and sellers. 
E-commerce has already enabled significant cross-border flows by aggregating huge selections and making pricing and comparisons more transparent. It has also reduced the impact of distance on trade flows. Research projects that cross-border B2C e-commerce alone will grow to approximately $1 trillion by 2020. Cross-border B2B e-commerce is likely to be several times larger. 
Logistics technologies also continue to improve. The Internet of Things (IoT) can make delivery services more efficient by tracking shipments in real time, and AI can route trucks based on current road conditions. Automated document processing can speed goods through customs. At ports, autonomous vehicles can unload, stack, and reload containers faster and with fewer errors. Blockchain shipping solutions can reduce transit times and speed payments. We calculate that new logistics technologies could reduce shipping and customs processing times by 16 to 28%. By removing some of the frictions that slow the movement of goods today, these technologies together could potentially boost overall trade by 6 to 11% by 2030.

Automation Changes Production Processes

Roughly half of the tasks that workers are paid to do could technically be automated, suggesting a profound shift in the importance of capital versus labor across industries. The growing adoption of automation and robotics in manufacturing makes proximity to consumer markets, access to resources, workforce skills, and infrastructure quality assume more importance as companies decide where to produce goods. Companies are reconsidering location decisions as a result. Service processes can also be automated by artificial intelligence (AI) agents.

The addition of machine learning to these virtual assistants means they can perform a growing range of tasks. Companies in advanced economies are already automating some customer support services rather than offshoring them. This could reduce the $160 billion global market for business process outsourcing (BPO), now one of the most heavily traded service sectors. Additive manufacturing (3-D printing) could also influence future trade flows. Most experts believe it will not replace mass production over the next decade; its cost, speed, and quality are still limitations. But it is gaining traction for prototypes, replacement parts, toys, shoes, and medical devices. While 3-D printing could reduce trade in some specific products substantially, the drop is unlikely to amount to more than a few percentage points across overall trade in manufactured goods by 2030. 

 Overall, we estimate that automation, AI, and additive manufacturing could reduce global goods trade by up to 10 percent by 2030. However, this reflects only the direct impact of these technologies on enabling production closer to end consumers in advanced economies. It is also possible that these technologies could lead to near-shoring and regionalization of trade instead of re-shoring in advanced economies.

Invisible Value of Services

In the traditional view, global flows of services in gross terms are much smaller than flows of goods. But as detailed above, the true value of services in trade is obscured in three areas: the value added they contribute to the production of goods, cross-border flows of intangibles, and global access to free digital services. There are three channels that collectively produce up to $8.3 trillion in value annually—a figure that would increase overall trade flows by $4.0 trillion and reallocate another $4.3 trillion currently counted as part of the flow of goods. If we add our estimates of these three channels to directly observed service flows, the total   value of services trade in value-added terms would be an estimated $13.4 trillion, a figure that would exceed the $13.0 trillion value added of goods trade. 

Over the past quarter century, more than a billion people worldwide have exited poverty. As their incomes rise, many of them are passing the point at which they can begin to make significant discretionary purchases and join the consuming class. Not only have millions of households gained spending power for the first time, but millions more are moving up into higher income segments, passing the point at which consumption accelerates sharply. The global middle class had expanded to 3.2 billion people as of 2016 and posits that we have almost reached a tipping point at which middle-class.

In the years ahead, emerging economies are projected to be the world’s fastest-growing pockets of demand. By 2030, overall global consumption is forecast to reach $106 trillion, twice its 2017 level, with 60 percent of this increase coming from the developing world. McKinsey estimates that emerging markets will likely consume almost two thirds of the world’s manufactured goods by 2025, with products such as cars, building products, and machinery leading the way. The map of global demand, once heavily tilted toward advanced economies, is being completely redrawn—and global value chains are reconfiguring accordingly. While China is the largest part of this story, other developing countries also play a role.

For instance, the adoption of EVs (Electric Vehicles) could disrupt automotive value chains and trade. Battery-powered EVs have only 20 to 30 moving parts in their drivetrains, compared to 130 to 170 moving parts in an internal combustion engine. We estimate that EVs could reduce trade in auto parts (which totals some $700 billion today) by up to 10 percent while also reducing demand for crude oil and petroleum.
The world is also shifting toward greater use of renewable energy, driven by a combination of technology improvements and regulatory mandates. Perspective projects that the world’s electricity generation mix will have a very different look by 2030, with the share of electricity generated from solar and wind energy increasing by 4 times and 2.5 times, respectively. These sources could account for almost 20 percent of electricity generation in 2030, up from just 6 percent today.

The potential impact created by six next-generation technologies: digital platforms, logistics technologies, additive manufacturing, automation technologies, electric vehicles, and renewable resources illustrates the degree to which technologies could affect global trade:

Estimated savings in world trade from innovative technologies will influence the future economics. The largest savings will come from digital platforms that became the basis for transaction savings. Digital transactions will simplify logistics. But the greatest savings will accrue from labor saving robots and computerized manufacture of parts (“additive manufacturing”). When electric vehicles are introduced they will not only reduce the costs of automobiles but also industries that support them, such as gasoline in and parts. The projected cost reductions in global trade could deliver over ten trillion of savings within the next decade.


Global value chains as we know them today could not exist without technology. The previous wave of digital technologies—from instant communications to supply chain management software—reduced barriers of distance and complexity, enabling companies to interact with suppliers and customers anywhere around the world. By reducing transaction costs, digital technologies enable trade in goods and services to soar.

#154 New Developments in China

Impact of Trade Tensions on China Value Chains

The general trend of the past 40 years has been toward lowering tariffs and nontariff barriers. But now the pendulum may be swinging in the other direction. Global value chains will respond to the changes in trade policy that ultimately emerge. The direct impact of the new US China tariffs could be relatively limited. China’s exports to the United States amount to 4% of its GDP, while its imports equal about 1%. Similarly, US exports to China are equivalent to 1% of its GDP, and its imports amount to 3%.

A full-blown trade war could have a cumulative negative impact of 1.6% on China’s GDP and 1.0% on US GDP by 2020. There were around 500,000 foreign enterprises operating in China. 40% of China’s exports are the products of foreign-owned enterprises and joint ventures between foreign and Chinese firms. The first two rounds of tariffs imposed by the United States on China amounted to $250 billions of goods. Half are on electronics or machinery—and foreign firms produce 87% of the electronics and 60% of machinery made in China. Higher tariffs affect firms in the United States, given that 29% of China’s exports to the United States are intermediate goods used in producing finished goods. As tariffs increase the cost of production in the United States, the effects can manifest as higher consumer prices and pressure on the bottom line for US manufacturers.

In the September 2018 McKinsey Global Executive Survey, 33% of companies said that uncertainty over trade policy was their top concern, and 25% said recent tariff increases were their biggest worry. Nearly half of respondents stated that their companies will shift their global footprint in response, and one-quarter said they expect to invest more in local supply chains. Rolling back globalization undermine global productivity growth and innovation. Research has found that global flows of goods, services, finance, people, and data boosted world GDP by around 10% in a decade over a scenario in which those flows did not exist. Openness to both inflows and outflows of all kinds has real economic value.

Change in the Geography of Global Demand

The map of global demand, once heavily tilted toward advanced economies, is being redrawn—and value chains are reconfiguring as companies decide how to compete in the many major consumer markets that are now dotted worldwide. According to current projections, emerging markets will consume almost two-thirds of the world’s manufactured goods by 2025, with products such as cars, building products, and machinery leading the way.  By 2030, developing countries are projected to account for more than half of all global consumption. These nations continue to deepen their participation in global flows of goods, services, finance, people, and data.

The biggest wave of growth has been happening in China. China’s working-age population is one of the key global consumer segments. By 2030, they are projected to account for 12 cents of every $1 of worldwide urban consumption. China will have more millionaires than any other country in the world. China now represents roughly a third of the global market for luxury goods. In 2016, 40% more cars than were sold in China as compared with all of Europe. China also accounts for 40% of global textiles and apparel consumption. As consumption grows, more of what gets made in China is now sold in China leading to the decline in trade intensity. 

China exported 17% of what it produced in 2007. By 2017, the share of exports was down to 9% which is on a par with the share in the United States but is far lower than the shares in Germany (34%), South Korea (28%, and Japan (14% ). China’s output, imports, and exports have all been rising so dramatically in absolute terms. But overall, China is rebalancing toward more domestic consumption.

China Building Domestic Supply Chains

There is an advantage in placing production close to their customers and building networks of suppliers in closer proximity to one another to improve coordination. Local industries become more vertically integrated and multinationals to serve these fast-growing domestic consumer markets. 
China, which drove the expansion of global value chains, has now developed more comprehensive domestic supply chains. Since 2001 its manufacturing output began to soar as its share of overall global goods production grew from 6% in 1995 to hit 32% by 2017. Automotive, transportation equipment, and computers and electronics saw especially large increases. China now produces almost half of global output in three industries: glass, cement, and ceramics and electrical machinery.

China now builds new industrial capacity modernizing industries at the same time, phasing out aging factories and building more technologically advanced new plants. In computers and electronics, for instance, China first emerged as a place for low-cost assembly and re-export. Now China is developing its own capabilities to manufacture components, including sophisticated chips that it previously imported from advanced economies. 

Building out domestic supply chains is enabling China to bring new jobs to its inland provinces—regions that did not make the same kind of economic gains as the coastal provinces during the recent export-led boom. China is now focusing on economic development in parts of the country that were left behind, and it has invested heavily in transportation infrastructure to move goods from the heartland to the coast. China hopes to take pressure off its biggest megacities and encourage more balanced development across a greater number of smaller cities.

Wages in Chinese coastal provinces have been rising but China can retain many types of manufacturing by moving production inland. In essence, Chinese companies can engage in labor-cost arbitrage within the country’s own borders. The “Made in China 2025” policy designates dozens of inland pilot cities for industrial upgrades. As a result of China’s growing domestic supply chains, its trade intensity has fallen. This new China effect explains the entirety of the recent slowdown in goods trade that has been observed at the global level. The steepest fall-off in China’s intermediate trade has occurred in computers and electronics. Measured as a share of global output, trade in intermediate inputs fell by 5.1%points between 2007 and 2017. China fully accounted for the fall; in fact, trade in intermediate inputs actually expanded slightly among other countries participating in this value chain. The industry’s overall trade intensity fell sharply over the decade as China’s industry became more vertically integrated and more of the computers, phones, and devices it turns out were sold to Chinese consumers rather than being shipped abroad.

The automotive industry’s global trade intensity similarly fell by 7.9% between 2007 and 2017. Two-thirds of this decline can be traced to the millions of vehicles being both made and sold in China. Trade intensity also tumbled by ten percentage points in the textiles and apparel industry during this period, with China accounting for 80% of the drop. China remains the world’s largest importer and exporter of goods. China’s focus on building domestic supply chains and vertically integrated industries has dampened the scope of the trading opportunities foreign companies once envisioned.


A full-blown trade war is likely to have a small negative impact on China’s GDP because China exports to the United States amount to only 4% of its GDP. Such trade confrontations will undermine global productivity growth and innovation because global flows of goods, services, finance, people, and data have so far boosted world GDP by around 10%. Openness to both inflows and outflows of all kinds has real economic value.

Emerging markets will consume almost two-thirds of the world’s manufactured goods by 2025. By 2030, developing countries are projected to account for more than half of all global consumption.
China, which has so far driven the expansion of global value chains is now developing its own domestic supply chains. China now produces almost half of global output in leading industries.

#151 Changes in the Structure of Global Trade

1. Goods-producing value chains have grown less trade-intensive
Trade rose rapidly from 1995 to 2007. More recently, the value in goods producing value chains has fallen. Trade is still growing in absolute terms, but the share of output has fallen from 28.1% in 2007 to 22.5% in 2017. The decline in trade intensity is especially pronounced in the most complex and highly traded sectors. It reflects the development of China which is now consuming more of what it produces.

2. Services play a growing and undervalued role in global value chains
In 2017, gross trade in services totaled $5.1 trillion. But trade in services has grown more than 60% faster than goods trade. Some sub-sectors, including telecom and IT services, business services, and intellectual property charges, are growing two to three times faster.

The full role of services is obscured in the reported trade statistics. Services create roughly one-third of the value that goes into traded manufactured goods. R+D, engineering, sales and marketing, finance, and human resources all enable goods to go to market. In the future, the distinction between goods and services will continue to blur as manufacturers increasingly introduce new types of leasing, subscription, and other business models.

3. Trade based on labor-cost arbitrage is declining
As global value chains expanded in the 1990s and early 2000s, many decisions about where to locate production were based on labor costs. Only 18% of goods trade is based on labor-cost arbitrage. Over 80 percent of today’s global goods trade is not from a low-wage country to a high-wage country.

Other than low wages factor into company decisions about where to base production. These include access to skilled labor or natural resources, proximity to consumers, and the quality of infrastructure.
In the future, automation and AI may amplify this trend, transforming labor intensive manufacturing into capital-intensive manufacturing. This shift will have important implications for how low-income countries participate in global value chains.

4. Global value chains are growing more knowledge-intensive
Intangibles are playing a bigger role in global value chains. In all value chains, capitalized spending on R+D and intangible assets such as brands, software, and intellectual property is growing as a share of revenue. This rose from 5.4% of revenue in 2000 to 13.1% in 2016. This trend is most apparent in global innovations value chains. Companies in machinery and equipment spend 36% of revenue on R+D and intangibles, while those in pharmaceuticals and medical devices average 80%. The growing emphasis on knowledge and intangibles favors countries with highly skilled labor forces, strong innovation and R+D capabilities, and robust intellectual property protections.

In many value chains, value creation is shifting to upstream activities, such as R+D and design, and to downstream activities, such as distribution, marketing, and after-sales services. The share of value generated by the actual production of goods is declining because offshoring has lowered the price of many goods. This trend is pronounced in pharmaceuticals and consumer electronics, which have seen the rise of “virtual manufacturing” companies that focus on developing goods and outsource their production to contract manufacturers.

5. Value chains are becoming more regional and less global

Until recently, long-haul trade crisscrossing oceans was becoming more prevalent as transportation and communication costs fell and as global value chains expanded into China and other developing countries. The share of trade in goods between countries within the same region declined from 51% in 2000 to 45% in 2012.

That trend has begun to reverse in recent years. The intraregional share of global good trade has increased by 2.7 percentage points since 2013, partially reflecting the rise of emerging-market consumer consumption. This development is most noticeable for China. Regionalization is most apparent in global innovations value chains, given their need to closely integrate many suppliers for just-in-time sequencing. This trend could accelerate in other value chains as well, as automation reduces the importance of labor costs and increases the importance of speed to market in company decisions about where to produce goods.


The structure of global trade is changing. The share of trade from low cost countries is declining as higher value chains are developing their own consumer-based consumption of goods and services. The share of global trade is also shifting from goods to services to knowledge-based products. With the rise of middle-class consumers in developing countries many of the present international value chains are shifting from global to regional markets.

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#150 Value Chains and International Trade

Though tariffs dominate the headlines, important changes in the nature of globalization of trade have been unnoticed. The global financial crisis of 2007-08 has obscured such shifts. Now the dynamics of global trade is revealing new transformations. 

Gross global output, as measured by GNP, continues to increase in the share of output that is traded. But the share of goods that are produced is declining because services and data now play a bigger role in the global economy. The trade in services is growing faster than the trade in goods. Services are now creating value beyond what the national GDP accounts measure. Alternative measures are finding that services already constitute more value in global trade than goods.

Global value chains are becoming knowledge-intensive. Low-skill labor is becoming less important as the basis for international trade. Only 18% of global trade is now driven from sources of low labor costs.

The growing consumer demand in China and in the developing world now make it possible for these countries to reduce the export of their output to start consuming more of what they produce. Attention has now shifted to domestic supply chains. China and developing countries have reduced imports of goods and started investing in new labor-saving technologies to lower costs to consumers. In the past digital technologies accelerated trade by reducing transaction costs. The next generation of technologies will fuel an expansion into consumer services such in health, education and an improved quality of life. 

This post is based on the report by the McKinsey Global Institute ( The post analyzes 23 global value chains, spans 43 countries and covers 1995 to 2017. The report accounts for 96% of global trade, 69% of global output and 68% of global employment. 

What are Value Chains?

Global value chains reflect millions of decisions made by businesses regarding where to source inputs, where to establish production and where to sell goods. These decisions shape the movement and volume of global flows of goods, services, finance, people, and data. The simplest value chains involve a sequence of production steps that process inputs and raw commodities from firms located in different countries. Complex value chains can involve hundreds of inputs from dozens of countries and consist of subassembly of more elaborate components. Two-thirds of world trade is therefor in intermediate inputs and not in final goods and services, engaging the scale and intricacy of cross-border networks. The output and employment of different sectors that make up value-chain is shown below:

Global Innovation Value Sector

Chemicals, automotive, computers, machinery, electronics and transport equipment are the most valuable, highly traded, and knowledge-intensive value chains. They account for 13% of global output and 4% of global trade. More than 50% within these value chains is in intermediate goods. One-third of the workforce in these value chains is highly skilled. Spending on R&D averages 30% of revenues. Participation in this value chain is concentrated in 12 locations and accounts for 75% of the value of global exports.

Labor-intensive Goods Sector

Textiles and apparel, toys, shoes, and furniture are highly labor- and trade-intensive. More than two-thirds of income goes to labor, most of which is low-skill. Production shifts to developing countries and accounts for 3% of global output and employs only 3% of the global workforce.

Regional Processing Sector

Fabricated metals, rubber, plastics, glass, cement and food and beverage are included in this value chain. It accounts for 9% of global output and employ 169 million people, or 5% of the global labor force. This value chain is often overlooked but is essential.

Resource-intensive Goods Sector

Includes agriculture, mining, energy, and basic metals. These value chains generate $20 trillion of gross output, nearly as much as global innovations value chains. Much of this output goes to other value chains as intermediate inputs. Access to natural resources and proximity to storage and transportation infrastructure determine where production is located. Countries around the world participate; 19 countries account for 75% of resource-intensive goods exports. The top five countries make up a lower share of exports in this group than in any other, at just 29%. While agriculture employs almost 870 million people globally, the other value chains in this sector employ only 49 million people in total. Mining and energy have the highest value added per employee among all the value chains we studied.

Labor-intensive Services

These value chains include retail and wholesale, transportation and storage, and healthcare. Given the personal nature of these services trade is growing faster than in any other   sectors. Sector e value chains are the largest job creators after agriculture, employing more than 740 million people (23% of the global workforce), two-thirds of whom are in wholesale and retail trade. These sectors are an important part of all economies. The value added per employee is the same as in labor-intensive manufacturing (roughly $25,000), and they employ seven times as many people.

Knowledge Intensive Service

This sector includes professional services, financial intermediation, and IT services. Over 50% of its people have bachelor’s degrees or above. Growth in this sector is constrained due to regulatory barriers. International trade can span the entire globe since costs are not directly related to distance. Country participation is highly concentrated with advanced economies. 21% of exports come from developing economies. The high concentration among countries reflects significant investments in a skilled workforce required to succeed in this sector.


Though the Global Innovations sector is receiving much attention in the media its output is so far only 13% of the global economy and 4% of global employment. Any country that wishes to increase GNP must first pay attention to improving the productivity of its Resource-Intensive and Labor-Intensive sectors. Attractive sectors, such as the Global Innovation and Knowledge Intensive economies will prosper only if linked directly to profitable gains. GNP growth will occur only if there is an balanced approach for combining sectors to increase overall efficiency.

The primary objectives of global trade in the future will be to harness the benefits that accrue from technological innovation in order to deliver gains that will occur in all of the remaining five sectors.