Is globalization dead?

For more than half a century, manufacturers created global supply chains that sourced goods wherever costs (wages) were lowest and sold them wherever demand was greatest. The trend drove world growth, powered the rise of many developing countries (particularly China), and resulted in the largest alleviation of poverty in world history. (It also helped fuel a political backlash in developed countries.)

In the last decade, however, that trend has reversed. A new study out this morning from the McKinsey Global Institute—CEO Daily got an early look—finds the share of goods produced around the world that is traded across borders has fallen sharply, from 28.1% in 2007 to 22.5% in 2017. That may partly reflect the political backlash against trade. But it also reflects rising consumer demand in China and other developing countries (they are buying more of their own goods), as well as improved domestic supply chains in those countries.

But here’s the rub: While trade in goods is declining as a share of output, trade in services is soaring. National statistics only attribute about 23% of all trade to services. But the McKinsey report says those numbers exclude some very significant aspects of services trade which, if included, would make it half of all trade.

“Globalization isn’t dead; it has just changed,” says Susan Lund, a partner at McKinsey and leader of the institute.

That has some important implications for the global economy. Among them:

— Foreign trade is no longer being driven by the search for low wages. Less than 20% of trade is based on labor-cost arbitrage, the report says.

— Knowledge-based trade is soaring. Investment in intangible assets—R&D, strong brands, intellectual property—has doubled as a share of trade, from 5.5% to 13.1%.

The implications for public policy are clear. Restricting trade in physical goods is fighting the last war. And attempting to restrict trade in intellectual property and intangibles is a fool’s errand. In the next round of globalization, it will be countries with the best talent, not those with the lowest wages, that will have the upper hand.

You can read the full report here. News below.

Top News

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Around the Water Cooler

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Goldman Apology

Goldman Sachs CEO David Solomon has apologized to the people of Malaysia for the involvement in the 1MDB sovereign development fund scandal of Tim Leissner, a former Goldman banker. Solomon: "It's very clear that the people of Malaysia were defrauded by many individuals, including the highest members of the prior government. Tim Leissner... a partner at our firm, by his own admission, was one of those people." Fox Business

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Germany's finance ministry is getting antsy about the outlook for the country's two biggest banks, Deutsche Bank and Commerzbank, and is reportedly looking ever closer at a merger between the two—though that decision would ultimately be up to the banks, not the government. Financial Times

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Sixty percent of the world's coffee species are on the brink of extinction. These are wild coffee species, and the two (yes, only two) species that we brew are not directly under threat. However, experts say we will eventually need to use genes from wild species to maintain the viability of the Arabica and robusta beans that we use; tricky to do if they've gone extinct. BBC

This edition of CEO Daily was edited by David Meyer. Find previous editions here, and sign up for other Fortune newsletters here.