Can economic regionalism bring more success than globalisation?

Globalisation is described as “the movement of goods, of services, of money, of people, of ideas, of patents, of licenses, abroad and across the world” by Shannon K. O’Neil, Vice President of Studies, and Nelson and David Rockefeller Senior Fellow for Latin American Studies at the Council on Foreign Relations and author of The Globalization Myth: Why Regions Matter. Since the 1980’s, globalisation has been the norm for business and trade; over the past 40 years, the movement has accelerated, with global trade going from $2 trillion in 1980 to $22 trillion today.

Research from McKinsey Global Institute indicates that globalisation reached its peak in the mid-2000s. What followed this peak period was a new era from 2008-2021, called “slowbalisation”. The pandemic slowed international trade, but it rallied again quickly. By mid-2022, world trade had reached 10% above pre-pandemic levels. Data from the International Monetary Foundation (IMF) found that “world exports as a share of GDP rose in 2022, matching the record high set in 2008.”

Globalisation and regionalisation in trade

Shannon K. O’Neil suggests that rather than globalisation as understood broadly, what the world has experienced and continues to experience is regionalisation. She points out that over the last 30-40 years, the world has seen major growth of three big trading regions: a European one, a North American one and Asian one. Between these three regions, nearly 90% of all trade happens. The rest of the world is a small portion of the movement around.

Regionalisation has driven economic competitiveness, increased manufacturing, and goods circling the world. Over the past years, the combination of the pandemic and its aftermath, geopolitical conflict worsening and climate change impacts, regionalisation has intensified. And regionalisation is here to stay, O’Neil says.

There is ample evidence to support this thesis. In Europe, approximately two-thirds of trade is intra-Europe. Likewise, in North America, 40% of trade is contained between Mexico, Canada, and the USA. Asia, the manufacturing powerhouse of the globe, produces 50% of all manufactured goods today. Of Asia’s trade, approx. 60% of it stays in the region.

Adam Tooze, Director of the European Institute at Columbia University, has also noted the rise in regionalisation. He theorises that “the world is on the brink of a polycrisis”, and that over the next ten years we will see a “new cocktail of globalisation”. He further states that what lies ahead will still be globalisation, just "a new pattern, a new way in which those relationships are structured. I don't actually expect serious re-globalization in the trade metric, on the foreign investment level, that seems highly implausible to me."

He links this new “cocktail” to the fraying of economic binds that happened during the pandemic and continued after, as well as the current and coming energy transition. He notes this will push “beyond the boundaries of the European bloc and the North American bloc”. Additionally, he sees the shift in the continuing unfolding of globalisation as being driven by two core vectors, a plateau in supply chains and the geopolitics of the “chip war”.

Regionalisation and supply chains

Will changes in regionalisation and globalisation impact supply chains and global logistics? O’Neil says not to an overly high extent, and that “geopolitics won’t end international supply chains because they’re just too competitive and too profitable to end. There’s no country today that can really make anything on a competitive basis, a globally competitive basis, by themselves.” However, that doesn’t mean changes in regionalisation and globalisation won’t have an impact; O’Neil ventures that geopolitics may mean that production places may shift. Countries and regions may no longer be able to maintain the level of production they did before due to geopolitics.

Within the last five years, the biggest driver of cost and profits for companies have been linked to governments, tariffs, export and import controls, industrial policies, and such. This is a fundamental shift; the biggest drivers of costs and profits used to largely be driven by markets, cost of labour, logistics and sourcing. This means that as companies plan ahead, they should be aware of their footprint around the world and where policies and governments are going, because these will long-term impact the profits and costs for companies. There will be big opportunities for those that are able to see those changes and adapt to them.

Legislation, freed trade agreements and supply chains

Legislation and trade agreements will have impacts on globalisation and regionalisation, which in turn can impact supply chains.

Free trade agreements (FTA) signed in the abovementioned regions, such as the Regional Comprehensive Economic Partnership (RSEP) in Asia, brings more than a dozen Asian countries together. Similar agreements are visible in the other regions, like the United States-Mexico-Canada Agreement (USMCA) in North America, and the European Union (EU) in Europe, where trade within the region is more profitable for its businesses, countries, and populations.

Whilst 90% of trade takes place in the three discussed regions, the rest of the world is following suit with free trade agreements of their own.

The African Continental Free Trade Agreement (AfCFTA), first signed in 2018, spans the entire African continent. It is the world’s largest regional trade agreement, covering more than 1.3 billion people. The Mercosur, an economic and political bloc formed in 1991, consists of Argentina, Brazil, Paraguay, Bolivia and Uruguay and associated states of Chile, Peru, Colombia, Guyana, Ecuador and Surinam. It was created with the goal of spurring development, creating a common market, and bolstering democracy.

Likewise, Central America has the Centra America-Dominican Republic Free Trade Agreement (CAFTA-DR). It’s the first free trade agreement between the United States and a group of central American countries including Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. This free trade agreement was created to encourage “stronger trade and investment ties, prosperity, and stability throughout the region” and with the USA.

FTAs can reduce trade barriers and create a more transparency and predictability in the trading and investment environment. They can assist with the reduction or elimination of tariffs, competitiveness in market, the creation and upholding of product standards, and more.

Geopolitics and global finance: the impact of on international trade

Whilst in the past 25 years, geographic boundaries have somewhat faded for companies, the world is now facing major upheaval as geopolitical uncertainty continues to challenge supply chain moves. According to data gathered and analysed by the Uppsala Conflict Data Program, conducted by the Peace Research Institute Oslo, not since before the end of the Cold War has the world seen this number, intensity, and length of conflicts worldwide. In 2023 there were 183 active conflicts; hereunder there was a 28% increase in violent events.

Furthermore, 2024 is a year of mass elections across the world, meaning approximately 49% of the world’s people are voting. This includes but is not limited to the US presidential election, which has been described as “the biggest danger to the world” in 2024. Major shifts in political leanings through these mass elections could easily disrupt, hinder or smooth the way for supply chains. Additionally, with increased regulations impacting global and regional trade, supply chains are feeling the strain.

Whilst money talks, there is no denying that geopolitics can make a ruckus too. The IMF, for example, reports that countries are “reevaluating their trading partners based on economic and national security concerns”, and that “under the surface, there are increasing signs of fragmentation. Trade and investment flows are being redirected along geopolitical lines”.

As McKinsey puts it, “geopolitical shifts affect capital flows”, adding that, “Since 2015, direct investment in China and Russia has dropped precipitously, as a result of decreased spending from advanced economies in Asia, Europe, and the United States”. Similarly, IMF notes that “[...] China’s share in U.S. imports declined by 8 percentage points between 2017 and 2023 following a flare-up in trade tensions. During the same period, the U.S. share in China’s exports dropped by about 4 percentage points.”

Both the IMF and McKinsey note that they reason the world hasn’t felt this is due to emergence of “connector” countries, most notably Vietnam and Mexico, who have acted as proxies for the countries and minimised “economic impact of trade decoupling between the U.S. and China”. McKinsey further notes that flows of funds into “developing economies have increased, notably into Africa, India, and developing Europe”.

What lies ahead?

There is no way to predict what the future holds; geopolitically, things could get better, or they could fracture further. However, there are steps businesses can take to help add more resilience to their supply chains, including diversifying their supply chains and implementing regionalisation to their overall logistics. Utilising a globalised approach with a regional set up can help companies grow and better withstand disruptions and other supply chain challenges.

This diversification can and should extend long past logistics; diversification of sourcing, production and distribution are all necessary to ensure that issues like the chip shortage in 2022 can be avoided. Many companies are already doing just that. Having learnt hard-earned lessons during the pandemic and its subsequent aftereffects, many companies have or are implementing a regionalised approach. Instead of one production hub for the entire supply chain, many companies have opted for a more regionalised approach, choosing to produce and sell within the same region. Additionally, working with a logistics partner that has a keen understanding of global and regional politics and their impacts, as well as offering multiple modes of transportation can further improve the supply chain.

Whatever lies ahead, companies can be sure that resilience, agility and flexibility will remain key attributes they should infuse their supply chains with. Otherwise, global disruptions can and will lead to longer disruptions within their own supply chains.