Unlocking globalisation's goldilocks formula

Gung-ho globalization is no more. The US and China are on the brink of declaring Cold War II, the World Trade Organization is in an advanced state of decrepitude and Joe Biden devoted the most striking parts of last week's State of the Union Address to lamenting America's habit of "exporting jobs." But what comes next?

Deglobalization? International trade flows are bigger than ever. Slowbalization? The same objection applies. Globalization 2.0? An irritating cliché rather than an answer. Localization? Good for high-end cheese but not for cars and computers. A growing number of people think that the answer lies with regionalization, not just because regionalization provides a plausible description of what is going on but also because it opens a path out of our current quagmire.

The beauty of regionalization, to its advocates, is that it offers most of the upsides of globalization while minimizing the downsides. Capitalists get economies of scale and scope thanks to a bigger playing field, and lower labor costs thanks to the proximity of cheap labor (Eastern Europe or Vietnam or Mexico). Consumers get lower prices and better products thanks to labor arbitrage and specialization. On the other hand, citizens are spared the big disruptions that go along with full-scale globalization. Regional governments (particularly in the European Union) can compensate losers. Multinational corporations can shield their supply chains from the potential disruptions that come from either distance or global tensions. "Regionalization" is thus the goldilocks option between globalization on the one hand and nationalism on the other.

Christine Lagarde, the president of the European Central Bank (ECB), argues that the shift from globalization to regionalization is one of today's three great changes in international trade (the other two are the shift from dependence to diversity and efficiency to security). The result of fragmentation at the global level may well be that regions have to step forward to drive integration and manage the costs of change. Sebastian Mallaby, of the Council on Foreign Relations, maintains that the new era of regionalization will be much kinder to ordinary people than the last one of "China-centric globalization." Regionalization is also generating fancy theories about "the return of geography" and "strategic autonomy."

The fullest exposition of the regionalization hypothesis can be found in a new book, The Globalization Myth: Why Regions Matter, by Shannon O'Neil, also of the Council on Foreign Relations (and a Bloomberg contributor). O'Neil makes three big claims. The first is that, even at the height of the neoliberal order, "globalization" often took the form of regionalization. Companies naturally look to their near abroad for suppliers and customers — and indeed for cheap labor — before they look to the far distant yonder. After all, moving things is expensive (and polluting), and ties of culture often bind us to our neighbors.

The world that neoliberalism left us is not so much an integrated global market as three regional economies — what the Japanese management guru Kenichi Ohmae once called "triad power." As O'Neil notes, more than two-thirds of Europe's trade remains within the European Union, over half of Asia's within Asia, and about 40% of North America's between Canada, Mexico and the US. Half of what is sold "international" travels less than 3,000 miles — not much farther than a flight from New York to Los Angeles.

For every truly global company (such as Coca-Cola or Ikea), there are dozens that are household names within their own regions but have no resonance on the other side of the world (try looking for a Greggs in New York or a Chick-fil-A in London). A long list of companies have tried to go global only to retreat to their regions with their tails between their legs. In the 1990s, Walmart moved into 27 countries, from Argentina to Zambia. Today Walmart's North American operations are flourishing (Mexico has 2,500 stores, Central America more than 800 and Canada 400) but stores in Germany, the UK and Argentina have been closed. In the same decade Vodafone expanded across the world. Today it remains a European giant but has disappeared from Japan, New Zealand and the United States.

The second claim is that the world will become more regional in the future. Companies are shortening their supply chains not only in response to big external shocks (the pandemic, the war in Ukraine and growing tensions with China), but also for commercial reasons. The cost of labor is declining in importance as machines do more of the grunt work of production (and anyway Chinese labor is no longer as cheap as it was). Customers have a growing preference for custom-made goods and instant fashion.

The third claim is that this is all a very good thing. Trade with China disrupted American life far more brutally than trade with Canada and Mexico. In 2000-2010, trade with China destroyed two million US jobs according to one well-regarded study. Over the same period, NAFTA had only a marginal effect on US jobs. This is because trade closer to home leaves far more intermediate jobs behind in research, marketing and management: The average Mexican import is 40% US-made and the average Canadian import is 25% US-made, while the average Chinese import is just 4% US-made.

Cross-border clusters can embody all that is best in comparative advantage. O'Neil waxes lyrical about the complementary biotech industries on both sides of the border in San Diego-Tijuana: The Americans have one of the world's leading clusters of biotech start-ups, fueled by the University of California, San Diego, the Salk Institute and Scripps Research, while the Mexicans make hundreds of millions of dollars' worth of pacemakers, defibrillators, feeding tubes, blood-pressure cuffs, artificial respirators and catheters.

New evidence comes out all the time to prove that O'Neil is onto something. A recent article in Supply Management demonstrates that "near-shoring" is happening much faster than CEOs expected. A survey of 300 supply chain specialists found that almost nine in ten (88%) of US small businesses plan to nearshore parts of their supply chain while almost one in every two (45%) plan to nearshore all their suppliers. Almost four in ten (37%) of respondents said that all their suppliers were already nearshored. McKinsey & Company's report on The State of Fashion 2022 reveals that 70% of fashion companies plan to bring production closer to home.

Yet it is not hard for an Englishman to think of objections — or at least qualifications — to this argument. In his 1963 torpedoing of Britain's first bid to join the European Common Market (as it then was), Charles de Gaulle argued that "England in effect is insular, she is maritime, she is linked through her exchanges, her markets, her supply chains to the most diverse and often the most distant countries." Britain's close ties to North America, the Far East, India and Australia continue to shape its commerce and culture. One of Britain's biggest high-street banks is the Hong Kong and Shanghai Banking Corporation (HSBC). Storied trading houses such as Jardine Matheson and Swire Properties operate mainly in the Far East. More British expatriates live in Australia than in next-door France (though France remains a favorite retirement home with prominent Brexiteers such as Nigel Lawson). 

Britain is not alone in its far-flung links: Spain and Portugal have close links with Spanish-speaking Latin America and Portuguese-speaking Brazil, France with Francophone Africa, and Holland with Indonesia. On the other side of the ledger, proximity doesn't always produce friendship: India is not best friends with Pakistan nor Israel with Syria nor South Korea with North Korea. Sometimes heavily armed fences make the best neighbors.

If fast fashion is encouraging localization, virtualization is doing the opposite. A succession of technological innovations is making it easier to deliver some services over longer distances at declining cost: fast broadband, 5G networks, Zoom, Google docs, Slack and satellite internet. Designers can play around with the same design over the internet. Digital nomads can work from the back of beyond thanks to satellite links. Writers can collaborate wherever they are physically. Translation software is beginning to dismantle language barriers in the way that the internet killed distance.  

Regionalization doesn't necessarily deal with the problem of adding robustness to supply chains. Putting all your supply chains in one region might be the equivalent of putting all your eggs in one basket. Deeper regional integration within Asia doesn't deal with the security threat of a rising China: Surely, we want Vietnam and the Philippines to forge closer links with the West rather than locking themselves into the Chinese orbit? Natural resources are seldom if ever distributed equally between regions: If Western companies want a secure supply of the rare earths that go into the making of batteries, they have little choice but to deal with African countries.

Nor does regionalization necessarily take the sting out of globalization. America's anti-globalization movement started with NAFTA rather than with China, with Pat Buchanan trumpeting "I am an economic nationalist," Ross Perot talking about the "giant sucking sound" of jobs disappearing south of the border and Donald Trump finishing off with "the worst trade agreement ever." Mexico's location next door to the US may make it scarier than distant China, particularly as trade is entwined with mass migration. British anti-globalization sentiment has long been more focused on the European Union, with its sinister army of "Brussels bureaucrats," than on the Commonwealth.

Most importantly, the term "regionalization" conceals a vital distinction — between closed regionalization (or regionalization-minus), on the one hand, and open regionalization (or regionalization-plus), on the other. Closed regionalization is essentially nationalism in larger form: Groups of countries surrender national borders the better to defend regional borders and amass strength against their regional enemies. George Orwell's great dystopian novel, 1984, features a never-ending war between three regional blocks, Oceania, Eurasia and Eastasia. Open regionalization tries to combine closer economic ties within a regional bloc with closer ties with the rest of the world. Regions sign trade agreements with other regions rather than just building walls around themselves. MNCs generate several supply chains rather than replacing one form of fragility (dependence on China) with another (dependence on their own region).

Policymakers are right to celebrate the potential of regionalization so long as it comes with a plus rather than a minus. The EU has forged trade agreements with Canada, Japan, New Zealand and several South American and African countries. The United States needs to follow along by reviving the Transatlantic Trade and Investment Partnership and joining the latter-day version of the Trans-Pacific Partnership that it walked away from, while more generally pursuing a policy of "friend-shoring" rather than "nearshoring." At times during Biden's State of the Union, he sounded as if he was channeling Donald Trump's zero-sum "American carnage" view of the world. He needs to recognize that regionalization-plus is a far better policy not only for the United States but for the Western world as a whole — the closest we can get, in these dangerous times, to a Goldilocks option.

Adrian Wooldridge is the global business columnist for Bloomberg Opinion. A former writer at the Economist, he is author, most recently, of "The Aristocracy of Talent: How Meritocracy Made the Modern World." @adwooldridge

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement