Regionalization in Global Trade
Part 2 of our series on Global Trade
Last time in my article on Who Dominates Global Trade. I spoke about how there are three main regions of trade: Europe, Asia, and North America. These three hubs make 85% of global trade: as of 2021, European Union, UK & Switzerland make up 38% of global trade, East Asia is #2 at 30%, and North America is at 17%. The other regions (Africa, Latin America, Caribbean South Asia, Russia, Central Asia, Middle East) combined make up the other 15%.
But what’s more fascinating than the fact that just 3 regions dominate most of global trade is how much each region buy and sell within their region.
Below is interregional exports by region, which is a fancy way of saying how much regions sell products within their region.
From the World Integrate Trade Solution database which collects data on imports and exports, we find out that Europe basically sells 70% of its goods (BMWs, Airbuses, French bread,etc.) to itself. In other words, Europe is tightly integrated. East Asia & Oceania sell 50% of their goods within their region, and US-Mexico-Canada sell slightly less than half of their goods to their region. Latin America, Sub-Saharan Africa, South Asia, and the Middle East & North Africa are not integrated trade regions at all, all four of them sell most of their products to the outside world.
When we look at where regions buy from, we see a similar patterns. Europe buys most goods within Europe, East Asia & the Pacific now slightly buys a little over half of its goods within East Asia & the Pacific. For North America, we see that when it comes to buying goods, Canada-Mexico-USA have been buying less of each other’s goods overtime. In 1995 when NAFTA was created, 40% of North American firms bought goods in North America, by 2020 that decreased to a third of goods. This has to do with the rise of buying imports from China. The other four regions: Latin America, Africa, Middle East, and South Asia barely buy goods within their regions. We especially see this in South Asia, where South Asian firms only buy 3% of goods within the region! This makes sense since India & Pakistan hate each other. These countries still have territorial disputes over Kashmir.
What we see from looking at these patterns of interregional trade is that the European Union created a powerful trade bloc that makes Europeans manufacture goods together, buy from each other, and sell to each other. East Asia has deepened their trade with each other over time, and now over half of international commerce remains in the region. NAFTA or the new name, the USMCA, is the third largest trade hub, but is the least intertwined trade hub of the Big 3. USMCA is far more interdependent than the other regions on global trade.
I point this out because if 85% of trade is concentrated in three regions, and if Europe, East Asia, North America conduct half to most of their trade within their regions; then that means the world is more “regionalized” than “globalized”. It’s not true that nations have bases all over and sell goods all over the world. Regional trade zones have made some regions more important than others: we have regionalization not “globalization”.
How did this happen?
Europe’s 70% Regional Integration:
Europe’s integration happened after the destruction of WW2. As these countries were losing their colonies and fearful of the Soviet threat, the only way these nations could stay relevant and not become poor or destroyed was to #1 depend on America for military support from Moscow and #2 become a huge economy together.
Europe made made treaties: The Treaty of Paris, The Treaty of Rome, the Treaty of Brussels, the Treaty of Maastricht, Treaty of Amsterdam, Treaty of Nice, and Treaty of Lisbon: these treaties bound Europe’s passports, workers, firms and regulations together and created the European Union (EU). Secondly, after the Eastern European Revolutions between 1989-1991, many Central & Eastern European left communism and joined the EU like Poland, Romania, Hungary, Czech Republic, Slovakia, and etc. These countries became cheap labor pools for the rich European countries. A perfect example of this relationship is Poland being the assembly hub for Germany. Thirdly, in 1991, the Soviet Union died and split into 15 different countries including Russia, Ukraine, Belarus, the Stan countries, the Baltics, Georgia, Armenia, Moldova, and Azerbaijan. These countries abandoned communism, and the new Russian Federation tried integrating with Europe. Russia became the new main natural resource supplier for Europe, supplying for crude oil, refined petroleum, gas, coal, aluminum, nickel, cobalt, platinum, diamonds, wheat and iron. At the peak of Russia-European trade, in 2021, right before Russia’s invasion of Ukraine, Russia exported $176B of commodities and goods to Europe. Meanwhile the entire continent of Africa provided Europe, slightly less resources, $173B.
East Asia’s 51% Regional Integration:
East Asia integrated differently. It wasn’t government led, but rather business leader lead. Japan was the first East Asian country to industrialize in the late 19, early 20th century. After WW2, destroyed Japan, Japan was able to quickly rebuild itself by supplying resources to America during the Korean War. Japan then directed itself to make factories at cheap places. In the 1950s-1960s, Japan’s former colonies & occupied territories like Taiwan, Hong Kong, Singapore, and South Korea were extremely poor. Japanese car companies like Toyota, Japanese sportswear firms like Mizuno, and Japanese TV companies like Toshiba used places to sell quality goods at cheap prices. Then Taiwan, Hong Kong, Singapore, and South Korea became the “Four Asian Tigers” and got richer, and then they needed cheap places too, so Japan and the “Four Tigers” built production in even cheaper places like the Association of Southeast Nations (ASEAN): Malaysia, Thailand, Indonesia, and Phillppines ,and etc. When Deng Xiaopeng opened up China’s economy Mao’s death in the 70s and Vietnam opened up their economy with the “Doi Moi” policy in the 80s, these places also became outsoured, destination spots for labor intensive work using special economic zones. Brunei joined ASEAN in the 80s, and the nominally socialist authoritarian states Vietnam, Laos, Cambodia & Myanmar joined in the 90s. In 1997, ASEAN became the ASEAN Plus Three including China, Japan, and South Korea in 1997. In the late 2010s, the plan included the ASEAN Plus Six: including: India, Australia, and New Zealand.
North America’s 33% to 48% Regional Integration:
America is relatively protectionist when it comes to trade. Because America’s economy is so large domestically, America is among one of the least globally integrated economies on earth in terms of trade as a percentage of economic output, America is in the same company as nations like Nigeria, Pakistani, and Bangladesh when it come to trade. Below you will see a the list of countries that have the lowest ratio of trade as a percentage of GDP:
America has always been slower to adopt global trade, despite NAFTA and its free trade agreements. America has so much substantial wealth and a such a massive domestic market, that most American firms focus on American consumers. In fact America has the highest tariff rates in NAFTA!
NAFTA in other words is a half-hearted attempt at regionalization compared to Europe or East Asia. Europe and East Asia are far more interconnected and co-dependent than America is on Canada and Mexico. Will America deepen regionalization, become more protectionist, become more open to “friend shoring” or globalize more? We’ll have to stay tuned to find out.
The other regions:
The lack of regionalization has been a barrier to growth and will be a bigger barrier to growth in the future. The nations that have grown explosively despite not being regionalized: Saudi Arabia, UAE, Qatar, Kuwait have grown because they produce the most in demand products on earth: oil/gas, refined petroleum and petrochemicals. As fossil fuels are no longer in demand as they were a decade ago, increased regionalization could benefit the middle east.
Also, if India was more regionalized with Pakistan instead of preparing for war against them, then India could have grown even more, perhaps at China’s growth rates.
Economic integration has helped nations like China, Vietnam, and Laos get access to trade with rich nations like Japan & South Korea (200% to 250% growth since 1995 adjusted for inflation and cost of living!). In addition, Romania, Lithuania & Poland had incredible growth by being more integrated with Germany & France (200% growth!).
These nations have been growing faster than Ghana, South Africa or the rest of Sub Saharan Africa. Faster than Morocco or Egypt in North Africa or Colombia, Brazil, Chile or Argentina in Latin America.
Luckily Latin America, the Caribbean, Africa, the Middle East, and South Asia all have opportunities to regionalize more. They already have regional groups, they just aren’t nearly as integrated as the European Union.
South Asia has the South Asia Association for Regional Cooperation which has Afghanistan (SAARC). Central America has Central American Integration System (SICA) . South America has the Southern Common Market (Mersour). Africa has the African Union. The Arab states have the Gulf Cooperation Council. It’s up to these organizations to create the regions they want.
Links are underlined!
Other Sources:
The Globalization Myth: Why Regions Matter by Shannon K. O’Neil
Good job. Mr Yaw I suggest you may like to look at my pieces of writing on economics as well, since there is some overlap there. best, Jacob