Regionalization vs globalization: what is the future direction of trade? – The European Sting – Critical News & Insights on European Politics, Economy, Foreign Affairs, Business & Technology

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This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Stefan Legge, Lecturer and Postdoctoral Fellow in Economics, University of St. Gallen, & Piotr Lukaszuk, Director of Data Forensics, St. Gallen Endowment for Prosperity through Trade

  • Destabilizing global events, including COVID-19 and the blockade of the Suez Canal, have exposed vulnerabilities in international trade.
  • Several leading analysts and commentators predict that trade will become less globalized and more regional.
  • We looked at merchandise trade data between 1815 and 2021 to test this hypothesis.

International trade is an essential source of economic prosperity. That is why policymakers, economists and business leaders are concerned about recent developments. The COVID-19 crisis, along with the blockade of the Suez Canal, adds to a series of troubling events: the rise of protectionism and the Sino-US trade war to name just two. These developments have contributed to new discussions on shortening supply chains and building resilience.

Some analysts and commentators see a wave of de-globalization accelerating. The Economist predicted January 24, 2019: “The new world will work differently. Slow-tagging will lead to deeper links within regional blocs. Supply chains in North America, Europe and Asia source closer to home. In Asia and Europe, most trade is already intra-regional, and the share has increased since 2011. ”And in the Financial Times, Martin Loup wrote December 10, 2020: “The plausible future is not that international trade will die. But it is likely to become more regional and more virtual. “

Are the regionalization forecasts supported by the data?

Based on a careful analysis of merchandise trade data, we examined the extent to which the data supports such projections. To do this, we have established three indicators revealing regionalization: the share of world trade between nations of the same continent; the share of world trade between nations with a common border; and the trade-weighted average geographic distance of world trade. All three report a trend towards regionalization if they have increased recently.

1. Commercial data 1815-2014

First of all, we considered historical business data provided by Michel Fouquin and Jules Hugot, which dates back to the year 1825 (Figure 1: Regionalization tests in historical trade data, 1815-2014). We have observed that about a fifth of world trade takes place between neighboring countries, about 60% between countries of the same continent. And the trade-weighted average geographic distance in world trade is around 5,000 km, but fluctuates over time – with declines during major disruptions. For all three indicators, there is no evidence of regionalization in years prior to 2014.

2. Commercial data 1950-2019

These figures constitute a historical reference. But what does the more recent data show? For this, we used the latest data provided by Keith Head and Thierry Mayer (Figure 2: Regionalization tests in contemporary trade data, 1950-2019). Note that the historical data covers a somewhat different set of countries than the contemporary dataset, which makes comparisons between datasets difficult and emphasizes intra-dataset analyzes.

However, contemporary trade data does not support the regionalization hypothesis either. The shares of world trade between neighboring countries and those on the same continent are remarkably stable. And the average geographic distance traveled by goods has increased over the past 20 years, not least due to China’s integration into the global economy. This increase compensated for the decline of the 1990s, which largely reflects the opening up of the countries of the East.

3. Business data 2016-2021

Why then do many commentators argue that regionalization is happening? So far, we could conclude that you can see regionalization everywhere except in the data. However, the latest data that captures the year 2020 is cause for concern. Although these data are not yet available for all countries, we can consider import statistics from the EU. The models in Figure 3 (Regionalization tests in the latest EU-28 trade data, 2016-2021) were remarkably stable until the COVID-19 crisis hit in February 2020. Notably, the share of Imports from countries on the same continent have increased and the average geographic distance of imports has decreased considerably (this is not a Brexit effect when considering the EU-28). The pandemic-related disruptions have clearly affected international supply chains.

What does the data show?

It can be argued that any emerging pattern in regionalization statistics is suppressed by existing long-term trade flows. We therefore resume the analysis by focusing on the “new trade”, that is to say the flows at the level of products between countries which have never previously exchanged such goods at a commercial level (we do so. define as minimum $ 1 million). Here we find that the trade-weighted average distance has declined continuously over the past five years and reached in 2019 its lowest level since the 2008 financial crisis. In addition, the share of new trade between border countries experienced a significant increase in 2019 to reach 18% of the 9-10% observed over the past two decades. The jury is still out on whether these recent signs of regionalization are the first signs of systematic change.

The COVID-19 economic crisis has strained globalization. It remains to be seen whether businesses and policymakers will change their behavior for good after the recovery. Growth in merchandise trade had slowed before the pandemic, according to data from the CPB World Trade Monitor. This slowdown in the growth of world trade seems to contradict a contemporary trend: the number of trade agreements has increased in recent years.

What is the World Economic Forum doing on trade facilitation?

the Global Alliance for Trade Facilitation is a collaboration of international organizations, governments and companies led by the Center for International Private Enterprise, the International Chamber of Commerce and the World Economic Forum, in collaboration with Gesellschaft für Internationale Zusammenarbeit.

It aims to help the governments of developing and least developed countries to implement the principles of the World Trade Organization. Trade Facilitation Agreement bringing governments and businesses together to identify opportunities to address delays and unnecessary red tape at borders. Global Alliance for Trade Facilitation | Benefits of trade

For example, in Colombia, the Alliance worked with the National Institute for Food and Drug and Business Surveillance to introduce a risk management system that can facilitate trade while protecting public health, reducing by 30 % the average rate of physical inspections of food and beverage and providing $ 8.8 million in savings for importers in the first 18 months of operation.

According to the World Trade Organization, the cumulative number of regional trade agreements in force has grown from less than 100 in 2000 to almost 500 today. Most world trade now takes place between pairs of countries that have entered into a reciprocal trade agreement. Recently adopted trade agreements by the EU as well as the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership suggest that this number is expected to increase further. Such agreements often facilitate trade between nations located in different geographic regions. Yet the average geographic distance of FTA partners has been remarkably stable at around 4,800 km since 2000.

While the global financial crisis has permanently reduced the speed of globalization, the global economy has already entered the COVID-19 crisis with largely stagnant global trade volumes. The regionalization pattern that now appears in the latest trade statistics enriches the debate and offers researchers new metrics to quantify the extent of regionalization.

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