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The globalization myth

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Globalization is taking a beating. Its diminishing number of defenders face a rising chorus of critics, particularly in the United States, that blame it for wage stagnation, increased inequality, and the hollowing out of once vibrant industrial towns.

Yet these often acrimonious debates miss the real underlying trend in trade of the last 40 years: As companies and money went abroad they regionalized more than they globalized. This misunderstanding is now leading to the wrong prescriptions from those who want to help U.S. companies, workers, and communities that have suffered in recent years. The path to stronger and more inclusive growth isn’t less globalization, it is more regionalization.

To be sure, global trade has grown over eleven fold since 1980, some $22 trillion in goods and services now crossing borders each year. Still, this international commercial expansion hasn’t been as deep or widespread as most imagine. Drill down and only about two dozen nations took advantage of the world’s opening to truly transform their economies, trade as a percentage of GDP doubling or more. In contrast, nearly 90 nations saw international exchanges stagnate or become a smaller part of their overall economies — if anything they deglobalized.

Add to this, these ramped up exports go and imports come from nearer by than commonly understood. The average internationally-sold product travels less than 3,000 miles, not much more than the distance between New York and California. Sure, some well known companies source parts from all over the world: Boeing boasts suppliers across 58 countries. But only a handful of companies live up to the “global” hype. A study of 365 prominent multinationals found that just 9 have truly conquered the world (measured by sales). Many, when they expanded abroad, did so mostly next door.

As international regional ties broadened and deepened, three major manufacturing and supply chain hubs rose above the rest: Europe, Asia, and North America. Together, they now churn out 90 percent of the world’s goods. Yet these regions are not created equal. Europe and Asia have integrated much more as a region than North America. Two-thirds of EU trade and over half of Asian trade remains within their respective regions, while in North America only 40 percent of trade occurs between the three nations. The rest of the world is even further behind, trade with neighbors below 15 percent.

Since regionalization gave nations a competitive boost, it helps explain in part the winners and losers from trade. And it has given Europe and Asia an edge over the U.S. and North America.

What globalization’s critics and supporters alike get right is that these trends are again changing. COVID-19 accelerated a whole set of forces reshaping global trading ties. Robots, automation, and 3D printing increasingly mean many businesses can do more with fewer workers, making cheap labor relatively less important. 

Demographic shifts are raising costs in once low wage nations, specifically in China, where more workers are now exiting the labor market than entering. The value of time is growing, too. As consumers expect faster delivery, factories thousands of miles away can mean lost sales. Add the headaches of supply chain snafus and more numerous and extreme climate events, and far-flung production is becoming relatively less profitable in many industries. 

Politics are changing, too: Freer markets are giving way to industrial policies and protections; and national security concerns are baked into trade agreements and influence international commercial ties.

Many of these shifts favor the United States, as do its clear legal rules, world-class universities, and wealthy consumers. But regionalization will become more—not less—important going forward, as the benefits of bigger markets and broader market access, of larger workforces with a greater range of skills, of diverse and bountiful natural resources, and of various types of financing matter.

Expansive commercial ties with Mexico and Canada create a bigger market for U.S.-made goods and tariff free access to more of the world for U.S.-based suppliers as Mexico and Canada have free trade agreements with nearly 60 percent of global GDP, while the United States has preferred access to less than 10 percent. And exports are more globally competitive when countries make them together, as they can take advantage of differences in skills, workforces, resources, and industrial clusters and specialization to make goods better, faster and cheaper. And when products are manufactured or assembled in Mexico or Canada, they are much more likely to buy parts from U.S. factories or offices, those orders keeping and creating U.S.-based jobs.

International trade has shaken up the U.S., creating winners and losers. But shutting out the world isn’t the way to ease disparities and bring prosperity. If the U.S. wants to remain an economic powerhouse, competing with Asia, Europe and others for global consumers, businesses, and industries, it can’t go it alone. It needs its neighbors. 

Shannon K. O’Neil is vice president of Studies and Senior Fellow for Latin America Studies at the Council on Foreign Relations. She is the author of the forthcoming Book “The Globalization Myth: Why Regions Matter.”

Tags free trade globaization regionalization

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