A Regionalized World

The author of Two Nations Indivisible and a columnist for Bloomberg Opinion, Shannon K. O’Neil offers insights on postglobalization commerce. She cogently argues that the most important economic activities on the planet hinge on the cooperation of neighboring nations.

A Regionalized Economy

The global economy is regionalized. A few regions dominate international commerce, and the biggest powers favor relationships with their nearest neighbors. Most commercial activity sends goods not across the world but to nearby countries. While North America, Europe, and Asia, for example, trade with one another as global powers, they remain closely tied to their own smaller spheres.

The world has become more international but not nearly as global as the news would have you think.Shannon K. O’Neil

Thanks to trade, the average American household gains $10,000 a year in disposable income. Cross-border trade gives consumers access to cheaper and better electronics, apparel, and household appliances. However, international manufacturing displaced many US factory workers: Two million Americans lost their jobs to the rise of Chinese manufacturing.

In 1981, cross-border commerce accounted for $2.4 trillion in activity; now the total is $20 trillion. Simple innovations such as the shipping container spurred the rise of international trade by allowing the standardization of shipments, making them faster and cheaper.

Selling to customers in other countries is a perilous business.Shannon K. O’Neil

A few multinational brands are truly global: Coca-Cola, Nokia, and Sony are among the firms with worldwide supply chains. But most purportedly global companies focus on a few areas. Ikea, for example, operates stores across the world but manufactures or orders two-thirds of its products from Europe. Zara assembles its garments in Spain and Portugal with fabrics from Italy, Greece, Spain, Morocco, and Turkey. Walmart generates nearly 90% of its sales in North America.

Europe

The European Union is a cohesive international trade bloc that shares a common currency. The multiple currencies that preceded the euro complicated cross-border transactions. But Britain, Denmark, Poland, Hungary, and the Czech Republic are either current or former EU members that use their own currencies.

The union of Europe hasn’t been seamless, given the profound cultural and economic divides among member states. Residents of Western Europe long fretted about an influx of Eastern European workers into factory jobs and the trades. Immigration remains a flash point. Germany and other states were receptive to immigrants from Syria, Iraq, and Afghanistan, while Hungary was less open to newcomers.

COVID-19 led European nations into deep lockdowns, resulting in closed borders and hoarded masks. The pandemic proved a rallying point for European governments, as the EU issued hundreds of billions in bonds and raised taxes to pay for the stimulus. As the pandemic eased, public trust in EU leadership rose, and it is now an even more powerful regional force.

Asia

When the Chinese Communist Party opened the nation’s economy, growth came to the country with a vengeance. South Korea in particular was a big backer of China, starting in the 1990s. Japan jumped in, making Hitachi TVs and Canon cameras in China. Ford, General Motors, General Electric, Siemens, and Ikea later invested in China, as money from China’s neighbors transformed the country’s economy and skylines.

Free Trade

Former president Donald Trump frequently bashed the North American Free Trade Agreement (NAFTA) as the “worst trade agreement ever.” Former Mexican president Andres Manuel Lopez Obrador was similarly critical of NAFTA. And yet the two vocal naysayers deepened cross-border cooperation  in July 2020, when they made a joint announcement praising the United States–Mexico–Canada Agreement. NAFTA was effective, as products of all types now cross North American borders without tariffs. NAFTA even carved out specific language to protect intellectual property.

Political reluctance weakens North America as a regional power. Europe and Asia eagerly pursue cross-border cooperation, but isolationism undermines North America’s efforts. The Trump administration undid many prior free trade policies. Trump brought back tariffs, quotas, and export controls. China retaliated by removing American-made computers from government offices and by encouraging boycotts of US brands such as Apple.

Protectionists overlook the benefits of international trade: Companies that export enjoy larger markets and pay their workers more. Germany’s economy experienced this in the 1990s, when the nation collaborated with countries in the former Soviet bloc. Volkswagen began manufacturing in the Czech Republic and Slovakia, and Mercedes-Benz opened factories in Hungary and Slovenia. German companies gained access to cheaper labor in the short term and to larger, more robust markets for the long term.

While Europe and Asia invest in infrastructure, North America ignores obvious opportunities. Train lines and highways often stop at the Mexico–US border, creating logistical choke points.Shannon K. O’Neil

American should embrace a new era of cross-border commerce. The United States needs to educate students and workers for today’s professional reality. Thriving economies no longer make physical things; instead, they reward those with technological skills. The US economy’s biggest asset is likely its human capital. The American educational system needs to retool itself away from the old notion that workers stop learning in their 20s. Longer lifespans in a fast-changing economy ensure that US workers will switch careers frequently. They need to learn fresh skills through apprenticeships and lifelong education programs.  

How Trade Works

O’Neil offers a dispassionate, readable, and insightful overview of how international trade works and how tariffs and protectionism function. In the midst of a US presidential race featuring much ignorant, destructive rhetoric regarding tariffs and protectionism, O’Neil provides clarity and a reality check for those striving to understand the operations of the global market, which she ably contends is above all a series of regional markets. Investors, businesspeople, and students of economics will benefit from O’Neil’s informed insights.