There are four reasons why regionalism will take centre stage over the next decade.
First is protectionist and nationalistic tendencies. In times of crisis, political leaders fall back on their instincts to protect their nation’s own immediate interests. The personal protective equipment export bans in the early phase of the Covid-19 pandemic are a good illustration of this.
But modern anti-free-trade impulses run deeper. Even US president Joe Biden, who favours international co-operation and intends to mend ties with friends and allies, resorts to nationalist measures. One of his first acts in office was to sign an executive order on “Buy American” — a direct succession to his predecessor’s policies.
China’s policy of “internal circulation”, favouring domestic production and seeking to be independent from foreign suppliers, is the Asian counterpart to this. In public discourse on international trade, terms such as ‘local content’ and ‘re-shoring’ are hence omnipresent.
Second is international power policy. As with so many of his other policies, former president Donald Trump’s chief concern was in changing the tonality of international relations, with a focus on “de-globalisation” and isolating China via economic decoupling. Concepts such as ‘autarky’ and ‘strategic autonomy’ increasingly enter our political discourse, and ‘national economic self-sufficiency’ is the yard-stick for successful policies today. But when national security is used to restrict trade and investment, such as in steel, one wonders when if we are heading into a Thucydides Trap.
Third is carbon reduction. Teenage activist Greta Thunberg’s crusade led companies to think hard about their carbon footprint, resulting in goods being produced closer to home. This has only been furthered by the quadrupling of shipping costs from China to Europe seen in the first quarter of 2021.
But there is an even bigger effect. Europe has set itself ambitious green targets that could lead to significant distortions in trade and investment. With other countries decarbonising at a slower rate, companies there will produce at lower costs than European firms.
The consequence is that production is shifted to locations with less strict environmental measures or carbon taxes, leading to job losses and even faster de-industrialisation. One potential answer is a carbon border adjustment mechanism; but even if born out of the best of intentions, this is yet another hurdle to international trade.
Finally, of course, are classical business reasons, such as the shortening of supply-chains to ensure supply security. Maybe the best we can hope for right now are regional blocs such as EU, RCEP and USMCA. Hibernating through this adversarial period, and having another go when the political climate is milder, could prove to be the chosen route for investing companies.
Martin Kaspar is head of business development at a German mittelstand company in the automotive industry.
This article first appeared in the April/May print edition of fDi Intelligence. View a digital edition of the magazine here.