Trade Regionalization: More Hype than Reality?

While experts are predicting a shift away from global trade to regionalized patterns, recent data suggest that more skepticism is in order: an analysis of trade data based on four different regional definitions, 2003 and 2012. shows a clear trend towards less regional trade between , and there is no consistent trend in recent years. Since 2004, trade flows have typically spanned longer distances, a trend that increases during pandemics. Looking ahead, while geopolitical tensions, technological trends, and environmental concerns all have the potential to contribute to increased trade regionalization, other forces, such as declining container shipping costs and the facilitation of long-distance transactions Continuous improvement of the technologies will continue. In favor of long distance trade. When deciding to regionalize, leaders must pay attention to the economic rationale that always guides such decisions.

of the More than a decade, Experts have stayed Prediction of change To do more Regional Trade PatternsAs companies adopt Close strategy To produce goods Close to markets Where they will be sold. Many expectations Turbocharged by Covid-19 This phenomenon.

But recent data suggest that trade regionalization is increasingly sceptical. Trade flows have expanded. long distance, even during a pandemic. While trade regionalization may increase going forward, we would not bet on a shift from global to regional business.

Anecdotal evidence of increasing regionalization

In our DHL Global Connectivity Index 2021 Update In the report, we track the percentage of global trade that takes place within regions using four different regional definitions: one from the World Trade Organization (WTO) and the United Nations (UN), as well as within continents and three macro-regions. . Asia Pacific, EMEA (Europe, Middle East, and Africa), and the Americas.

While there was a clear trend towards less Regional trade between 2003 and 2012 shows no consistent trend in recent years. When we use WTO definition, Which divides the world into seven regions, we see an increase in regional trade between 2012 and 2016. But this trend finished In 2016 And if we divide the world using the other three regional definitions, the increasing trend disappears entirely.

Because all regional definitions involve subjective judgments, we prefer to focus on a more objective measure of changes in global trade patterns: the average distance traveled by all trade flows around the world.

If there was indeed a strong shift toward regionalization, one would expect trade to become, on average, greater. small Distance But our analysis for the DHL Global Connectivity Index shows that trade flows are indeed spread over long distances Since 2004, despite a gap between 2012 and 2018.

The pandemic increased long-distance trade.

There is also trade Traveled a long distance. During the Covid-19 pandemic, despite expectations that disruptions will force greater reliance on nearby suppliers. this is because Exports increased tremendously. In Asia To meet growing Demand for imported goods in many parts of the world. therefore, Countries away from Asia are imported over long distances, while countries within Asia themselves import over short distances. This led to an overall shift towards more long-distance trade even as some buyers did. Switch to nearby suppliers.Especially for time sensitive products. While Barriers to long-distance trade Dominating the headlines, short-haul trade was also affected by the pandemic Capacity constraints And Labor shortage.

The fact that long-distance trade has grown more than short-distance trade during the pandemic raises questions about the role of regionalization in supply chain risk mitigation strategies. Surroundings and Regionalization Is Many attractionsand they can increase flexibility through shorter transit times and less cross-region interdependence.

But long-distance trade can also contribute to resilience. Long-distance trade promotes specialization and economies of scale, and there are. Some evidence that producers were able to rapidly increase exports during the pandemic to countries that supply a large share of global demand for their products;

Regionalization in the long run?

Forward, Geopolitical tensions, Technological trendsAnd Environmental cause All have the potential to contribute to increased trade regionalization. So could. New trading blocks Such as Regional Comprehensive Economic Partnership (in the Asia Pacific region) and African Continental Free Trade Area. And regionalization of supply chains due to pandemics may accelerate in the coming years, as large Resetting takes time..

However, other forces will continue to favor long-distance trade. These include container shipping costs. Finally coming down to a more general level, The growing part Of Emerging economies In World Trade (he Trade over long distances.), and the ongoing improvement of Technologies that facilitate long distance transactions..

The waning of business interest in regionalization after the boom at the start of the pandemic also reinforces the sense that predictions of a large increase in regional trade may fail to materialize. In the April 2020 survey, 83 percent of executives He said his companies planned to move closer to the coast to regionalize their supply chains. When the same survey was repeated in March-April 2021, Only 23% still said they were planning to move closer to the coast. Another set of surveys This suggests that companies have moved away from regionalization and near-shore projects to other methods of increasing supply chain flexibility, such as increasing inventory levels and dual-sourcing raw materials.

The war in Ukraine has given another impetus. Business interest I Regionalization. However, many of the effects of the war have, so far, favored long-distance trade. For example, the European Union is increasing energy imports. From more far off Countries To reduce dependence on Russia. during this, Russia is doing more trade with Asia. rather than Europe, despite its greater distance from Russia’s major population centers.

The potential for major increases in trade regionalization is also limited by the fact that trade is already quite regional. Using most regional definitions, more than half of global trade takes place within regions. About three times This ratio would be expected in a “frictionless” world where distance and country differences do not affect trade patterns. Surprisingly, transportation costs Specify less than 30% The diminishing effect of distance on trade. Preferences for similar products In neighboring countries, Regional trade agreementsAnd Many other similarities and connections Short-distance trade has long been promoted among nearby countries.

Should your company adopt regionalization?

The main implication of this analysis is that leaders should be skeptical of the assumption that a major regionalization wave is underway. If your company is considering regionalization because you expect your customers or suppliers to adopt regional strategies, carefully evaluate what real commitments they are making. Rhetoric has gone far ahead of reality.

Ultimately, whether a company should regionalize or not, the main drivers should be the economic fundamentals that have always guided such decisions, most importantly demand patterns and production costs/capabilities.

what Is What’s new is the extent to which companies should factor geopolitical tensions into their thinking. The near-term trend may be lower than expected, but that’s what many are starting to say. friendship or allyshoring Can become increasingly important in strategically sensitive industries.

Be especially wary of any supply chain reconfigurations that could lock your company into a higher cost structure. Without continued government support, a company that expands its cost base significantly. Risk of losing business For more efficient competitors. And while the pandemic and war in Ukraine have highlighted the need for resilience, they have also contributed to it. A big rise in inflation And Government budget pressures. This means that sufficient policy support for moving supply chains will be limited to the most politically sensitive product categories. Increasing pressure to cut costs will require companies to take a closer look. And Far away from the most efficient and reliable production and sourcing locations.

Leave a Comment