Revue Européenne du Droit
International trade: towards increased regionalization?
Issue #4
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Issue #4

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Anne-Laure Kiechel , Julien Marcilly , Théo Maret

Revue européenne du droit, Summer 2022, n°4

Despite the proliferation of regional trade agreements in the 2000s, the share of intra-regional trade in world trade has been reduced since the great financial crisis of 2008. Apart from Europe, Asia and, to a lesser extent, North America, the importance of intra-regional trade remains low even in Africa and Latin America. However, given the difficulty of reaching a global consensus on multilateral agreements, the current period could mark a turning point. The recent entry into force of major regional free trade agreements such as the Regional Comprehensive Economic Partnershp (RCEP) in Asia-Pacific and the African Continental Free Trade Area confirm this. The desire of companies to diversify their supplies while favouring shorter circuits (Near-shoring) as well as the desire to trade with “friendly” countries (Friend-shoring), against a backdrop of strong global geopolitical tensions, should also favour regional trade. However, the trend towards regionalization could be slowed down by the economic consequences of the war in Ukraine. To limit food supply problems, many governments have implemented measures to restrict exports of food commodities, including to nearby countries.

1.Globalization and regionalization of trade went hand in hand until 2008

1.1.Increased importance of international trade until 2008

Between the end of the Second World War and the great financial crisis of 2008-2009, there was a trend towards globalization of international trade in goods and services. It was first supported by the advent of a new world order under the impetus of the United States, then from the 1980s onwards by the integration of Asian countries into global value chains (first and foremost Japan), and then by China and other emerging countries in the 2000s.

This trend towards inter-regional trade, which is mainly explained by differences in production costs, energy supply or the strategy of penetrating promising markets, went hand in hand with the increase in intra-regional trade in certain areas. During this period, the creation of the European common market was one of the first examples of political efforts to promote extensive regionalization with strong integration of member countries in what would become the European Union, which would increase the share of intra-regional merchandise exports to more than 60 per cent of total international trade by the 1980s 1

Figure 1 – World exports as a share of GDP

Source: IMF, GSA calculations

In this context, international trade grew faster than global GDP from the 1980s onwards: global exports, which represented about 15% of the world economy in the early 1990s, accounted for 25% of GDP when the great financial crisis began in 2008 (see Figure 1). Since then, growth in international trade has been lower than growth in world GDP.

There are several reasons for the slowdown in the growth of international trade. First, since the strong growth prior to 2008 had been made possible in part by the gradual decline in the cost of transporting goods, the end of this decline has coincided with less dynamic trade. One reason for this is the reduction in technological opportunities to improve the efficiency of supply chains (for example, the size of container ships cannot increase indefinitely). 

The internationalization of firms and production chains, which had benefited from the growing integration of many emerging countries into world trade in the 2000s (particularly China since its entry into the WTO), has also shown signs of slowing down since the 2008 crisis, as evidenced by the slower growth of trade in intermediate goods until 2020. Moreover, the growing tertiarization of emerging economies has also contributed to the loss of the relative weight of international trade in the world economy, insofar as services are traditionally less traded internationally. 

At the same time, international trade is facing various setbacks in terms of trade liberalization: the failure of the Doha discussions within the framework of the WTO initiated in 2001 and lasting more than 10 years, the blocking by the United States under the presidency of Donald Trump as of 2017 of all appointments of judges to the WTO’s appeal body, which de facto prevents it from functioning 2 or the rise of trade protectionism since 2008. These trends have led to a situation sometimes referred to as Slowbalisation, i.e. a slowdown in the globalization of trade in goods 3 .

1.2.Despite the signing of numerous regional trade agreements in the 1990s and 2000s, the share of intraregional trade has changed little

In the face of these institutional blockages complicating trade liberalization in a multilateral framework, two trends are observed:

  • The negotiation of preferential trade agreements (PTAs) between countries or regions of different zones, such as the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union or the negotiations between the European Union and the Southern Common Market (MERCOSUR);
  • The negotiation of regional trade agreements (RTAs) such as the African Continental Free Trade Area or the Regional Comprehensive Economic Partnership in Asia (see annex). The cumulative number of regional free trade agreements has increased since the early 1990s, as shown by World Trade Organization data (figure 2). Note that the peak observed in 2021 is a consequence of the Brexit, with a significant number of agreements concluded by the United Kingdom to replace agreements within the European Union.

Figure 2 – Number of regional agreements coming into effect per year, and cumulative figure

Source: WTO, GSA calculations

A study by the World Economic Forum 4 attempted to measure the evolution of the regionalization of international trade by considering the evolution of three distinct indicators:

  • The proportion of global trade between countries of the same continent;
  • The proportion of global trade between countries sharing a border;
  • The weighted average distance of international trade.

Analyses of two separate databases for the periods 1815-2014 and 1950-2019 do not demonstrate a trend toward regionalization. The proportions of trade between countries on the same continent or sharing a border have remained relatively stable, while the weighted average distance of trade has changed little.

The evolution of the share of intraregional trade by zone confirms this conclusion. According to data from the United Nations Conference on Trade and Development (UNCTAD), the European Union and Asia-Oceania are the two zones with the largest share of regional trade, with just over 60% of intra-regional trade in goods.

North America, despite the existence of the North American Free Trade Agreement (NAFTA) and more recently the United States-Mexico-Canada Agreement (USMCA), remains slightly below with a rate closer to 30% and decreasing since 2005. Finally, sub-Saharan Africa and Latin America are still lagging behind, with the share of regional trade representing less than 20% of total trade, underlining the preponderance of exports to other regions of the world, particularly the advanced countries and China in the case of raw materials.

Membership or not in a currency zone does not seem to change these regional differences significantly. For example, in the Economic and Monetary Community of Central Africa (CEMAC) and the West African Economic and Monetary Union (WAEMU), the share of intra-zone merchandise trade is low (3% for CEMAC and 13% for WAEMU). Moreover, there is no upward trend.

Figure 3: Share of intraregional goods trade by zone

Source: UNCTAD, GSA calculations

Figure 4: Share of intraregional merchandise trade for different zones

Source: UNCTAD, GSA calculations

Box 1 – Gravity models justify regionalization of trade

One of the main models used to determine the basis of international trade is the gravity model, which postulates that trade volumes between two given countries are a function of their respective size and the distance between them. It is described by the following equation for two countries a and b:

Va, b=G × MaMbDa,b

V denotes the volume of trade between the two countries, M the economic size (e.g. GDP), D the distance between the two countries, and G a constant.

This equation, similar to the one describing the gravitational force, implies that, all other things being equal, trade is greater between two countries if they are geographically close and decreases as the distance between them increases. This model has been verified empirically and has often been used to test the effectiveness of trade agreements.

Disdier and Head 5 (2008), for example, conducted a meta-analysis of 103 research studies and showed stability in the coefficient related to distance and those related to the respective economic weights of countries. Chaney 6 (2011) also provides a review of the literature supporting the empirical relevance of the gravity model, which was notably made compatible with other simple economic models.

The phenomenon of regionalization of international trade seems to be a logical consequence of this model, since it implies a minimization of distances between trading partners. 

2.The trend towards diversification of supplies and shorter supply chains favors the regionalization of trade, but not the rise of food protectionism

2.1.The trend is towards diversification of supplies and shorter circuits

The World Economic Forum study 7 cited above observes from partial data available for the period 2016-2021 on the then 28 members of the European Union trend towards regionalization. Indeed, the weighted average distance of trade of the members of the European Union, as defined above, goes from about 5900 km before 2020 to 5200 km that year, before oscillating since then around 5600 km.

This trend is explained in particular by the health restrictions that limited the international movement of people and the production of certain goods as part of the containment measures. These supply chain pressures have continued since then due to the faster and stronger than expected global economic recovery. Beyond the COVID-19 pandemic, other events have highlighted the vulnerability of global supply chains and thus companies dependent on a limited number of suppliers, such as the temporary blockage of the Suez Canal in 2021. The war between Russia and Ukraine is having an impact on value chains, especially as it is leading to measures restricting trade between these two countries (see table).

The question is whether these recent changes will indeed lead to increased regionalization of international trade. For example, the European Union has made announcements on the need for strategic autonomy. To achieve this, the objective is to promote the relocation of value chains in several industrial sectors (foremost among them the medical and pharmaceutical industry) to improve the region’s resilience to exogenous shocks such as the COVID-19 pandemic. Similarly, Indian Prime Minister Narenda Modi has emphasized the notion of the need for economic self-sufficiency in the wake of the COVID-19 pandemic, and several countries, including Japan, have included in their recovery plans targeted support for companies that repatriate production activities to their own countries.

But at this stage, the results of these new strategies are not visible: exports of intermediate goods, a good indicator of the health of global value chains, rose 47% year-on-year worldwide in Q2 2021. This strong growth is not just due to favorable base effects (trade having fallen a year earlier during strict confinements), with these same exports up more than 20% year-on-year in Q2 2019. Considering a complete relocation of manufacturing processes domestically or regionally highlights the problems of rising production costs and lack of local skills. Reducing production costs has been the primary driver of past relocation of production in order to offer lower prices to consumers. A relocation of production processes to more developed markets would necessarily mean higher prices, which would be shared at least partially by consumers. The differences in production costs between countries remain significant, even if they have narrowed somewhat over the past 20 years: while China’s GDP per capita was 6% of that of the United States in 2000, it is now around 30%. Finally, even with a complete relocation of manufacturing processes to the national or regional level (within the EU, for example), this new local production process would still be dependent on the supply of raw materials, which is highly dependent on location.

Moreover, while previous regional trade agreements appear to have had a minor effect on intraregional trade (see section 1), the recent signing of a few major agreements could change this. The African Continental Free Trade Area (ACFTA), as well as the Regional Comprehensive Economic Partnership (RCEP) for Asia-Oceania, illustrate this trend. According to initial estimates 8 from the United Nations Economic Commission for Africa (UNECA), the ACFTA is expected to increase intra-African trade by 40%.

These two free trade agreements are being implemented in areas with extremely different situations (see table): the RCEP signatory countries represent 30% of world GDP in Asia, compared with only 2% in Africa. On the other hand, Asia-Oceania is more highly integrated than Africa, with nearly 60% of intra-regional merchandise trade already in place. The longer-term potential for the African free trade area is therefore even greater.  The RCEP overlaps with many already deep agreements between countries in the zone, such as the ASEAN Free Trade Area. In this sense, the marginal impact of the African agreement could also be particularly important as existing regional agreements in Africa are less deep.

This strategy of adopting a pragmatic approach by favouring the signing of regional agreements over multilateral agreements does not, however, have all the advantages: it does not make it possible to respond to certain issues that are global in scope. This is the case, for example, with environmental changes: a regional approach could indeed favor the lowest bidder on environmental standards or working conditions and perpetuate the dumping phenomena already observed today. The questions linked to the implementation of the European carbon tax confirm this. 

2.2.Rise of food and energy protectionism in the context of the war in Ukraine

The war between Ukraine and Russia has accelerated the rise in energy and food commodity prices. In response to this rise, which is increasing inflationary pressures with significant risks of social protest, many states are tempted to implement protectionist measures.

As illustrated in Table 1, such measures have emerged very quickly, both in low-income countries (such as Burkina Faso) and in high-income economies such as Japan. They target a variety of food commodities: meat, grain, or oil. These measures consist mainly of restrictions on exports. But they also involve facilitating imports by lowering tariffs (which is therefore not protectionist).

For example, Indonesia – after several progressive measures – banned all palm oil exports at the end of April in order to limit price increases on the domestic market. Yet the country is the world’s leading producer and exporter with two thirds of its production exported, representing 60% of the world market. This decision has therefore quickly pushed up prices on the international markets.

In the short term, the evolution of protectionist measures observed for foodstuffs will probably be dictated by the evolution of the conflict, even if other economic factors could reinforce this trend, such as the drought underway in the Horn of Africa or the heat wave in India which is destroying wheat crops. 

Table 1 – Protectionist measures on food commodities decided since the beginning of the crisis between Russia and Ukraine on February 24

 
Source: Global Trade Alert, GSA

Table: Comparison of two recent free trade agreements: Regional Comprehensive Economic Partnership and African Continental Free Trade Area

African Continental Free Trade AreaComprehensive regional economic partnership
MembersAlgeria, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Central African Republic, Cape Verde, Côte d’Ivoire, Comoros, Republic of Congo, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Eswatini, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, South Africa, Kenya, Chad, Lesotho, Liberia, Libya, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, Somalia, South Sudan, Tanzania, Togo, Tunisia, Uganda, Zambia, ZimbabweAustralia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, New Zealand, Philippines, Singapore, South Korea, Thailand, Vietnam
Economic size (% of world GDP)2%30%
DepthElimination of customs duties for 90% of tariff lines over a period of time depending on the level of development of the countriesRemoval of rights on 7% of additional lines scheduled for a later dateRemoval of barriers on 91% of assetsProhibition of certain customs barriersMaintain tariffs on rice, wheat, dairy products, sugar and beef and pork (protection of farmers)Unified Rules of OriginNo obligations to open up services or vulnerable sectors of the economies
Social normsNo inclusion of social normsNo standardization of standards on working conditions (unions)
Environmental standardsNo environmental obligations, maintaining the flexibility of the StatesThe States must not compromise the protection of the environment, without specifyingNo environmental standards

Notes

  1. IMF, trade data
  2. The Europeans have tried to set up an interim multi-stakeholder structure to deal with this situation, but this structure has not yet been set up and is still under negotiation.
  3. Apart from the exchange of goods and services, the other dimensions of globalization are the flows of capital, people and data.
  4. Regionalization vs. globalization: what is the future direction of trade, World Economic Forum, 2021
  5. Disdier, Anne-Célia and Keith Head. 2008. “The Puzzling Persistence of the Distance Effect on Bilateral Trade,” Review of Economics and Statistics, 90(1): 37-48.
  6. Thomas Chaney. 2011, “The Gravity Equation in International Trade: An Explanation.”
  7. Regionalization vs. globalization: what is the future direction of trade, World Economic Forum, 2021
  8. UNECA, African Price Monitoring Report, 2022
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Anne-Laure Kiechel, Julien Marcilly, Théo Maret, International trade: towards increased regionalization?, Aug 2022,

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