Meeting

Academic Webinar: The Globalization Myth

Wednesday, January 17, 2024
Martin Pollard/Reuters
Speaker

Vice President, Deputy Director of Studies, and Nelson and David Rockefeller Senior Fellow for Latin America Studies, Council on Foreign Relations

Presider

Vice President for National Program and Outreach, Council on Foreign Relations

Academic and Higher Education Webinars and Renewing America

Shannon K. O’Neil, vice president, deputy director of studies, and the Nelson and David Rockefeller senior fellow for Latin America studies at CFR, and author of The Globalization Myth: Why Regions Matter, leads the conversation on why regionalization, not globalization, has been the biggest economic trend of the last forty years.

FASKIANOS: Welcome to the first session of the Winter/Spring 2024 CFR Academic Webinar Series. I’m Irina Faskianos, vice president of the National Program and Outreach here at CFR. Thank you all for joining us.

Today’s discussion is on the record and the video and transcript will be available on our website CFR.org/academic if you would like to share the call with your colleagues and classmates. As always, CFR takes no institutional positions on matters of policy.

We’re delighted to have Shannon O’Neil with us to discuss the globalization myth. Dr. O’Neil is vice president, deputy director of studies, and the Nelson and David Rockefeller senior fellow for Latin America studies at CFR. She’s an expert on global trade, supply chains, and Mexico and Latin American democracy. Dr. O’Neil is a columnist for Bloomberg Opinion and has often testified before Congress. And she is the author of The Globalization Myth: Why Regions Matter, which was published by Yale University Press in October 2022, and just came out in paperback in October 2023. So it’s just out in paperback. She’s also the author of Two Nations Indivisible: Mexico, the United States and the Road Ahead, which was published by Oxford University Press.

So, Shannon, thanks very much for being with us today. I thought that we could start with you talking about why regionalization, not globalization, has been the biggest economic trend of the last forty years.

O’NEIL: Great, Irina. Thanks so much for having me. And, hello, everybody. Nice to—can’t see you, but nice to be here with all of you. And, you know, let get at that, sort of why I argue that regionalization is really the biggest thing that’s happened over this last forty-plus years. Let me get at it, starting with a tale of two cities. And the first city is the city of Akron, Ohio, which is where I happen to be from originally. And Akron, Ohio was once dubbed the rubber capital of the world. In the 1950s and 1960s it was a boom town. People were moving there to work in the factories. And, in fact, one out of every two tires that were made around the world were made in Akron, Ohio, out of all of the factories and production that was there.

Now it is a town that, when I was growing up—so in the 1970s—hit hard times. They started to face more competition from Japanese tiremakers, from French and German tiremakers. And the competition got so stiff that by the early 1980s the last tire came off of a factory line in Akron, Ohio that’s ever been made. And most of the companies were sold off to their competitors—to Michelin in France, to Continental in Germany, to Bridgestone in Japan. And since then, you know, Akron has hit pretty tough times. You saw lots of people leave the city. It’s been, you know, a place with lots of the challenges of the quote/unquote, “rust belt” that people talk about.

And many people would say, you know, this is a classic example of the vagaries of globalization. This is what happens, right? They get competition from abroad, and these are the real challenges. But let me put a little nuance on that. And let me compare it to another town, Columbus, Indiana, which is about a four-hour drive from Akron, Ohio. And this also was an industrial town. It is the home of Cummins Engines. So, a particular engine type was invented there between the world wars. And during the postwar period, just like Akron, Ohio, you saw a huge boom as Cummins Engines went to be part of the Marshall Plan, rebuilding Europe, building up Asia, building up the United States and the like. And you saw a huge boom in prosperity come to this town, that’s about the same size as Akron.

Now, Columbus, Indiana and Cummins Engines also hit tough times in the 1970s. All of a sudden, Japanese engine makers were beating them out for contracts with Ford and GM and others because they could make more efficient, you know, more sophisticated and reliable engines than Cummins was able to make. But Cummins was able to limp through the 1980s and not go bankrupt. And then in the 1990s, it saw a rebirth. And one of the key factors in its rebirth was NAFTA. All of a sudden where they had struggled vis-à-vis, you know, German engine makers, Japanese engine makers, they could now distribute their costs across North America, making some things in Mexico, some things in Canada, and some things still in Columbus, Indiana and parts the United States.

And all of a sudden, they had new markets as well. And in fact, today if you go down to Mexico and you’re on one of the highways in Mexico and there’s trucks that are going up and down, in part because of the trade with the United States, chances are that is a Cummins engine in that truck, made in actually upstate New York for all of the trucks that are in Mexico, or a big portion of the trucks that are in Mexico. So, Cummins was able to get its mojo back and actually grew and is one of the big engine makers again. Was able to kind of come back. And also the town of Columbus, Indiana, was able to do so as well. And it’s actually one of the most trade-dependent towns in the United States. And is also one that is thriving.

Now, what’s the difference between these two? I would argue it’s not globalization, because both face globalization, but it was regionalization. And in fact, in the case of Akron, it was limited regionalization. They got hit by competitors from other parts of the world before NAFTA, before they were able to bring in partners through free trade agreements, and the like. And they were facing regional supply chains in Europe through what was the European Community at the time, which is now the European Union, and Asia, where Japan had reached out and it had factories all over Asia. And it was able to use its economies of scale and scope and different kinds of labor and natural resources to make better products at lower prices. So they were competing against regional supply chains, and Akron wasn’t able to keep up. While Cummins Engines and Columbus, Indiana, because they could hang on there until the 1990s, were able to form regional supply chains that allowed them to compete.

Now, this is sort of an example, I would say, or anecdotes that get to a larger theme. And, you know, there’s a lot of talk out there about globalization, and people feel passionately about it. They love it or they hate it. They have strong opinions about it. But as Irina said, you know, I think the biggest phenomenon is that we actually misunderstand it over the last forty to fifty years. And what we’ve seen, more than globalization, is regionalization. And let me just put out what I would say are two myths about globalization.

The first over the last forty, fifty years is that the world, in fact, globalized. And when you start looking at trade and economic data, what you find is that very few countries actually participated in quote/unquote, “globalization.” And so, what I did is I measured trade as a percentage of GDP. And so if you globalized—the way I measured it is, did your trade double or more as a part of your economy, right? That’s a big shift or transformation of your economy.

And when you look at it that way, there are only about two dozen countries in the world that saw their economies transformed. And in contrast, you have eighty-nine countries that saw trade as a percentage of GDP stay the same—so stagnate not change—or even decline. So there’s a good number of countries that deglobalized over these last forty, fifty years, in terms of their access and their openness to markets around the world, rather than globalized. So that’s one myth, is that everybody—it was an all-penetrating phenomenon that swept the world. It’s actually only twenty-five countries that really participated. So that’s one side.

The other myth is that when companies, and money, and people, and ideas, and patents, and goods, and inputs went abroad—which they did, we’ve seen trade go from two trillion to twenty-two trillion around the world since 1980. But when they went abroad, they didn’t necessarily go to the other side of the world. They didn’t necessarily globalize. And, yes, there are companies out there that you and I all know—you know, Boeing sources from fifty-plus different countries, and Coca-Cola can be found in every small town everywhere in the world. But the vast majority of companies that went abroad, the other tens of thousands, hundreds of thousands that you or I might not know their names, yes they did go abroad, but they didn’t go all that far away.

They went closer by. And in fact, when you look at trade statistics, something that brings us home is the average good that is traded internationally travels about four thousand miles. And that is roughly the distance between New York and Los Angeles. That doesn’t get you to Shanghai. It doesn’t get you to Berlin, if you’re leaving from the United States. It’s much closer. It’s much more regional. And when you combine those two together, that not that many countries participated and when they did their companies did not go all that far away, and what you’ve gotten over these last forty-fifty years are three big regional hubs. The European one, an East Asian one—or, focused on East Asia—and a North America one. And between those three hubs, 90 percent of all global trade happens. So you add up all those other dozens of nations, all the nations of South America, of Africa, of the Middle East, of South Asia including India, all together they’re just 10 percent of global trade. The real dynamism is within these three big hubs, within these three big regions.

What we’ve also seen is that all regions, or these three regions, didn’t do it equally. And so, we see more integration in some versus others. So we see within Europe and the European Community, and now the European Union, we see almost two-thirds of trade, and the movement of money, and the like within these nations. So, these are nations that make things together and they sell things to each other, mostly. When we look at Asia, we see in 1980 about 30 percent of trade stayed within Asia. That has grown over these last forty, fifty years to almost 60 percent. So there too, they make things together and, increasingly, sell them to each other. They still sell them, obviously, to the United States and other parts, but increasingly to each other.

When we turn to North America we see, pre-NAFTA, about 40 percent of trade was within the three countries of Mexico, Canada, and the United States. It grew in the decade after NAFTA almost 48-49 percent. So almost, you know, half—one out of every two dollars—was within the region. And then after 2001, it fell back down to about 40 percent. So, it’s much less integrated than the other two blocs or regions. Now, it’s more integrated than the rest of the world. You look at South America, Africa, the Middle East, South Asia, only about 15 percent of trade stays within those regions. When they trade, they trade with places further away. But it’s not all that much trade, right? It’s only 10 percent of global trade. But the three regions, we see North America much less integrated than Asia or Europe. And I would argue that is to North America and the United States’ detriment, and to Asia and Europe’s competitive strength.

And why is that? Well, why that is—and this gets back to the story of two cities. Why did Akron fail and Columbus, Indiana succeed? And in part because regionalization, the ability to draw on different labor markets and different labor costs, draw on different access to capital, draw on different skill sets, draw on different natural resources, draw on different access to markets all over the world, allows you to be more competitive with your goods. Not just in your home market, but in markets more broadly. And that allows you to, as a company and then as your workers within the company, to grow and thrive.

So, you have scale that you can’t have as just one country, even a country like the United States. That’s one side. The other side is that when you’re working, or trading, or integrated through supply chains with others in your region, they’re much more likely to buy from you. So today when you look at goods that are coming in from Mexico to the United States, imports from Mexico to the United States, on average 40 percent of that good was actually made in the United States. That’s U.S. suppliers. That’s U.S. intellectual property. That’s U.S. inputs that are going into that good that’s there. The same good average, you know, amount of American-made value added in something coming in from China is less than 4 percent. So there’s really nothing there, because most of it is Asia. That’s where the other parts and pieces and components come from.

So, when a factory opens up in Mexico, it’s much more likely to create jobs in the United States than if a factory opens in China. And that too is an aspect of regionalization. And so what we’ve seen over the last forty-fifty years is that, whether we like it or not, manufacturing has gone from being a one country thing, often, to being a team sport across groups of nations. That is what international supply chains are. And what we’ve also seen is that when those are regionalized, it’s much more likely to create economic prosperity in jobs and growth in the countries that participate than those that do not.

And I think that it’s a lesson for the United States as we go forward. As we’re trying to create jobs, we’re trying to create growth, we’re trying to create inclusiveness, is that we need to be thinking more regionally than just domestically in terms of our economic prospects. So let me stop there.

FASKIANOS: Shannon, thanks so much for that. Really terrific.

Let’s go now to all of you for your questions.

(Gives queuing instructions.)

So we’re going to go first to a raised hand from—let’s see. The first one comes from Babak Salimitari, who’s a graduate student at the University of California, Irvine.

Q: Hello? Can you guys hear me?

FASKIANOS: We can.

O’NEIL: We can.

Q: Good morning.

So, my question—I don’t know, when I was reading the articles and listening to what you were saying, it seems more so that this regionalization versus globalization is a debate over the semantics. Because at the end of the day, a lot of the jobs that were in the United States, they just got up and left. Now whether they went to a specific region or whether they went to globally—you mentioned the fact that the Middle East, and Asia and, I think, Africa, that was, like, only 10 percent of where globalization went to, or like—yeah, 10 percent.

And I was also looking yesterday that in Macomb County of Michigan, from, like, 2010 up until, like, President Trump was elected, a hundred thousand jobs disappeared. And there was also a town hall where I remember President Obama said: Those jobs are never coming back. You’re going to need a magic wand to bring them back. And it’s just—I wonder, what is it about those regions that did globalization or, as you say, regionalization happen—so, like, the EU and then Asia—there was one more if I’m not mistaken. But why were those places more appealing for our jobs to go to in comparison to the places that you mentioned that weren’t as appealing?

O’NEIL: Great. Thanks, Babak. That’s a great question, and actually gets right to the heart of what’s really different between regionalization and globalization. And we have seen jobs leave the United States, for sure, right? And I would say, where we have is often when it has gone to places further away, right? As you—as you highlight there, right, lots has gone to Asia, right, because that is a place that’s more competitive because they have regionalized much more than we have here in the United States. So, you know, there’s a lot of great academic studies out there that look at the hit that China sort of coming into the world.

So in 2001, China joined the WTO. And for lots of reasons, that allowed or encouraged capital to go into China because it was—they knew they would have access to global markets, and the like. At the same time, China was joining already established Asian regional supply chains. These are supply chains that, you know, I talk a bit about in the book, of the history, they were first created by Japan. Japan in the 1960s started going out and started putting factories and what, at the time, was very poor South Korea, and Taiwan, and other countries. And then South Korea and Taiwan got much wealthier and began doing more value-added things. And then they started sending factories out to Thailand, to the Philippines, to other countries around there, and to China, as China started opening up in the 1980s and 1990s.

And what’s interesting here is we see the China shock. And, you know, a lot of this academic literature, it estimates somewhere between one and two million jobs left the United States because of China coming in. Now, we don’t usually talk about this but I—you know, if you look at some of the statistics and the like, yes, the United States was hit very hard by China coming into global markets. Hit harder, at least in a per capita way, was Mexico. They lost hundreds of thousands of jobs which, given their size, was sort of more important to their economy, because they were a direct competitor with China, right? They made shoes. They made clothing. They made toys, and things—industries that were just destroyed and taken away and moved to Asia.

Now, the difference here, which I was trying to get out—and I’ll explain it again, perhaps, make it a little bit clearer, Babak, is when a factory opens up in Mexico it’s much more likely, one, that what’s made in that factory, or assembled at that factory, will be price competitive. So be able to compete in U.S. markets, but compete in global markets. And two, it’s much more likely to keep or create jobs in the United States. So when a factory moves to Asia, or moves to China, there will be no U.S. jobs associated with that, right? Like, you’ll come back, and you’ll buy it, you know, at Walmart or at a store, and it’ll be a good price, and it’ll be good quality, likely. And so it’ll be attractive to a U.S. consumer. But there’s no jobs there, right?

If a factory opens up in Mexico, they are likely going to be U.S. jobs. And because it’s spread across three different nations, and the benefits of economies of scale that we can get, you’re much more likely to be price competitive. And so you’ll be able to sell to U.S. consumers, right? When you go to the Walmart store and you’re deciding to buy, you know, this blender, that blender, the prices can be the same. So you could buy the one that was actually made in Mexico, the United States, and Canada, not just the one that was made in Asia. And so that actually, both keeps but also creates U.S. jobs.

And so what’s interesting here, and, you know, there’s a lot of talk about NAFTA. Now NAFTA’s become the USMCA. But at the time of NAFTA, that, you know, this stole U.S. jobs. You know, factories were moving to Mexico and the like. But careful studies of actually what the costs have been is that, basically, NAFTA was a wash, right? It didn’t create jobs in United States—or it didn’t—we see a net zero in terms of the jobs that went back and forth. What we do see is countries like China, with whom the United States does not have a free trade agreement, there is where you see really the job losses. So I think as we—the point I want to make, and I think is really important to understand, is that all globalization is not created equal for U.S. workers, for U.S.-based factories, for the U.S. economy. And that regionalization provides real benefits.

If you want to create jobs, and good jobs, here in the United States, regionalization provides a benefit. It’s sort of a Goldilocks. It’s not too close that things are too expensive, then you can’t compete on the store shelves because things cost more. But it’s not too far that the whole supply chain goes somewhere else and there’s no U.S. jobs created. It’s sort of this happy medium, where you can actually get benefits to the U.S. economy, and to U.S. workers, and to communities. And that’s how you bring back—or, you create and see a blossoming of jobs.

And the last thing I’ll say is just tied to that, is when we think about, you know, quote/unquote, “good jobs,” right, jobs that are tied to trade, that are tied to other parts of the economy, on average, pay 18 percent more than jobs that are part of the local economy. So you could say, oh, we should just close the borders and we’ll all just do everything here. And the problem with that is then when you do that, things cost more money. So people buy things less often. So there are jobs that disappear with that, right?

If your car cost $3(,000) to $5,000 more because it was only made in the United States, you might not buy a car as often. You might wait six months, you might wait an extra year with your current car. Which means then, you know, people who sell cars, not going to—you don’t need as many of them right? And then, you know, all the things that go on to that. You lose lots of jobs in the economy. So the benefit of internationalization is, one, those jobs pay more than jobs that are just domestic. And, two, it creates jobs in the sense that the economy moves more quickly, people buy and sell and move and trade and do things more often, and there’s more jobs overall in that process.

FASKIANOS: Thank you. There are two questions about China, so I’m going to pair them. One from the University of Missouri at Columbia and one from Stony Brook University.

Does high integration in Asian supply chains mean that it’s difficult or impossible for the West to decouple from China? And then, the other question is, why is so much made in China? How are we to understand this?

O’NEIL: Yeah. Those are both great questions.

So the made—I’ll start with the made in China, and then we’ll go to how can we get out of—can we get away from China. (Laughs.) So made in China for so many years was in large part because China was the last stop on the assembly line. And especially when you look back at the 1990s, early 2000s, China was not as technologically sophisticated as South Korea, or Taiwan, or Japan, or even places like Thailand and the like. So those are the places that would make the semiconductor, or make the engine, or make, you know, the technology that went into the phone or the Sony Walkman at one time, now, you know, the AirPods, and the like. And China was a place where they were put together. And the value that China added was much smaller. But because it was the last stop on the chain, it was dubbed “made in China,” right?

And there’s a great study that someone did about the iPhone. And, you know, one of the early iPhones came out of China. So it was made in China. But the value added was, you know, I don’t remember the exact numbers, but it was something like, you know, $10 of the $400 price. And then today, when you fast forward, and iPhones are coming out of China it’s a third of the value is actually made in China. And that sort of shows them becoming more sophisticated, right? They aren’t just putting things together, they’re actually now making the microphones, or the screens, or the other parts to it. So part of the made in China and the ubiquity of that for so long was it was the last stop on the assembly line.

And much of its growth was fueled by trade. So it was very export oriented. China has changed its model. And just to give you kind of an example or a statistic is, if you look back at the late 1990s, early 2000s, trade, as part of China’s GDP, was maybe, you know, 33 to 35 percent. So a third of its GDP came from trade. Today, it’s 20 percent. It has declined. It’s a much more inwardly focused economy than it was, say, at the beginning of this century. And partly there you see a little bit less made in China because it’s focused on its own markets, or it’s focused on other markets rather than the United States.

Which gets us to the, are we able to decouple? Can we get away from China. (Laughs.) And, first, I would say, actually, China’s doing a very—you know, a pretty successful job of getting away from us. So it has cut its imports from the United States and buys, you know, less soybeans and grains, and other things. It’s diversified and buys many more from Brazil, and Argentina. and other places around the world, because they don’t want to be so dependent on the United States. It has invested significantly, to the tune of hundreds of billions of dollars, to try to create its own technology—its own semiconductors, its own green technology, its own electric vehicle batteries, and the like—because it doesn’t want to be dependent on U.S. technology. It doesn’t want to have to import from the United States or its allies.

And I think the real question is, how can the United States and Europe, in a part, can it decouple, or de-risk, or whatever the term is that people like to use? And particularly in industries that we’re worried about the connection to China, because they might cut it off, right? If they decided to stop shipping us toys, you know, kids might be a little bit upset because you couldn’t get the latest whatever it is, but it wouldn’t be a national security concern, maybe. But if they stopped shipping out semiconductors, or they stopped shipping out some other technologies maybe, you know, Air Force jets wouldn’t be flying. Maybe the basic communications and telecom, the fact that we can all talk here over the internet and have this, you know, Zoom, we couldn’t do that because we wouldn’t have the technology. And that would be a bit more of a challenge.

What we’ve seen over the last five years is trade between the U.S. and China, as a percentage, decline significantly. So, China’s trade with the United States used to be about 21 to 22 percent of U.S. trade and imports. It’s now down to 16 or 17 percent. So huge decline. Lots of that is replaced by Mexico, is replaced by Southeast Asia, is replaced by Poland, by some other countries sort of around the world. So we’re seeing some movement.

The real challenge here is there are particular things that China really dominates. And you can’t really get it anywhere else. Either you can’t get it all anywhere else, or you can’t get it at an affordable price anywhere else. So, there are all sorts of minerals that it processes. There’s rare earths, they’re things like graphite, and germanium, and gallium, which—you know, a bunch of names, but these are really important things if you want to actually have a phone or do you want to have sort of modern technologies, and the like, or if you want your car to drive. They’re part of all of that. And they, in many of these areas, controls 60, 70, 80, 90 percent of processing and production. They also make the vast, vast majority of solar panels. So, if you want to go green and you want to have clean energy, this is the place where they make most of them. And so I think there’s a lot of challenges here, is how do you build up capacity in other parts of the world for these various products?

And the last thing I’ll say is, one is just can you make the investment in other places, right? There are environmental regulations with mining and refining that are kind of hard to deal with in some places. But two is, because China has such a lock on some of these industries—80 to 90 percent of production—they can flood the market. And if you’re a private company who has to make a profit, China and state-owned enterprises in China don’t actually have those limitations sometimes. So they can lower the price, drive your business, and then put it back up.

So this is where a lot of governments are starting to think about industrial policy, think about subsidies, thinking about supporting industries to make sure, you know, we have things, like masks, made in the United States, or basic medicines made in the United States. Thinking about things that we see as part of national security, and paying for them so that we don’t rely on countries that maybe we don’t quite trust to give it to us in an emergency.

FASKIANOS: Thank you. I’m going to take the next question from Ibtissam Klait, who’s with the University of the People, and is also a CFR Higher Education Ambassador.

Q: Hello, Dr. Shannon. Hello, Irina. Thank you for this invitation.

Dr. Irina, I believe that the belt of—the One Belt, One Road that connects China to the world, this is a stark example of globalization which would have manifested into a military power. I want your perspective, please. Thank you.

O’NEIL: Sure. No, happy to talk about that. And let me say two things about that. One is, I’m not saying there hasn’t been any globalization. Of course, there has. I’m just saying that there’s been more regionalization than globalization. So on the company side, right, we see companies that are truly global. We just see more companies that, when they went international, they went regional. And I would say the Belt and Road is actually a really good example of this. Because when you look at the investments that that China has made abroad, a strong majority have been within the region. They focused a lot of that money in Asia. Yes, they have projects that span Europe, they buy up, you know, percentages of ports. Yes, they have projects that go to Latin America, where they build grids and roads and deepen ports, or in Africa the same. Sure, they do. They have those.

But the strong majority has been regional. That’s really where they focus the Belt and Road money to create the infrastructure, to lower logistics costs that make it even more regional, right? Make it even more competitive for companies to operate across border lines, for ships, and roads, and rails, and airports, and the like to fly and to move within the region. So, I think this is a question—it is a situation of both. But even there, Belt and Road has actually been a regionalizing force. The hundreds of billions of dollars they have put in there throughout Asia have made it even more regional in Asia than global, often.

FASKIANOS: Thank you.

I’m going to take the next question from Charlotte Hulme, who is an assistant professor of the U.S. Military Academy at West Point: I’d be curious to know your thoughts on what would have been the differential political fallout had the United States focused on regional integration as opposed to globalization?

O’NEIL: I mean, this is a hard challenge for the United States, right? Because part—the United States was and has been really the anchor of global order since—at least in the post-World War II period, right? The United States is one of the bigger pushers of the Bretton Woods institutions, you know, the IMF, the World Bank, the World Trade Organization, and others. So, they really have been sort of holding up this system. The other interesting thing with the United States is, yes, while we participate in the World Trade Organization and the like, we actually are not all that open in terms of trade. Trade, as a part of our economy, is not a particularly big part. And, in part, because we have such a big economy and in a fairly prosperous one, when you think about relative to other global actors and countries around the world.

But we also have not signed very many free trade agreements. In fact, we have access—preferential access through free trade agreements, you know, no tariffs or lower regulations, the like, to less than 10 percent of the globe’s economy. And just to put that into perspective, Mexico and Canada have signed free trade agreements that gives them access to 60 percent of the globe’s economy. So when we are trying to send exports out into the world, Mexico and Canada have an advantage over us in about 50 percent of the globe’s economy, because they have free trade agreements. So they don’t pay tariffs. They have fewer barriers, you know, sanitary checks or other kinds of certifications than the United States, because we, frankly, just don’t have market access. We don’t have preferential market assets, because we haven’t signed free trade agreements.

So, one of the benefits of this regionalization is we can actually export through—if we—you know, our inputs, the things that—you know, parts and components that we make in the United States are assembled in Mexico or assembled in Canada, they can go out and go tariff-free into markets like Japan, like Australia, like much of Asia. They can go tariff free into Europe if they go out from Mexico, in ways that we can’t. Where we would pay money.

I’ll give you an example. If a car is exported from Mexico into Europe, you know, a Ford Fiesta, let’s say, or a car from Mexico, they pay zero tariffs because Mexico has a trade agreement with the EU. If a car is exported from the United States, it’ll pay depending on the car a 10 to 20 percent tariff. So it’d be unaffordable. So we don’t export cars. But if the engine comes from the United States, and it goes into a car in Mexico, then that car is exported, then all the workers, they get to participate in that trade and they don’t pay tariffs. And you can see a competitiveness.

So, the importance of this regionalization, we in some ways the United States are held back in our exports because we don’t have preferred access. Other people have—don’t pay tariffs, and we do pay tariffs. So our goods are more expensive. And one way around that, particularly right now when the United States government in Washington doesn’t seem particularly keen on signing any new agreements. One way to get in the back door there is to focus and double down on regionalization. Because Canada and Mexico are partners in a free trade agreement, the USMCA, they do have access. They have signed agreements. And it’s a way that we can actually benefit, sort of piggyback on that work that they’ve done in their market access, in ways that we don’t have.

FASKIANOS: Great. I’m going to go next to Sophia Samara.

Q: Can you hear me?

FASKIANOS: Yes, we can. And you’re—

Q: OK, great.

FASKIANOS: You’re with what university?

Q: I study international and European studies at the University of Macedonia in Greece.

And I want to ask something more theoretical. You focused on economy and trade. However, theoretically, globalization has, like, an analogy with global threats. And I wanted to—I want your opinion on, do you think that those threats that are global are a region-to-region phenomenon, that rise on the region and then move to another region? Or do you think that they’re actually global? So does the distinction you make only apply to the realm of economy and trade? Or could we apply it to other realms? Thank you.

O’NEIL: Sure, Sophia. So this regionalization argument, I think, is most convincing on the economic side, and sort of commerce and the like. We do see regional aspects to other things as well, you know, to culture, to information. You know, when people read websites that are not in their home country, they tend to read those nearby. They don’t tend to read those far away. So you see, even in areas where there’s no cost, right? You and I can go online and we could look at a newspaper from anywhere in the world. We tend to just look at the ones that are nearby to us, and countries nearby, right? Not the ones further away. And you could—there are reasons there, right? There’s language reasons and the like. But that tends to be true. When you look at the movement of students, when you look at the movement of vacationers, they too tend to stay regional. So this sort of movement of people and ideas, that too has a much more regional sense than one would imagine. And so there is a centripetal force, if you will, there.

Now, in terms of global threats here, right—and so, you know, I think there’s sort of different levels to this, right? When you go to war with someone, you tend to go to war with the people next to you, right? Sometimes you go to war with people far away, but usually it tends to be people next to you, right? We can just look at the most regional recent conflicts we have, right? We have Russia and Ukraine, and we have, you know, Israel and Gaza, right? Because you share borders, you tend to—some of those threats. Bigger, existential threats, like nuclear weapons and the like, sure, there are things that are—that are going to be regional that can reach any part of the world. Things like cyber threats, too, presumably could reach anything in the world as well. So, you know, there are aspects.

I mean, in all of this I’m not—I would never say that things aren’t global, because they are, right? And as communications, as the movement of ideas and people, and information, and even goods and physical things, has—the costs have come down because of technology, because of shipping, because of airplanes, all this stuff, right? We do see movement around. But what’s surprising, given how low transportation costs have become, especially for ideas and the like—we’re at zero, frankly, right, with Zoom or voice over IP, or all of that. What’s surprising is how close things stay to particular countries or within particular regions, given that there’s no other frictions there, right?

And even threats, I would argue, lots of threats come between—or conflicts come between those who are near each other. So does cooperation, right? You look at free trade agreements and things like that, they tend to be with your neighbors, they tend to be with those closer by. But so do conflicts. You know, overall—of course, there’s conflicts with places far away, but they tend to be, especially the kinetic ones, with those who are next door to you.

FASKIANOS: Thank you.

I’m going to take the next written question from Blake Dann, a junior at Arizona State University, majoring in global politics: I’m curious if this trend toward regional economic integration may affect multinational defense agreements as these countries become less tied together economically. For example, European dependence on American defense.

O’NEIL: Hmm, yeah. No, that’s a good question. I guess I would say that—I’d say, you know, I’ve been talking a bit about sort of the trends of the last forty to fifty years, which was, you know, I would argue more regional than global. I would also say right now, over the last decade but particularly accelerated the last couple of years, we’re seeing sort of a once-in-a-generation fluidity to these supply chains. And there’s all sorts of reasons. There’s automation and technology, there’s demographic changes. There’s climate changes. But particularly, there are geopolitical changes and there are industrial policy changes. So governments intervening in markets.

So where many of these decisions were market based, where people were looking for price competitiveness and the ability to compete, now increasingly I think many companies are making decisions based on things that governments are doing, right? They’re either—you know, geopolitics, they’re favoring certain countries over other countries, or they’re offering subsidies or tax breaks, or sanctions to force sourcing or production or sales in different countries. So I’d say all of that, you’re seeing some movement around there. Part of that, especially the geopolitics of it, is you’re seeing what our Treasury Secretary Janet Yellen calls friend-shoring but, you know, looking to put particular industries that you find important to your national security in places that you trust will give you access to those things if bad things happen, right?

So in this, the United States trusts Europe, pretty much. They don’t trust China so much. And vice versa. And so I think here, just getting back to your defense question, what the United—what I think all countries will find, including the United States, is that it’s going to be very hard to indefinitely subsidize many industries. Perhaps semiconductors is something that we’ll permanently subsidize, but other than that there are very few industries that you’re willing to permanently subsidize, for lots of reasons. So industries, companies are going to have to be profitable. And to be profitable, it’s very hard to make things in just one country, just in the United States.

So for defense, when you’re sourcing different parts for planes, for what—surveillance equipment, for whatever it is that you need, you’re going to have to have manufacturing and industrial partners. And you’re going to add on this national security layer, which is it needs to be countries that you trust. So there, actually, I don’t think Europe will be cut out, because that’s a whole host of countries that we trust. I think many of the arrangements that we see the government trying to make—the Biden administration trying to make with countries in Asia that we trust—Japan, South Korea, Australia, India, perhaps—that’s partly trying to find different places where you can source. Lots of things there. There’s geopolitics there too. But on the commercial side, that you can source from.

And I think you’re going to see the United States turning more and more to those in the Western Hemisphere, particularly Canada and Mexico, given the already deep trading ties, the industrial bases there, and the trust that we have in those countries. So it doesn’t mean Europe will be excluded, but I do think there still will be the sort of regional aspect to that, because it is profitable, because there’s already a proven path to profitability for private companies who participate in all this who, if they don’t turn a profit, will go out of business tomorrow. Which is different than places where you have state-owned enterprises that have a cushion of a federal budget.

FASKIANOS: Great. I’m going to go next to Zachary Billot.

Q: Hi, there. I’m a senior at the University of Nevada, Las Vegas, majoring in political science. But my main interest area is in international organizations and the design of them.

So I’m interested to see your opinions on the Chinese integration, either as an observer state or sort of as a funding partner, to several different international organizations—the Arctic Council, building of the African Union new headquarters. I’d be interested to see how you think that might play into this idea of regionalization first, but still globalized focus or command of control abroad?

O’NEIL: No, that’s a great question. And, you know, one thing you’ve seen China successfully do, and concertedly do, is really become big players in all kinds of international organizations, in all kinds of UN bodies, and the ones that you’ve just discussed. They become really big players in lots of the standard-setting bodies around the world, the International Telecoms Union and others, that set the standards for all kinds of technologies, and the like. So they submit dozens and dozens of papers and the like. In part, because if they can set the standards then their companies can get ahead, but also in part, they have, you know, an interest in those aspects.

We’ve also seen them create organizations when they have felt—or, be part of founding organizations if they felt that the international ones out there don’t suit their purposes. The BRICS is one of them. You know, sort of a group of emerging markets that came together. China being one of them, Brazil, Russia, India. China, the first founder, South Africa and the new members who just joined in the last few months as well. You see them forming an Asian Infrastructure Bank. I mean, there’s a lot of things that they’re doing on the global stage as they’ve sort of kind of emerged and want to assert their influence and authority, and the like.

Some of this is good, right? One of the previous questions was about the Belt and Road Initiative, and China’s invested hundreds of billions of dollars to build infrastructure in countries that didn’t have it and needed it. And it’s helped those countries grow. And so some of that is important. Other parts, you know, there is at times a coercive side to this. So much of the funding that China has put out there, often some of the terms are onerous or very opaque, and, you know, at times collateral is natural resources or even the ports or airports or things themselves, as we saw in the last couple of years in Sri Lanka and places, where it’s a very difficult balance.

So as China is the second-biggest economy in the world, it’s an incredibly important player and it needs to be a voice in these global institutions if they’re going to matter. That’s for sure. But you also need to find some sort of balance. And it’s hard when some countries come to these organizations to try to solve problems together and others come just to get kind of advantage, right? And I think there’s moments when you see that, and where they don’t really work. And I think, you know, one of the challenges, for instance, with the World Trade Organization today is many countries, including the United States, feel that it isn’t working to actually set ground rules that are fair and transparent, right? Because it deals with tariffs, but it has nothing for subsidies. And that’s really been the China growth model, is to put in subsidies to sort of give its companies and its products a leg up in various places.

So, you know, I think this is one of the things that international organizations struggle most with, is we need to include China because it’s one of the most vital players in the world and countries in the world. And if we’re going to solve climate change and all kinds of other things, they’re going to have to be part of it. But there’s often a disappointment, and a frustration, and even anger that they are not playing—they’re not contributing to the public good within these organizations. And how do you balance all of that? So, I don’t think there’s any easy answers, Zachary—(laughs)—on how we do this. But I think it is—it is why we’re seeing struggling. And, frankly, why I think we’re seeing more issues coming down to bilateral, multilateral things. So rather than the World Trade Organization, we’re seeing the G7, or the G20 take on these issues, because these bigger global organizations aren’t able to grapple with the global problems we have today.

FASKIANOS: Great.

I’m going to take the next question from Fernando Reimers, who wrote his question but has also raised his hand. So, Fernando, you can just ask it yourself.

Q: Thank you, Irina. Shannon, thank you so much for writing the book and for the—for the webinar.

So what is your explanation for how U.S. domestic politics explain the fact that we didn’t pursue regionalization more aggressively? I’ll just share an observation which may not have anything to do with it. But I remember when we began to talk about NAFTA, I was convinced it was going to be like the European Common Market, if not the EU. And I remember writing to Larry Summers, saying we should be prepared because there are going to be all kinds of education exchanges between universities and so on, between countries in NAFTA. And none of that came to pass. In contrast, in my own field, in education, I’ve seen an extremely effective creation of exchanges between China and the U.S. You know, the Confucius Asia Society played an incredible role getting K-12 schools to teach Chinese to kids, teach them about China, and so on. So, anyway, that may not be part of the answer, but why? How are own domestic politics a part of the explanation for why we missed this opportunity?

O’NEIL: Mm hmm. And, Fernando, nice to hear your voice. It’s been a long time. (Laughs.)

Q: Yeah.

O’NEIL: But, you know, I think there’s a lot of answers. But one of the reasons is that I think it caught us by surprise. And, you know, you look back at the postwar period after World War II, and the rest of the world was decimated because those wars have been fought in their places, right? So Europe was decimated, right? The roads were destroyed. The rails were destroyed. You know, it had been the center of war. And Japan had also been destroyed, right? The bombs—so, you had—for twenty years there was no industrial competition around the world, right? The United States was the only game in town in terms of this. And we got—we didn’t have to be efficient. We were the only ones who were able to produce. And we did produce for the world, right? We did send these things out to the world.

The other thing is that when Europe, and Japan, and Asia rebuilt, they rebuilt more technologically sophisticated for the time, right? They rebuilt with a more modern infrastructure. And when you see that today, if you go to China, their infrastructure is much better than our infrastructure. I will say that as living in New York and going—I mean, our airports are getting better, but it’s been a while. But you go there. And so as you get to the 1970s, and 1980s, the United States and had no competition for twenty years, and had gotten used to, like, there’s nobody else who makes anything out there that’s any good. In fact, part of the Marshall Plan was bringing people from Europe here to train them how to make stuff again, and all of this right?

And then all of sudden you hit the 1970s and 1980s and, you know, what? Europe and Japan figured out how to make stuff. And they had set it up in a different way that was much more competitive than the prewar period, and much more competitive than the United States was by itself. And so, I think there’s a little bit of just a mindset here, is the United States—I mean, we’re a huge country. We’re a prosperous country. We have some of the best technology, the best universities—of which you’re a part of. I mean, there’s all these things and advantages that we still have. But I think we got a little bit used to resting on our laurels, that nobody else could compete with us.

And, you know, lo and behold, 1980s, 1990s, lots of people compete with us. And, in fact, they had a leg up a bit, because when they rebuilt their manufacturing industrial base, they did it in a more efficient, later twentieth century into the twenty-first century kind of way. And they never kind of came at it as, like, we’re going to be alone. We don’t have to do it with anyone else. And I would say just the comparison with China. I mean, China is shifting right now, but it came up knowing—I mean, its rise—its incredible rise with double-digit growth for twenty-five, thirty years, was really based on the global economy. And it’s just the last ten years where they’ve been pulling back, right? They’ve been reducing trade as part of their economy. They’ve been trying to become self-sufficient, right? Indigenous innovation, all these, you know, five-year, ten-year plans are all about becoming more self-sufficient.

But they too harnessed the global economy, and the United States, frankly, for that rise. In ways that, you know, we didn’t. Our path was different in our industrialization and our growth. And so, I think we have to adjust our mindset that for us to succeed it’s got to be kind of a team effort, right? We can’t just be—we’re not playing singles here anymore, right? This is a team.

Q: Thank you.

FASKIANOS: Thank you.

I’m going to go next to Mojúbàolú Olufúnké Okome.

Q: Thank you very much. Mojúbàolú Olufúnké Okome. And I teach political science at Brooklyn College.

So thank you very much for your thought-provoking presentation. I have to confess, I haven’t read the book. But I was just—a lot of questions came up for me. And one is, if regionalization is so beneficial and NAFTA was supposed to be a regional economic agreement, why hasn’t NAFTA been beneficial to North America in general? Also, China doesn’t seem to be putting all its eggs in the regional basket. And wouldn’t it be more logical to combine regional and global strategies?

So and what is intriguing about your presentation is that this regionalization thing has been pushed in the Global South more than, you know, in the Global North. So why is it that there was no embrace of the usefulness of regionalism in the Global North? You know, because in the Global South it was, like, if we’re going to develop, we have to do more south-south trade. And for Africa, where I’m from—actually, I’m speaking from Nigeria today—this has been the thing. But, you know, we haven’t managed to grasp it. But there’s that African Continental Free Trade Agreement that’s supposed to maybe push it some. So really love to hear what you have to say.

O’NEIL: Great. I’ll give you a short answer, since there’s three questions. And I guess, good afternoon, or good evening, since you’re in Nigeria. (Laughs.) So on the first one, NAFTA, you know, I think the limitations to NAFTA are that it’s just not that deep an agreement. It’s basically an investment agreement. So it makes sure there’s a level playing field for investment. It does reduce tariffs. But it isn’t as deep in agreement as we saw, say, in Europe, where, you know, it’s about regulations, it was about monetary policy, as the euro came along. It was about the movement of people, it’s about the way—you know, sanitary checks and all sorts of things. You saw the EU really develop a central bank, develop a judicial system, develop a parliament. It’s a really deep integration that has been, frankly, beneficial on a commercial side in ways that NAFTA never was, right? NAFTA has no staff, right? NAFTA is a trade agreement, but it’s much more limited.

What I would say is that it’s always hard to prove the counterfactual, but I think there’s a good case to be made that without NAFTA the United States and North America wouldn’t have an auto industry anymore. It just wouldn’t be competitive. We’d be importing cars from other places. You know, there are a lot of industries actually that have integrated. What NAFTA has done is certain industries have integrated, but not all that many. And the industries that have integrated have actually become locally, but also globally, competitive. So automotive industry, aerospace industry, some processed foods. There’s some machinery and the like. You see sort of competitiveness, and growth, and prosperity in those industries that really have integrated and used NAFTA as the base. But you haven’t seen as many as you see in Asia. So, I would say NAFTA actually has been a good thing. It just hasn’t been as widespread. And in part, because it’s a somewhat weak agreement, right? It’s not all that significant and forcing of integration.

On China, I would say what you see in China and part of its rise is it chose a regional strategy in making things and then a global strategy in selling things. And so you see a bit of both. And now more recently, China has been turning to a regional or even more domestic in making things. Sort of its China for China policies, where they want the value-added to be made in China not made in other places. And more regional in selling things. So there’s movements over time. Part of that is U.S.-China tensions. They don’t want to be dependent on the United States, so they’re looking for other markets. Often within the region, Southeast Asia, and the like. But they did combine that. Regional in making things, hooking into regional supply chains for sort of the growth, and learning, and in learning managerial skills, and knowledge, and intellectual property, and the like. And then looking at global markets as a place to sell these goods.

And then finally on sort of the Global South and regionalization, you hear a lot of talk about regionalization in the Global South. You hear it in Africa. I do a lot of work on Latin America. You hear it over—you’ve heard it in Latin America since the 1960s. There’s been almost twenty organizations set up to bring regionalization to Latin America. The reality is, Africa, Latin America, the Middle East, South Asia, they haven’t been able to do it. The rhetoric is there, but the reality is not. And the trade between the countries in Africa, or the trade between the countries in South America, is very low. It’s 10 to 15 percent. And really, the vast, vast majority, 85 to 90 percent, goes to places far away.

And what that has meant is largely that Africa and Latin America and other places have been kept on the ends of supply chains. So they send out raw materials and they buy back the finished goods. And all of the value-added, the manufacturing and the technology and the sophistication, happens in other places. So they don’t learn. You know, you don’t have sort of climbing the value added. You don’t have educational gains. You don’t have better jobs with better wages paid, because you just are sending out the raw commodities—the oil and the minerals and the cobalt and the like, and then you’re bringing back the iPhone or the Samsung phone, or whatever it is.

And that’s where I think regionalization has a real promise for Africa, for other places. And hopefully the Africa Continental Free Trade Agreement will help begin to do that. But I think this is the real challenge. There’s a lot of talk about it, but we haven’t seen the actual numbers change. And I think that’s why in some places you haven’t seen inclusive growth. It’s one of the factors.

FASKIANOS: We have very little time left. So I’m just going to do a quick hit—it may not be a quick hit—for a written question from JP Maddaloni, who’s a military professor at the U.S. Naval War College: Are there certain commodities, he’s thinking energy, that are more global than regional? Do you see a regionalization dominance in certain commodities?

O’NEIL: That’s a—that is a great question. And, yes, there is commodities, because some are just found in certain places, right? Like cobalt is only found in the Democratic Republic of Congo, pretty much—(laughs)—you know, places. Others, you know, nickel and things, are in three or four countries. So, yes, oil as well. So those are global commodities. In terms of value, in terms of global trade and the global economy, which is $100 trillion, they’re not a huge value. So that’s partly why they don’t look quite as important. They’re sort of the beginning of a process, not the middle or the end of the process. And even some of those are regional, right? So oil markets are global, though you see different prices in parts of the world. But natural gas markets are very regional.

And I will say sort of last, as we finish this out, as we move to a greener economy and greener energy supplies, they will tend to get more regional or even more local, right? You’re not going to send solar power across an ocean. You’re not going to send wind power across an ocean. Geothermal too is going to be used more locally. And natural gas, which is a bridging kind of fuel or energy source, is already very regional in its—in its pricing and in its use. So, yes, there are commodities that are out there that are global, but I think even there some of the phenomenon—especially in the energy and energy transition—is going to be more regional and more local as we go forward.

FASKIANOS: Fantastic. Thank you to all of you for your questions and comments. I’m sorry that we couldn’t get to all of you. Shannon, we’re just going to have to have you back. But you should also—I commend her book to you. Again, the title is The Globalization Myth: Why Regions Matter. And you’ll find some answers there. So please check that out. And you can also follow Dr. O’Neil on X, formerly known as Twitter, at @shannonkoneil. So, Shannon, thank you for this hour. We really do appreciate it.

The next Academic Webinar will be on Wednesday, January 31, at 1:00 p.m. Eastern Time with Thomas Graham, who is a distinguished fellow at CFR; and Bonny Lin, who’s at the Center for Strategic and International Studies. And they’ll talk about the China-Russia relations. And in the meantime, I encourage you to learn about CFR paid internships for students and fellowships for professors at CFR.org/Careers. Follow us at @CFR_academic on X, and visit CFR.org, ForeignAffairs.com, and ThinkGlobalHealth.org for research and analysis from our fellows. So please do go there for more information on global issues. And again, thank you all for joining us. And Shannon, thank you to you.

O’NEIL: Thank you all, and thanks for the questions.

(END)

Top Stories on CFR

 

NATO (North Atlantic Treaty Organization)

The war in Ukraine marks a new era of instability in Europe. Countering Russia’s efforts will require a stronger, more coordinated NATO.

China

After the rise of Chinese power during the 2010s and failed U.S. policies in the Indo-Pacific, the United States should renew the Pivot to Asia and place the region at the center of its grand strategy.*