CFR Fellows’ Book Launch Series: The Globalization Myth: Why Regions Matter By Shannon K. O'Neil

Thursday, October 20, 2022

Vice President, Deputy Director of Studies, and Nelson and David Rockefeller Senior Fellow for Latin America Studies, Council on Foreign Relations; Author, The Globalization Myth: Why Regions Matter; @shannonkoneil


President, Council on Foreign Relations; Author, The Bill of Obligations: The Ten Habits of Good Citizens (forthcoming January 2023)@RichardHaass

The conventional wisdom about globalization is wrong. When companies, money, people, and ideas went abroad more often than not they went regional.

The Globalization Myth details the rise of three main regional manufacturing and supply chain hubs in Europe, Asia, and North America and lays out why it matters for the United States.

The CFR Fellows’ Book Launch series highlights new books by CFR fellows.


HAASS: Well, good evening. Welcome to the Council on Foreign Relations. I’m Richard Haass. By the way, for the record, this is a glass of ginger ale and nothing more. I don’t want any rumors to be flying about.

Tonight, we are gathering for the important and happy occasion of celebrating Shannon O’Neil and her new and latest book, which I happen to have a copy of, The Globalization Myth: Why Regions Matter. So, first of all, Shannon, congratulations. Give it up. Come on. Give it up here. (Applause.)

So, Shannon has a distinguished background. Currently, she’s vice president here at the Council on Foreign Relations. She’s deputy director of Studies, which is the Council’s think tank. She is by any and all accounts one of this country’s—on the shortlist of the leading experts on Latin America and Mexico. Even when I used to work for the president at the White House every now and then he’d say, bring in some experts to talk to me, and you’d always say, well, who are the two or three experts on this subject that you would want to expose to the president, because he would get the best advice and so forth, and what they say and write matters the most.

My account was not Latin America. My account was not Mexico. But if it had been, this would have been my first call right here, and she’s taught me and us a lot.

My only question for you before we get started, though, you got your B.A. from Yale?

O’NEIL: I did.

HAASS: And you got your Ph.D. from Harvard?

O’NEIL: Yes.

HAASS: Besides that extraordinary range of universities you attended, which did you like more?

O’NEIL: Yale.

HAASS: Yale? OK. I just wanted to—

O’NEIL: Right. (Laughs.)

HAASS: Just wanted to check that out. It’s kind of like, you know, were you rooting for Iran or Iraq. But just wanted to check that out. OK.

O’NEIL: I sit on the blue side on the Yale-Harvard game. There you go.

HAASS: OK. Thank you for that.

So we’re going to—Shannon and I are going to talk about this book for a bit, and then we’re going to open it up to you all, our members and our guests.

So let’s start with the basics. It’s called The Globalization Myth. I know what the word myth means. What does—when you use the word globalization, since it’s bandied about by all sorts of people, often pejoratively—you and I are often described as globalists with contempt dripping from those who use it—when you use the word globalization what do you mean?

O’NEIL: So, when I started looking at globalization, I really look at it from an economic point of view. So I’m looking at trade data. I’m looking at money, foreign direct investments, or investment portfolios or other bank loans, looking around—I’m looking somewhat at movement of people, looking at ideas, patents, royalties, but a lot of the commercial movement that’s going on in the world. That’s what I’m thinking about, not necessarily the globalists that often get pegged.

HAASS: So you’re looking at the flows.

O’NEIL: I’m looking at the flows, yes.

HAASS: Largely, economic, across borders, and all that. So, you know, before we get to the reality, what’s the myth?

O’NEIL: So the myth is when, you know, you hear about globalization and you watch the news and the like, there’s this sense often—the conventional wisdom—that it is this juggernaut that’s unstoppable, that’s taken over the whole world. You know, you have, you know, Tom Friedman saying the world is flat and that everybody has been wrapped up in this globalization.

And when I went and looked at much of the data—you know, the financial data you can find or the economic trade data and the like, that’s actually just not the case. And when you look at these last forty years, the sort of golden era of globalization or the way it’s sort of portrayed, there’s only about two dozen countries that have actually seen their economies transformed by, quote/unquote, “globalization” where they’ve seen trade as a percentage of GDP double or more. And there’s actually almost ninety countries where globalization or sort of trade and money flows either stayed the same as they were in the past or they actually went down. So they deglobalized over these last forty years.

So that is the myth, to me, that is this ever present and all present penetrating force.

HAASS: OK. So, one—I’ve already got one takeaway from tonight’s meeting. You’re not looking for an extended favorable comment by Tom Friedman in his next column. (Laughter.)

O’NEIL: We’re in conversation.

HAASS: Oh, OK. I just want to clarify these things for one and all.

Just as an aside—I wasn’t going to go there but let me just raise it—if there’s twenty or so countries that have been, largely, or much more globalized, many more that have not, is there a distinct gap or difference in performance?

O’NEIL: There is a difference in performance, and what’s also interesting is—one is not that many internationalized but those that did, most of them or the majority of them, when they internationalized, when they traded, they traded not globally but with their neighbors. They regionalized, and those are the nations that really saw a transformation.

So those are, you know, China and Taiwan and Mexico and Poland and Romania and others where they—yes, they internationalized. Yes, their trade expanded and their investment expanded. But it came from places much closer than not, and one of the hallmarks, I would say, of these last forty years is the rise of three big regions and sort of manufacturing regions and economic regions. So an Asian one, a European one, and the North American one.

And so those are the ones. Yeah, they saw a change in their economies but it was because they tied themselves to their neighbors, mostly.

HAASS: So then it’s no mystery that the Middle East and, to some extent, Africa and South Asia, which haven’t had those kinds of hubs or regional markets developed, have fared rather poorly?

O’NEIL: I think it helps explain the winners and losers from globalization. Those that did not reach out to their neighbors and, you know, the areas that you just pointed out, 15 percent or less of their trade is actually with their neighbors.

So when they do send things abroad or bring things in it’s from very far away. In comparison, in North America 40 percent of the trade or the investment stays within North America. In Europe it’s two-thirds, so it’s much higher, and even in Asia, which started out lower, we’ve seen it increase from 30 percent in 1980 to, today, over 60 percent.

So, overall, you see those places in the world that have not fared so well they haven’t integrated. North America has integrated but just 40 percent, and Asia and Europe have integrated far more than we have and I would argue that that’s really been part of their economic strength that we’ve seen over these last few decades.

HAASS: OK. So in recent years, the words supply chains have been uttered more than in the previous several millennia put together. Is this proof of your—of your thesis that has the much greater concern/focus on supply chains? What does—what does that do with or for your argument?

O’NEIL: So I’d say this last round of globalization, what’s different than in the past rounds is precisely the creation of international supply chains.

So if you look back at trade at the beginning of the twentieth century, there was a wave of, you know, globalization or increased trade, but mostly countries sent out finished goods to other countries and brought in finished goods.

I mean, if you look at these last forty years what we see much more than anything else circling the world is pieces and parts so, you know, what economists call intermediate goods. So not the final product but the things that go into that product—the inputs. Seventy-five percent of what’s traded is actually an intermediate good. It’s not that final thing, and that’s new. That’s not the case in the past.

So that is international supply chains. But what you find is that, you know, trade is not as global as we think and, particularly, in the making of things in these supply chains. It’s much more regional than not.

So the final consumer could be across the world but the actual making of things happened much closer. So this is, actually, why we see regionalization, really, is because of supply chains.

HAASS: OK. So when all these cranky people criticize the likes of you and me and they call us globalists—I mean, Steve Bannon and others went after people like me hammer and tong—should I have gone back to him and said, actually, you’re wrong—I’m a regionalist? (Laughter.) Do they just have—do the critics just have it wrong?

O’NEIL: You should say we’re inspiring regionalists. We don’t have enough regionalism. That’s our challenge, not the globalism. There’s not enough regionalism.

HAASS: Which brings me to my next question. So then the Biden administration just brought out a National Security Strategy. Let me put it this way. There’s a certain lack of absolute overlap between your book and their National Security Strategy. There are some differences I would say. So let’s just start with the most obvious, which is something like the Trans-Pacific Partnership.

Reading your book, that, to me, would be a textbook case of why regions matter or why regionalization ought to be at the hub of American foreign policy or geoeconomic policy. Am I missing something here?

O’NEIL: No, you’re not. I mean, I look at the way many Democrats think about these issues and, frankly, Republicans, too. I think there’s a bipartisan misunderstanding of what happened. And so—you know, I talk about this in the book—but I am from Akron, Ohio.

So I grew up in Akron and I grew up in a time when Akron was failing. It was becoming a post-industrial place. You know, the last tire company had left and, you know, Akron and towns like it are usually held up or often

held up as this is what globalization did. These are the victims of globalization, right—the Rust Belt and the like.

But I would argue that that is actually wrong. What happened to Akron, Ohio, was limited regionalization. And so, you know, the last tire left Akron in 1982. So that was a decade before NAFTA was signed, and they lost out to competition from Japanese tire makers who were making tires and cars all over Asia already. They were already integrated.

They lost out to German and French tire makers who were doing it across Europe. They had better technology because they were innovating at economies of scale and specialization, and U.S. competitors in Akron, who were just on their own, they couldn’t compete.

And so that, to me, is what happened to Akron. So if that’s the problem, which I don’t think is the general diagnosis, then the solution is not put up the walls and try to keep everything in but how do you find those partners and, you know, what international supply chains have done, I would say, is changed manufacturing from, you know, a single country to a team sport.

This is how we do it now, right, to get the specialization, the economies of scale, different labor skills and wages and access to resources so you can make things that are higher quality at lower prices.

It’s a team sport and you can’t play it alone, and that’s where, I think, the new National Security Strategy and some of these other—the rhetoric that we see is falling down.

HAASS: Just as a cheap aside, if things here don’t work out for you and you decide to go back to Akron and run for mayor, I think you’ve got to fine tune your campaign platform. (Laughter.) Just saying.

So all the criticism then of NAFTA on both the left and the right, is it seriously misplaced?

O’NEIL: I do think it’s misplaced because I think they’re missing this larger phenomenon, and partly it is the world has changed. You know, when the heyday of U.S. industrialization and prowess around the world, 1950s and 1960s, we really had no competition.

Europe had been devastated in the war. Japan was devastated as well. There weren’t other manufacturing powerhouses out there, and what we saw through the ’60s, ’70s, ’80s, and then continuing today is other places rise back up, other places get industrial bases, compete on the global markets, and the way they’ve done it and those that have been successful have done it is through regionalization.

And I would say, actually, an example of this, which we don’t usually think of, is China. You know, China—

HAASS: Explain that.

O’NEIL: So China is not this sui generis manufacturing powerhouse. China’s rise has very much to do with the regionalization of Asia and other Asian countries outsourcing to China, investing in China.

We think a lot about U.S. companies or Western companies going into China, and we talk about them and they’re there, of course, right—the Teslas or the Volkswagens or Dell or you name it.

But, by far, the most foreign direct investment has come from other Asian countries and, by far, the most companies that are invested in China have come from other Asian countries. And so they hook China into their supply chains—you know, the Japanese, you know, the Toyotas and the like or even, you know—yes, iPhones are made by Apple but it’s Foxconn, which is a Taiwanese company, that actually makes them in China and built all of those factories.

So that regionalization, those supply chains and adding China to that, has made, you know, what some, you know, economists call factory Asia has really made the strength that we see of this exporting, you know, powerhouse, which is China.

HAASS: So let me move a few thousand miles away to a country of recent noted political and economic stability. Of course, I refer to the United Kingdom. (Laughter.) Based on your analysis, was Brexit just a bad, bad idea from the get-go, that—the idea that Britain could leave, in some ways, the most integrated regional economic hub in the world and think that it had a—not just a viable alternative but a superior alternative, based upon your book sounds—the first order approximation sounds like it’s just nonsense.

O’NEIL: Yeah. Worst decision ever. (Laughter.) But bad because it does nothing for Britain in terms of jobs, in terms of economy, in terms of competitiveness, because one of the biggest benefits Britain had as being part of the European Union was access to that market.

It also had access to these supply chains and, you know, Brexit’s, you know, big issues—they were kicked out and there’s tariffs and there’s new regulations and the like—but there were little issues that faced, you know, England and Britain which are—which make it even complicated.

So, for instance, if you are moving things around within the EU you have a certain pallet that you put your goods on. It’s a certain color and a certain size. But if those goods are heading outside of the EU, you need a different pallet that’s a bit of a different size and a different color.

So millions of pallets had to be changed for people just to send regular goods that they had sent before, and those kinds of frictions that are reintroduced just make it costly. And, you know, I would say—I defer to those of you who are, you know, U.K. insider politics experts, but some of the challenges that we’ve seen over the last couple of days this is Brexit coming home to roost.

HAASS: I tend to agree, and more challenges to come.

So let me move, again, around the world. I’m just going to hopscotch to this part of the world. So NAFTA—well, North America, more broadly, you said is one of the three great successful hubs. But you’ve got a situation now where one of the three members of that hub—Mexico—shall we say, is embarking on a trajectory which is, I would think, from your point of view, suboptimal. And so what does that do for your strategy and what does that teach us about the viability or vulnerability, if you will, of the regionalization concept?

O’NEIL: So it is—I mean, tragic, might be too strong of a word but it’s not all that too strong because right now, in particular, is a moment when you are seeing a fluidity to supply chains. You know, many of these were set up in the 1990s or first decade of the twenty-first century, and now for a whole host of reasons we can talk about—you know, automation and climate change and demographics and geopolitics—we’re seeing a fluidity.

Companies are all—you know, boards are talking about where do we want to put our next, you know, factory or our next operation, and it may not be where it has been in the past for all these reasons. And because of these, North America should benefit.

I would say—you know, I look over the last thirty, forty years, North America, it was—it has become a regionalized area but not to the extent of the others and it’s lost out for that. We’ve seen challenges. Some of the challenges to jobs, to communities, and the like, have come by not regionalizing as much as others.

So now is a moment when, you know, you could step back in. You could win again or you could gain space. But you need all three countries, in many ways, to do that and, perhaps, a couple more. You need a base that has sort of this diversity and size and market access and depth and you need them together. And Mexico—I would say the federal government of Mexico is pulling back. They have a very, you know, economic nationalist position, a much more isolationist position.

Interestingly, you go to the north of Mexico, you talk to some of the governors—

HAASS: In Monterrey, areas like that.

O’NEIL: —you talk to the industries in Monterrey and many of those states, and that’s not where they are. And so, you know, the industrial parks along the border are full and oversubscribed. There is a lot of economic movement there because companies—I mean, companies—in the end, there are very few industries that governments are going to fully subsidize.

So companies, in the end, have to make profits if they’re going to survive, and the profit/loss is telling them or showing them, given all these other factors, that, you know, Mexico, North America, can be a good place to produce, is profitable.

HAASS: You mentioned two words, the phrase “industrial policy.” If I were a fly on the wall, I would think, in many ways, the Biden administration has preferred that or emphasized that, which is a national, if you will, more than it has a regional policy. Or am I wrong in that?

O’NEIL: I think that’s right. You see the Biden ministration and, frankly, I think there’s support for this in Congress, too. It’s not just the Biden administration.

HAASS: Yet again we have bipartisanship.

O’NEIL: Indeed. (Laughs.)

HAASS: Be careful what you wish for when you call for it.

O’NEIL: So you do see, you know, this idea of the interest and the confidence in intervening in the economy to meet different goals. Some are economic competitiveness goals. Some are creating job goals. Some are climate change goals. Some are national security goals, deciding that particular products and industries shouldn’t be or can’t be in places that we feel are hostile to us.

So this—the U.S. isn’t the only country doing this, by the way. You know, China’s doing it, Europe’s doing it, and anybody who has any money is trying to do this as well, right. There’s industrial policy happening around the world. I think that’s a huge shift in the last ten, twenty years.

But this is an area—as I read the Biden administration’s policy, often it is a focus on reshoring and trying to bring these things back, you know, on critical supply chains where they lay out semiconductors, critical minerals, pharmaceuticals, and electric vehicle batteries—large-capacity batteries. There is this focus on can we bring much of this back where we think it’s going to be safe.

HAASS: Or chips.

O’NEIL: Or chips, yeah. And what they’re going to find is, one, we can’t bring it all back here because we don’t have the labor force. We don’t have access to the natural resources. We don’t have some of the—you know, the other elements that would let us do this. And, two, if you actually want to make them secure you need some geographic diversification.

HAASS: So even within regionalization you could have a degree of diversification?

O’NEIL: Even within you can have a degree of diversification and, you know—let’s take—you mentioned chips, so semiconductors. We just passed a bill. There’s going to be $50 billion plus put to support a semiconductor industry in the Western Hemisphere.

Much of that talk has talked about the foundries. We’re going to have, you know, foundries that are going to make high—you know, very sophisticated chips in Arizona and New York and Ohio.

But if you really want to secure the supply chain—if you really want to secure semiconductors you have to do the whole supply chain, right. You have to have the minerals. You have to mine them and process them. You have to have the foundries. You have to have the packaging and testing of which the vast majority—almost all of it—happens in China today. You even have to have the recycling at the other end for some of this stuff.

So how do you create that whole supply chain? I mean, this is an opportunity, to me. There’s all this money there—there’s subsidies, there’s tax breaks—to bring in other countries. It’ll make it more secure and it will allow that industry to be more competitive economically, commercially, than it would have been if it all happened here in the United States.

HAASS: And is there anyone in the Biden administration who agrees with you?

O’NEIL: Talked with a few of them. Hopefully. (Laughs.)

HAASS: OK. Well—

O’NEIL: So Commerce will be the one that will be making these decisions.

HAASS: Commerce. Yeah, that’d be my sense.

O’NEIL: Yeah, and they’re the ones who are going to implement this policy.

HAASS: OK. So when I think of regionalization as opposed to globalization, particularly in the governance area, to me, trade would be an obvious example. The World Trade Organization, nothing happens other than—actually, not even adjudication happens much anymore. But certainly, it’s no longer the negotiating venue for trade. Trade happens regionally.

So when you look at some of the other global challenges that we face—climate, health, you know, infectious disease, maybe cyber, whatever—does regionalization hold out some untapped potential in some of these other functional spaces rather than just, if you will, the traditional trade or manufacturing space?

O’NEIL: I think where there’s an opportunity there is, as you say, some of these global bodies—the WTO or, say, the U.N.—given the diversity of interests and perspectives and players within it, it’s very hard to get anywhere, also to get to a higher level agreement.

And, you know, in the ideal world this is where we would go. Everybody would agree and we’d set out, you know, trading rules that wouldn’t have subsidies and would do these various things. But that’s not going to happen and we know it’s not going to happen.

So how do you get to higher level, more complicated, trade agreements or other kinds of vehicles that add in climate change, that add in national security, that add in standards or other kinds of things that we want? Can you add in higher labor protections or environmental things?

So the way that, in reality, that has worked is when you have a smaller group and often that smaller group tends to be regional. The Europeans have been doing this. You know, they have all kinds of regulations, due diligence, on their supply chains. There are environmental issues, you know, green transition issues.

We see it in some of the agreements. You know, TPP has some of these elements, too, that are a bit more comprehensive and complicated. But that’s where you’re able to make progress.

HAASS: So was NATO an early example of the Shannon O’Neil concept?

O’NEIL: I think it is. I think NATO does have that right. You’re bringing together—and at the same time, you saw the economic (agreements ?) on the side happening throughout Europe. So, like, bring together countries that are willing to work together for these various goods and then they are more competitive, or with NATO they’re more secure, because of coming together.

HAASS: And then in climate if you wanted to promote that, theoretically, something like TPT or the agreement formerly known as NAFTA could set environmental rules. For example, tariffs could be placed on cross-border movements, depending upon the source of energy used, that coal could—there could be a coal tariff, in principle, if you wanted to have it. So that could become trade or that could become a climate pact.

O’NEIL: You could do that, and then you could imagine some of these agreements or regions coming together to focus on these things.

So, for instance, you could imagine a North America and a European, say, green steel or green aluminum coming together. It’s not that the world has to be just regionalized. But the point of the book and the work I’ve been doing is it already is regionalized, that that really is the trend of the last forty years and lots of the impetus and trends and things that are pushing the world today are going to lead to more regionalization than we’ve seen already.

HAASS: So let me ask you a question I always get asked. You’ve just finished this book. It’s come out. So people are going to say, well, where did this idea come from?

So were you just walking to work one day through Central Park and you said, I think folks got it wrong, this regionalization thing? Or was it something you stumbled on just by doing your research and you said, hey, there’s a pattern here?

I’m curious, because you hear about globalization all the time. You don’t hear nearly as much about things regional. So say a little bit about the evolution of your thinking on this.

O’NEIL: You know, it came about because of a project I was doing at CFR. I was doing the North America task force. This is—we do these institutional task forces. So I was the project director for that one—my co-chairs were Bob Zoellick and David Petraeus—and we were working on—sort of thinking about North America, thinking about it economically, in terms of energy security, people, national security issues.

We were visiting, you know, government officials in Mexico and in Canada along with the process and, you know, as I was working on it and doing the writing and looking at the data and visiting with all of these people with the two co-chairs, you know, you heard a lot of, dare I say, sort of cheerleading, right. North America is really integrated and we need to have it more and it’s really important to understand these ties.

And that was true, but once I started looking at the data I started seeing that Asia and Europe were so much more integrated than North America was, and so that difference was sort of a puzzle between the rhetoric I was hearing and then also just looking at the data. So that first spurred my interest.

And then I would say that the second part is—as I was working on that is I started talking to people—and this was, you know, back probably 2015-2016—I start talking with people in various companies and started talking with their supply chain managers.

And at the time, this was a really wonky, not interesting area. Nobody really had heard of it and—but it was really interesting the way they made decisions and where they decided to put factories. And so I interviewed a good number of people in various places, both here in North America but then also those who were going to Asia and China, and it just really spurred my interest that there was this whole latticework underneath the global

economy of people making decisions and deciding where to put, you know, factories or operations or, you know, back offices and the like that we weren’t really talking about.

So that’s what interested me. Now we’re talking about it a lot but at the time it was—I would say it was a bit under the radar. So that’s what spurred it.

HAASS: Just for the record, the word wonky is not a pejorative word here at the Council on Foreign—it can often be a compliment. (Laughter.) So—

O’NEIL: Self-professed wonk.

HAASS: There we go. We all are.

Two last questions from me. One is you just mentioned China and you said that China’s—a lot of its growth was a product of its regional. So imagine in the future there are geopolitical or economic crises in Asia—we’re seeing them in Europe—say, something about Taiwan or whatever.

Does regionalization in Asia—who does it constrain? Does it constrain the options of China or does it constrain more the options of the Taiwans and Japans and South Koreas? Who’s more dependent on whom?

O’NEIL: I think that is an incredibly important question and I’m not sure there is a clear answer.

I would say I think there has been a concerted policy—there’s been lots of concerted policies in China over the last couple of decades but there has been a concerted policy over the last five, ten years to bind those other countries to them economically, commercially, for geopolitical gain.

So, you know, the Belt and Road Initiative, yes, it’s gone, you know, in lots of different places and we talk about ports being bought in Greece or other places it’s gone. But the vast majority of that money has gone to Asia and building, you know, roads and rails and ports that look towards China and allow Chinese companies to come in and invest.

So you’re seeing them linking these countries together economically but also geopolitically. And, you know, interestingly, Chinese foreign investment has picked up dramatically. In a couple of years—over the last five, ten years, actually, outbound Chinese investment has been bigger than inbound Chinese investment and a lot of that’s gone to the region as well, them seeding companies and doing the same outsourcing that Japan did before, South Korea did before, Taiwan did before.

I mean, as you say, China—many of these countries are dependent on China because their businesses are there. They sell into China. I mean, interesting China has been walking back some of that. You look twenty years ago and Chinese exports—you know, 40 percent of what China was exporting to the world actually had inputs from other countries and today it’s below 20 percent. They’ve been cutting back on the sourcing from other countries.

HAASS: Become more self-reliant or less reliant?

O’NEIL: It’s become more—yeah, more self-reliant, and, you know, that may end up cutting both ways. It may mean, yes, more is produced in China but it also means that their neighbors are less dependent in the ways that you were just talking about because they don’t send as much to China as they did in the past.

HAASS: It’s a space to watch.

O’NEIL: A space to watch.

HAASS: Last question from me and then we’ll open up to our members and guests. So imagine you had in the—sitting in the chairs here tonight the USTR, the secretary of commerce, maybe the person on the NSC responsible for economics, whatever. In the world of reality, not in the pie-in-the-sky world—in the world we live in, given the politics of this administration, given the economics of the moment, are there things they could be doing in this realm that they’re not doing?

O’NEIL: I think what I would advise them to do or recommend is—I mean, in an ideal world, you go back and get into TPP. In an ideal world, you would do some of these things. But we’re not going to do that, right.

HAASS: We’re in this world.

O’NEIL: Yes. So one thing I would say is that they should protect and expand the USMCA. This is the successor to NAFTA. And this is an important agreement and, really, the baseline for economic competitiveness in North America. So you need to keep it, make sure it doesn’t sunset and disappear, and you should expand it. Think about places where you—

HAASS: What other country? You mean expand it functionally or bring in other countries?

O’NEIL: You could bring in other countries but expand it functionally and make sure that, you know, the digital side work(s). Make sure—can you take off some of the regulations. I mean, part of the challenge between the different countries is that lots of regulations remain there that don’t make a lot of sense.

I mean, one of the strengths of Europe, which we didn’t talk that much about, but one of the strengths there is they didn’t harmonize regulations. They just got rid of them in the sense that everything is the same unless you can prove there’s a national security reason to have a different regulation, and we don’t have that here between North America.

You know, we have these crazy examples in North America where, you know, Cheerios that are made in Canada can’t be eaten by people in Vermont because they can’t get through the regulatory process with the FDA.

HAASS: And why is that crazy? (Laughter.)

O’NEIL: Because, you know, they’re Cheerios. Come on.

But you have all of these frictions that even though you have a free trade agreement you have regulations that make it very difficult, and regulators can’t harmonize them away fast enough when other regulations appear.

So that’s one thing that they could do. But the other thing I would do is—

HAASS: Are you serious, by the way?

O’NEIL: I am serious. Yes.

HAASS: Oh, OK. Oh, wow.

O’NEIL: Yeah, I am serious. Yeah.


O’NEIL: Same thing in aspirin that’s made in Canada cannot be sold in stores in the U.S. because you have to go through the whole FDA process because we don’t believe the Canadians have safe drugs.

HAASS: That’s at least—I get that. But Cheerios, that’s—

O’NEIL: But Cheerios. Yes, I know. I mean—

HAASS: Wow. That’s my other big takeaway.

O’NEIL: There you go. (Laughter.)

HAASS: Your next study.

O’NEIL: But, I guess, what I would also say, especially if, you know, Commerce is there and others is, you know, we talk a lot about the gridlock in Washington. But we’ve actually seen a lot of movement over the last twelve to eighteen months.

We’ve had a bipartisan infrastructure bill. We’ve had a big climate bill and the Inflation Reduction Act, and we’ve had a CHIPS bill. So there’s a lot of money in play.

With the infrastructure bill we could make infrastructure that actually connects the three economies. There are lots of ports of entry on the various borders that haven’t been updated for decades. There have not been railroad crossings built in, you know, decades as well. We could expand an infrastructure to make logistics cheaper.

HAASS: Why isn’t it happening?

O’NEIL: It’s not happening because people tend to look to the United States—well, one, we haven’t spent money on infrastructure for a long time in the United States, as we know, right, anywhere. You know, if you look at the Army Corps—you know, civil engineers, they give us a D rating in most of our infrastructure.

So we needed that money. But we, particularly, have not built a lot along the borders for that reason. So here’s a whole pot of money, over a trillion dollars. A lot of it could go to the border. That’s one area.

Two, as we think about the, you know, Inflation Reduction Act, we think about electric vehicle subsidies and all of this, we should be thinking about it in North America. We should think about the industry and creating supply chains across North America because they’ll be more competitive, really, more affordable, right, in terms of the companies that have to provide them if you can use the different countries and their—you know, their cost benefits.

And then, you know, the last one—the CHIPS Act—we talked a bit about already. You know, testing and packaging for semiconductors, that’s something that could happen in Mexico or Canada, and they would make that supply chain more resilient but also more affordable. It wouldn’t be quite as expensive.

So that’s where I would start. You already have the money allocated. Use it to promote North America.

HAASS: Got it.

OK. Let me open it up to you all. Let me remind you this is on the record, if I’m correct. It is. So anything you say can and will be used against you.

We’ve got you all physically here in the room and then we’ve also got people in digital land. So I’ll do a little bit of ping ponging if we get questions in both the physical venue and the virtual venue.

So let’s start, though, here with those of you who were good enough to come out.

Sure. I know this gentleman in the front row. You have to introduce yourselves and let us know what you—

Q: Juan Ocampo with Trajectory. Thank you.

Shannon, if you compare the United States or team North America versus, say, team Europe and you have—over in Europe you’ve got—sorry for the French but, you know, Germany is the quarterback and you got a wide receiver who’s very good in Poland and Slovakia and I, you know, buy stuff that I know is made in all these various places.

It seems like it’s a pretty good support team, to that quarterback, and it seems like there’s a lot of players that they field. And when you look at where we are right now, if we keep talking about Canada and Mexico and we just talked about limitations with Mexico, how imperative is it to expand the team? You know, you can talk about Brazil, Colombia, a few other places with a lot of people, a lot of challenges, and to the extent that is important what can we realistically do to try and get there?

Because when you do a comparison of the teams, even if we really wanted to do it, right, it’s a long haul, I think.

O’NEIL: So I would say this. I would say when you look at the size of Europe both in terms of population and GDP and you look at the size of North America, population and GDP, they’re not all that different.

So, yeah, there’s twenty-seven countries in one and there’s only three in the other but it evens out in terms of sort of that depth of labor markets and skills and the like.

Is there room for others in the hemisphere? Sure. I think there’s definitely room for others, and whether it’s smaller countries, you know, Central America or Dominican Republic or others, or whether you go down to Colombia and others, you know, I think that is important.

For the—I mean, for the United Sates, thinking about it strictly from the U.S. interest, right, a very kind of realpolitik, if you’re thinking what is it that the U.S. benefits from these ties, well, they benefit from, you know, different labor skills and costs. They benefit from different access to resources, minerals, and the like that go into things.

The other big benefit is they benefit from access to world markets that we, as the United States, do not have. So Mexico and Canada both have free trade agreements with about 60 percent of the global GDP. We have preferred access to less than 10 percent of the global GDP.

So if you think about creating jobs in the U.S., if we can supply factories or assembly lines in Mexico, they can export tariff free to 60 percent of the globe—50 percent that we can’t. And that’s a way to get our products or our inputs out into the world in ways that until we can sign free trade agreements, which, as you said, is very unlikely anytime soon, we can benefit from that.

So I think part of the North America benefit is that—and, sure, if you include Colombia, other countries don’t bring that because they don’t have that breadth of access.

HAASS: Would that variability be something of a problem with those who oppose free trade agreements?

O’NEIL: Well, I would think this would be a benefit, right. We’re not going to sign free trade agreements. But if we want to, you know, get at 4 billion consumers that are out there, if we want to have access to them, then actually exporting through Mexico, exporting through Canada, is a way we can do that, which we can’t today.

And we see that—so, you know, TPP, which we bailed on and got out of , we already see differences. So, you know, if a U.S. maker of—you know, a U.S. rancher wants to sell their beef to Japan or Australia they’re going to pay 12 percent more with tariffs than a Canadian rancher of beef.

So if you grow the calf here but it ends up being slaughtered up in Canada and sends out, you actually can compete in those markets. But you can’t if you’re coming from the United States. And, you know, there are all kinds of examples like that where this is a way that we can be more competitive even without signing free trade agreements.

HAASS: Plus, the cow will be bilingual by them.

O’NEIL: Exactly.

HAASS: Yes? OK. Let’s get a virtual question.

O’NEIL: It will speak Québécois. (Laughs.)

OPERATOR: We’ll take our next question from Matt Merighi.

Q: Thank you. Ma’am, really have enjoyed the presentation—a really interesting perspective and one that I hadn’t really come across before.

I’m Matt Merighi, a term member based out of D.C. My wife is from Monterrey in Mexico. So I was very glad to hear the shout out for northern Mexico there.

I was curious, though, you know, as you were talking about where you went to university—I went to Georgetown, I went to Fletcher—and it strikes me that, you know, for regionalists that we produce in the academic sphere there’s a lot of students that are studying, you know, Arabic. They’re becoming experts in China, Brazil, Turkey, and a lot of far-flung places.

Not really a lot of experts being generated specifically out of schools in Canada and Mexico. So it strikes me that maybe there’s a little bit of, like, a kind of a human resources and kind of a human capital gap in terms of deep experts that we’re training to take advantage of this regionalism.

Is that something that you think is kind of hampering our ability to take advantage of regionalism because we kind of are casting our sort of vision, like, further askance? Or is that something that just through the nature of, you know, mostly being done through economic ties this sort of works itself out organically as time goes on?

HAASS: This is your chance to tout the IAF in Canada.

O’NEIL: Yes. CFR has an international affairs fellowship in Canada. You should all apply. It’s great. (Laughs.)

This is a great point and, you know, one of the interesting things is we don’t have a lot of educational exchanges, vocational exchanges, between the three countries and, you know, you think about, you know, where do Americans go when they study abroad. They don’t go to Mexico. Far more go to Costa Rica, which is a very small country, than go to Mexico.

And you think about the students that come in. You know, there are far more from Europe, from China, from India. Very few from Mexico, and we haven’t been able to build those bridges and I think it matters for a few things.

It matters just on this general cultural understanding and focus on our neighbors and, as you were sort of getting at, you know, who really thinks about this or talks about it. That’s part of it. But it also matters for, you know, the nitty gritty of regional supply chains and doing production across those three countries.

And as I was, you know, doing this research and talking with various folks, you know, one of the reasons why regionalization matters for companies is that you really care about your bottom line and the further away you

get from your—you know, there’s tariffs and there’s things like that but there’s also just cultural understanding and, you know, how do people work together in teams and what’s the trust in your organization or your sort of esprit d’corps.

It really matters to do things profitably and get out there, and, often, that’s easier with your neighbors because you tend to know them better. There’s more travel between the neighbors and the like. And I would say that this is a weak point in North America.

A lot of people vacation. They go to Cancun or, you know, maybe they go to Quebec, you know. But we don’t see the movement of people—students and those who spend more time as much as we do from other parts of the world.

So I think this is somewhere, too—you know, back if I was talking to, you know, the education department or others in government—how do you start more exchanges? How do you make sure that there’s movement of people across North America, particularly in the student place? I mean, I would add migration to it, but you told me to be realistic. But how do you get more people moving around?

HAASS: Great. Yes, sir? You have to wait for the microphone. Just let us know who you are.

Q: Mark Rosen from Advection Growth Capital.

Janet Yellen made a speech earlier in the year about friendshoring, and, you know, is that really what you’re talking about here, more—the concept of friendshoring? How does this differ from what—from your concept of regionalization?

And, secondly, I’d be interested to hear—both of you—what impacts will friendshoring have if we do continue to pursue that as a policy on China?

Will it isolate China? Will it cause China, perhaps, to look again at some of its more hostile policies? But I’d be interested to understand both of those points your point of view.

O’NEIL: Sure. So on the friendshoring, I think this is parallel to the friendshoring. I mean, they happen to be friends or mostly friends of ours—you know, Canada and Mexico.

But I think this is a parallel to that discussion, and what these countries are able to do is when you have these supply chains you’re just able to make things, you know, better, faster, cheaper, and you can compete on global markets.

And some of it may be for national security reasons for particular things that we want to make sure are in places that are not hostile to us, that defend intellectual property rights if we have a free trade agreement, for arbitrage if there are disputes, and these are two countries that we do have that with.

There’s other countries as well. Those are other trends, I would say. But I think these could be in parallel. I mean, there’s a Venn diagram. They overlap. But they’re not the same in that sense.

On the China issue, I would say, as I look at the U.S. policy so far on China, is that it is very punitive and it is pushing for decoupling, and we’ve seen this. You know, there are tariffs and there are blacklists, and I would say just in this last year there’s been three areas where the U.S. has really escalated.

You know, the first was the Uighur Forced Labor Prevention Act, which came into force in June, and this is—I think this, actually, can be a real sea change in the trade relations with China because it, basically, bans any inputs—any goods and any goods that have inputs from Xinjiang unless you can prove that it wasn’t made with

forced labor, and you’re not going to be able to prove that, and the law leaves no wiggle room for executive exemption. So that’s one that came into force.

The second just happened last week, which is export controls on semiconductors and their equipment, so very high-tech levels. And the third just happened yesterday is that the U.S. decided that lithium batteries made in China likely have forced labor because of their mining practices in the Democratic Republic of Congo.

So the semiconductors goes over the high-tech innovative side. The lithium batteries goes after your iPhone and other consumer goods. And so we’ll see how that plays out in the—you know, the coming weeks and months.

But if that continues and is put into force it’s going to be very hard to get consumer products in the United States. You’d have to prove somehow that, you know, the mines that the Chinese use for that particular lithium battery in your iPhone weren’t—you know, didn’t have children in them and that—you’re not going to be able to do that.

So I see these punitive measures to pull companies out or get these products out. I don’t yet see from the U.S. administration the proactive policies to say, OK, but why don’t you come here. How do you set it up so that when they leave they actually come to the United States or come to North America or come to friends?

And I would say that, you know, the cautionary tale there for the U.S.—I’m thinking about creating jobs here—is, you know, with the Trump tariffs you saw electronics—many electronics leave China. And so 2018, 43 percent of all the electronics coming to the United States came from China. 2021, it went down to 32 percent.

So you see a huge decrease, right—you know, an eleven-, twelve-point decrease. None of that came to North America. It all went to ASEAN countries.

So there is this fluidity and moving around. But if you only have a punitive policy to push it out, if you don’t have a proactive sort of carrots policy to pull it in, I’m not sure the U.S. economy is going to benefit from it.

HAASS: Can I have a virtual question?

OPERATOR: We’ll take the next question from Patricia Rosenfield.

Q: Oh, thank you very much for this, Shannon and Richard.

I’d like to come back to Richard’s point. Patricia Rosenfield, the Herbert and Audrey Rosenfield Fund.

But I’m throwing in this from having been at Carnegie Corporation and the World Health Organization where you see in international organizations a lot of them have regional offices and foundations have regional offices, and sometimes they work together but very often they’re competing with each other in unproductive ways.

And so I’d like to go to Richard’s point about the global problems that, certainly, are playing out regionally, what you are finding and what you’re thinking about this, going forward, related to pandemics, climate change, in particular, food supply issues.

How do you see the lessons learned from other governance that has been regionalized where there’s often more competition than cooperation and how—focusing primarily on the economic side but related to these global issues, how are you going to get cooperation when regional organizations—regionalization makes countries, perhaps, more competitive and less cooperative?

O’NEIL: This is a challenge, and one of our former senior fellows here at the Council on Foreign Relations, Jagdish Bhagwati, used to have this theory or he has an argument that, you know, all of these regional free trade

agreements are actually really bad for the global economy because it—I think he called it the spaghetti bowl and everything gets intertwined and makes a mess.

And, you know, in theory, I think that’s right, right. The best solution would be one set of rules that are global rules that everyone follow and that would be much more efficient and more effective, frankly.

But, realpolitik, that’s not going to happen. And so I think in—where this regional element, whether it’s an economic one or a health one or climate or these other things that, you know, you just brought up, Patricia, in the best case you can have sort of a demonstration effect where you have a region that comes together and figures out some of these issues and then that can be exported to other places, where you find a mechanism that works and then that becomes something that others can adopt.

That’s the best case. And, you know, right now I would say the U.S. government is hoping that the USMCA—that this trade agreement, it has labor provisions in it, has environmental provisions.

They’re hoping that if it works here, and they’ve been using those—they’ve been using it to try to deal with, you know, labor challenges in Mexico and the like where they see, you know, either, you know, unions being pushed out and the like. They’re hoping that if they can demonstrate it here then they can replicate it in other places.

That’s the best case scenario. I mean, the one I can hear or I’m imagining the worry in your voice is that the worst case scenario is, you know, one region has one set of rules, another region has another set of rules, and they compete with each other and they don’t coordinate or they don’t cooperate across that, and that’s, also, obviously, a challenge and that’s where—I mean, one thing we haven’t really talked about or haven’t mentioned yet is protectionism and that is there in all this.

You know, industrial policy is not always high minded and about reaching a green transition. Some of it’s just about protecting your own companies and your own economy in ways that, you know, in the end, it’s sort of a race to the bottom.

So that’s, definitely, there. There’s always, you know, that competition challenge and you hope that you get to the demonstration effect where you see, you know, rising up and picking the best option rather than the worst.

HAASS: Let’s move to this side of the room.

Yes, sir?

Q: Thank you. Zach Sadow, CEO of KMX Technologies.

HAASS: Could you speak a little bit closer to the microphone?

Q: Zach Sadow, CEO of KMX Technologies.

Two massive trends are unfolding right now. The energy transition and the reshoring for geopolitical reasons from Asia have converged and create an extraordinary opportunity, it seems, for North America and South America around critical minerals, supply chain integration, industrial technology.

In your mind, if North and South America and this reshoring effort were to work for this multi-decade upcycle investment opportunity that’s coming in auto electrification, in the transition, critical minerals, what would that look like? How would these countries work together and what would that look like?

O’NEIL: Yeah.

HAASS: Let me just build on—a thirty-second build on. Do we need new institutions to do these things or could we simply adopt and use existing institutions? How would we go about this?

O’NEIL: So, speaking, more broadly, on Latin America, this is one of the regions that lost out this last time, right. They weren’t one of these two dozen countries and most of them except for Mexico were not part of those two dozen countries that grew and that benefited from internationalization.

They also weren’t countries that regionalized with each other. Mexico, again, accepted with North America. The rest of them, trade between the region is 15 percent, maybe. Probably closer to 10 percent.

So this is a region that was left out, and, as you were hinting, you know, I think the—this fluidity of supply chains, the green transition, the fact that this Western Hemisphere has a bounty of lots of the, you know, green transition commodities that are going to be in very high demand for the decades to come, there’s a huge opportunity here.

As someone who looks at Latin America a lot, I’m worried they’re going to miss it and I see, you know, a few really big challenges for the region. One is logistics just cost too much in the region. It’s very hard to—you know, why have they not regionalized?

One of the reasons is logistics. It’s too hard to move between the countries. They don’t have railroads. They don’t have roads between the countries. The ports need to be updated, and one of the challenges of the ports is, you know, there’s only three or four companies that control global shipping lines and they don’t ship between the ports or they don’t go from Sao Paulo to Buenos Aires. They head over to, you know, Shanghai. They go across.

So you don’t have the routes that would make logistics. So you really need to invest in infrastructure to make—to connect the region, which is something Europe has done, Asia has done, and Latin America has been left out. So that’s one thing.

The second is that as I look at the next ten, twenty years, you know, twenty-first century manufacturing and jobs are not going to be the same as twentieth century manufacturing, and this is a region—and, you know, I might even go up a little further than Latin America in this. We don’t have the education to take these jobs, right. There are manufacturing jobs that will move out of Asia and move other places but they’re going to be different jobs than the ones that left twenty-plus years ago. And so I think we don’t yet have those educational, you know, institutions to train people for these jobs.

And the third, I would say, is the politics. Right now, especially, in the region, and, you know, we already talked about Mexico a little bit, but moving down the region we have a series of leaders who are dealing with lots of domestic challenges—you know, COVID and inequality and violence and all sorts of things.

But I think that is turning them inward rather than outward in thinking about the international opportunities there. So the opportunity is definitely there. But I’m hesitant or somewhat pessimistic that they’ll take advantage of it.

And I wouldn’t leave the United States out of that—you know, that summary in terms of the opportunity is definitely there but I’m worried that—pessimistic that we’ll take advantage of it.

HAASS: OK. Let’s get another question—yes, sir—from here in the city.

Q: Jean Monier with McKinsey.

First of all, congrats, Shannon. That’s an incredible book, and I encourage every member to get it.

Just a question about facts on talent. I mean, what you brought is, indeed, a lot of facts. But, you know, the same way, for instance, that supply chain was a topic that was down the ladder of the corporate world and now it’s a topic for CEOs and board of directors, do you think, you know, this regionalization could be also a topic where, you know, top policymakers—people at State, at the NSC, as Richard mentioned—could start thinking about the U.S. strategy for engagement? And what does it say?

O’NEIL: So, I think we are thinking about supply chains. I mean, when I’ve had conversations with people in various parts of the government everybody’s talking about supply chains. So is everybody on CNN and everywhere else.

HAASS: Even people who don’t understand what they are.

O’NEIL: Often. I think one thing—and let me just—you know, when I was doing the research there are some areas that I, actually, found real hope and let me give you one example on this hope. Because we often think about globalization or this internationalization as this race to the bottom and the most efficient. And I read that—I hear that when I have conversations, but I read it—you know, it was all about, you know, just efficiency and the workers were thrown to the side and the like.

But doing this research that’s not always the case and let me go to the European example of regionalization because I think this is an interesting case in that there are many industries in Europe that became globally competitive and they did not race to the bottom. They paid decent wages. They have worker protections.

And, you know, one example that really struck me when I was doing the research was the example of Zara. So many of you might know Zara or your kids might know Zara. You know, Zara is the biggest fast fashion brand in the world. It sells over, you know, half a trillion dollars’ worth of clothes every year. It is also the highest profit fast fashion company in the world. So it’s not only the biggest; it’s also the most profitable.

And the way they do that is by not producing in Asia but by producing in Europe. So only 15 percent of their clothing comes from Asia, unlike the Gap and H&M where most of it comes from Asia. They do almost all of it in Europe, and they find a combination of automation, of smaller runs. So they don’t do these massive runs of, you know, hundreds of thousands of t-shirts and the like. Smaller runs, smaller batches, more flexible, faster to the market, and then they don’t have to discount, and so their profit margins stay higher.

So, to me, as I was looking at it, this is the hope. You know, Europe has a lot of problems. It has energy problems that are most acute. It has demographic problems. It has—you know, it has a lot of challenges. But they have found—even in the most cutthroat of global businesses, they found the most profitable model by producing it with high-wage countries.

So I think as we think about the United States, it’s not out of the range, right. You can do—you can reach this high equilibrium. There’s ways to do it, and it’s not all regionalization but that is a part of the story. And so that’s what I would say for supply chains is that there’s hope here, too.

HAASS: So, I apologize. I know there’s several questions left but we have time limits here. We try to be respectful of them—of your time.

The good news, though—the particularly good news tonight, at least for those in the room as opposed to those virtually, is not only is there a reception for which there’s food and drink but there’s also the opportunity to ask questions of Shannon that you may not have gotten a chance to ask.

So I want to encourage you to read or, better yet, buy The Globalization Myth: Why Regions Matter, and I think you’ve gotten way beyond wonkdom.

O’NEIL: (Laughs.)

HAASS: This is, actually, an important corrective to a lot of the conversation about how the world works and, as we were exploring it, actually has real implications for foreign policy that we ought to—we may live globally but, increasingly, we’ve got to think regionally, and I think that actually would have important consequences for what it is we do and how we do it.

So, Shannon, thank you for writing this book. Thank you for spending the evening with us and explaining the ideas and the motives behind it, and I think everyone here will agree with me that you have added significantly to the conversation.

So thank you. (Applause.)


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