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Shannon K. O’Neil is an expert in global trade whose new book, The Globalization Myth: Why Regions Matter, argues that the emergence of three major economic blocs in North America, Asia and Europe, has been more important to the world economy’s recent development than globalization. Dr. O’Neil is currently a vice president at the Council on Foreign Relations, where she holds the Nelson and David Rockefeller chair for Latin America studies. Besides her career in academia she has also worked on Wall Street as an equity analyst. The following is a lightly edited transcript of a recent interview.

Q: Your book argues that globalization is a slightly inaccurate way to describe what’s happened to the world economy in recent decades: You see regionalization as much more important. Could you expand on that?

A: The conventional wisdom about globalization just isn’t accurate, for two main reasons. The first is that when you look back at the last 30 to 40 years, these years of the creation of global supply chains and the hyper-globalization that people talk about, it just hasn’t been as widespread and as penetrating as it is often portrayed. When you look at the economic data of the last 40 plus years, there have only been 25 countries that have really seen their economies transformed by globalization. I measure that by looking at trade as a proportion of GDP: only these two dozen plus countries have really seen a transformation, where trade has doubled as a percentage of their economy. In contrast, you see dozens more — 89 to be precise — where trade as part of GDP stayed the same or even declined: you have countries that de-globalized over these last 40 years. So that’s one big difference from the way we usually think about globalization, it’s just not as widespread as is commonly believed.

The second is that when companies went abroad, they usually didn’t go to the other side of the world. Sure, some companies did, but most did not: Most of them went regional. The increase in trade that has happened is much closer by. One statistic that brings this home is that the average good that’s traded travels 3,000 miles — that’s about the distance from New York to Los Angeles, that doesn’t get you across the Pacific or the Atlantic Ocean. So when you combine these two things — that not that many countries were involved, and when they were they more often connected through trade with their neighbors or countries nearby — you don’t get this globalization that we talk about today, or at least the majority is not that [sort of] globalization, it is much more regionalization. Our misunderstanding of what’s actually happened over 40 years then affects how we think about what is to come because things are changing again.

There is a widespread belief, though, that millions of people, particularly in developed countries like the U.S., have lost their jobs, mainly in manufacturing, to China and other parts of Asia. Are you saying that’s all been overemphasized? 

There’s two things that have happened. One is that we tend to focus on the very high-profile companies that have gone global. We know the story of Boeing, that it sources from 58 different countries — that is a global company, for sure. But you don’t see the names that you and I might not know, the tens of thousands of companies that when they went abroad, they just went nearby. 

The other part is the nature of trade over these last 40-plus years has really changed. What is traded around the world is not as often the finished products, but the components and inputs that go into a finished product. Somewhere between 75 and 80 percent of what is now traded is what economists call intermediate goods. These inputs are much more regional than final products are. For example, lots of the trade involved in making an iPhone is within Asia, as the screens and the processors and the microphones and the cameras and everything else come together — even if they’re then sold around the world. That’s part of the reason we say ‘iPhones are sold all over the world, it must be global’ — and they are, except that the trade behind it is very regional, when you come down to it. 

As for services, this is an area that is actually much less traded than physical goods, though they’re ramping up very rapidly now. Even though services would seem to be something that can be truly global, because you don’t have the cost of moving things around as much as you do with physical products, we still see a regional aspect to this. 

In part it is things like trade agreements, and the ability for services to move across borders, that really matter. There’s frictions there. In part it is languages, or similar legal frameworks that tend to be the same closer by, because you have accountants or bankers or lawyers that are crossing borders, they don’t have the expertise with issues on the other side of the world. In part it is because tourism is a big part of services. Interestingly, people tend to vacation near home: 75 percent of vacations in Europe are taken by other Europeans. They’re not people from the other side of the world. You see that even more so in Asia and in other parts of the world. The same thing with students: education that crosses borders also tends to be regionalized, more than globalized. Even with call centers, some of those companies that put call centers on the other side of the world are now bringing them back because they find that there are frictions, that they aren’t able to serve their customers with people who are on the other side of the world due to time differences or cultural and language differences. 

Within this theme of regionalization, can you talk a bit about the three big regions that you see as having developed over the last several decades, and which you see as the most integrated right now?

With this globalization that has happened over the last 40 years, what you’ve gotten, really, is three big regions: a European one, a North American one, and an Asian one. Those three regions produce 90 percent of all traded goods. The dozens of other countries in Latin America and Africa and the Middle East and South Asia: they only produce 10 percent of global trade. 

In between these three regions, you see differences in terms of integration. The most integrated is Europe: two-thirds of its trade is between its countries, they basically make things together and sell them to each other. 

Part of the story of the rise of China, over the last 30 plus years, is really a story of Asia’s regionalization.

In Asia, we’ve seen a big increase in integration. In 1980, about 30 percent of trade was within Asian nations; today, it’s 60 percent: we’ve seen a huge increase as Asian countries make things together, and then increasingly sell them to each other as well. 

And then in North America, in the early 1990s, about 40 percent of trade was between Mexico, Canada, the United States; with NAFTA, that rose up to about 47 or 48 percent in 2000, so almost one out of every $2 between the three countries; but then that fell back down to 40 percent in the first decade of the 21st century, the decade that China came into the WTO. So North America is the least integrated of the three regions. 

Given your diagnosis, do you think that regionalization is a trend that policymakers should encourage?

As I look back at the last 30 to 40 years, I see this regionalization as really bringing comparative advantage to countries that participated. Part of the story of the rise of China, over the last 30 plus years, is really a story of Asia’s regionalization. China hooked into regional supply chains that were developing in the 1960s and 70s, first led by Japan. And as all these countries came together, they proved they could make high quality products, in an affordable way, that compete globally. It’s ‘Factory Asia’, not just China. China was in many ways the last stop, and so while goods say “Made in China,” they bring parts from all over Asia. 

Some of the winners and losers of ‘globalization’ in the last 30 to 40 years, actually come down to this regionalization. Latin America and Africa and other areas that didn’t win, or didn’t do as well: in part it’s because they did not participate in regionalization. When they are trying to make products, they’re competing against a whole group of countries that had come together and had specialized and had economies of scale, had diversity in labor skills and access to capital and markets, all these things that made their products so much more competitive globally. 

What this means for the United States or places like that is, yes, you need to think regional. That is how you are going to be able to manufacture in globally competitive ways. But the U.S. shouldn’t give up on global markets: Because 95 percent of the world’s consumers don’t live within U.S. borders; and many of the next billion people who are going to come into the middle class, who are going to buy products, also probably don’t live in or very close to North America. For countries like the United States, or for Asia, for Europe, for other countries all over the world, if you can make things regionally, you can get those economies of scale and specialization and advantages. Whether you like it or not, manufacturing is now a team sport across countries, that’s how it’s done competitively. But I wouldn’t suggest that any country cut itself off from consumers around the world, because those are going to be places where you can sell these now more competitive products.

The interesting thing is, it often is difficult for companies to go global. And that’s why there’s actually so few of them that do. There’s a great study by McKinsey, where they survey 600 companies, and they find that when companies go abroad, they tend to increase their profit margins and operating margins and the like. But if they go further abroad, then those margins tend to come back down: they call this the ‘globalization penalty’. Often the most profitable companies are not those that go international, but go regional.

Is there a danger with regionalization that protectionism grows, at least between the regions? 

It is a danger, and it’s a reality. If you look at the last decade, the biggest set of trade barriers that have been put in have really been not tariffs, but subsidies. By one count, a study that was done out of Europe, there have been 20,000 subsidies put in place over the last decade plus, just between Europe, the U.S. and China, it’s pretty evenly divided. And organizations like the WTO really aren’t set up in their rules to take on subsidies. They do a decent job on tariffs, there’s some other things that they can navigate. But the various types of subsidies that have been laid out are difficult for that body to take on. 

One of the reasons we’ve seen the rise of regional free trade agreements, and regional bodies, is precisely because when it comes to these thornier issues, it’s easier for a smaller group of countries to agree on, diminish or even eliminate them. This is not optimal, but given the realities, the second best solution in terms of economic theory is where we are. You can work with a like-minded group of nations. Given the growing number of frictions in trade around the world, the forums where countries are able to take those on are going to be smaller groups, and often regional ones.

Do you think it’s going to make less sense for the likes of Boeing and Apple to have globalized supply chains in future?

There are several factors that are changing global supply chains today. This started before COVID, in the 2010s, but I do think COVID is accelerating these factors. This involves automation and demographic shifts that are changing labor costs; and it involves the effects of climate change on transport and logistics, as well as the taxes, levies and carbon border adjustment mechanisms and other kinds of things that countries are thinking about putting on emissions. And it involves geopolitics. 

I do think there will be incentives for companies to change their supply chain structure, based on tariffs and things that they will have to avoid, but also on the incentives and subsidies that they might be given if they choose particular markets.

So many companies, even before we hit COVID, even before we hit some of the geopolitics which we are all talking about today, were already starting to think about moving their supply chains because placing their footprint in a certain way was less profitable, or there were changing dynamics. And as we add in what COVID has shown us about transportation and logistics, what geopolitics is changing about the profit structure for a lot of companies, I do think we will start seeing more regional supply chains and even duplicate supply chains — some that supply markets in particular parts of the world because they can get to customers faster and they can use automation and other things to speed the process in ways that mean they don’t need to be in massive factories the way they used to be. And also, they can then get around some of the geopolitical barriers that have been thrown up in recent years.

There’s lots of incentives that are being put in place now, such as in the United States, which is putting hundreds of billions of dollars towards semiconductors and green technology, and the like. China’s responding in kind, Europe probably will as well, they’re discussing it right now with state aid rules. There will be incentives for companies to change their supply chain structure, based on tariffs and things that they will have to avoid, but also on the incentives and subsidies that they might be given if they choose particular markets.

Where do you see China’s role in economic integration in Asia? 

When I look back at the last 30-40 years of Asian integration, it was led by companies and CEOs. There was assistance from governments. But it was really the companies going out and outsourcing, looking for labor and new places to make pieces and parts. By contrast in Europe, it was top down treaties and diplomats who were setting the rules that companies then followed or took advantage of. 

In Asia, it was very different. You don’t see free trade agreements in Asia until the 1990s. And you don’t see ones that really matter or changed the nature of the rules until the 21st century. Back in the 1960s and 70s, Japanese companies first searched for labor and went to, at the time, very poor places like South Korea, Taiwan and Singapore, and began putting factories there. The Japanese government followed with development assistance, building the ports that their companies could get in and out of, and building industrial parks. Later you see South Korea and Taiwan, as they became more wealthy and more sophisticated in manufacturing, begin to go out to other countries including Thailand, China, Vietnam and other places. 

China today is following that model and its foreign direct investment and companies are now going out into Asia, the government is complementing that with Belt and Road investments. You see integration through commercial ties. When Japanese companies went to South Korea, there was not a lot of love lost between those two countries (just 20 years before they’d been colonizers). There are still challenges there, as we know; the economic ties have managed to, at least so far, supersede many of the geopolitical conflicts or tensions that remain in Asia. 

Often Asian nations or Asian companies are able to navigate those significant geopolitical differences and tensions in the search for profits, for economic and commercial gain. China is part of this Asian story and following the same path, but it is just so much bigger. And as the geopolitical moment is very different from the post cold war era of openness underpinned by the U.S. and Europe. So as we look forward to the next 10 or 20 years, the path will change. We’ve seen China’s participation in Asian supply chains diminish already, as they want to take more of the high value-added work. We talk a lot, at least in the Western press, about how that hits U.S. or European companies; but Asian companies have invested more in China than U.S.- or European-based companies, and they’re getting hit or pushed out as much if not more. They are particularly in technological areas where China has ambitions to lead, replacing South Korean or Taiwanese companies.

The Biden administration has carried on with a lot of the Trump administration’s trade policies that are primarily hostile towards China. Is the U.S. going to succeed in its long term aim of hobbling China’s efforts to advance in many industries? 

One of the biggest changes we’ve seen over the last decade is the return of industrial policy, and the fact that governments are turning away from relying principally on markets to govern economies and commerce. The other difference is that compared to the industrial policy of the 20th century, it now has many different goals. It’s not just economic competitiveness: one of the big goals is national security, very broadly defined, including controlling supply chains or access to products across many sectors. We have climate change goals, too: governments around the world have made pledges that they’re going to become net zero or reduce their carbon footprint over the next couple of decades, so they need to change the nature of their economy to reach those goals. You also have some governments, like the Biden administration, talking about social justice and inclusion. 

These multiple goals mean different policies and evaluations when it comes to deciding whether the outcomes of those policies are successful or not. If it’s just to create more innovative products, then shutting yourself off is not going to be the way to do it. Open trade and the free movement of ideas, scientists, and patents would be a better way to go about it. But if your goal is national security, if your goal is climate change, if your goal is some of these other issues, then perhaps you take a little bit less open innovation, in return for making sure that you can have access to semiconductors, pharmaceuticals, or rare earths or other minerals, the electric vehicle batteries and the like, and so that they’re not dominated by someone or another country where you may have geopolitical tensions. 

Taken together, your book is an argument against zero-sum thinking in trade. How do you persuade people of the merits of such arguments, as countries around the world become more protectionist in their thinking?

This is the hard question. There are very few industries that governments will be able to subsidize indefinitely for national security concerns: semiconductors is one, maybe electric vehicle batteries or green technologies, such as hydrogen, at least for a good number of years. But there’s going to be very few. 

… the way to prosperity and to inclusive growth is engaging with international markets, not running away from them. 

What COVID actually brought home was that international supply chains are actually very efficient, and pretty resilient and robust. We like to talk about how supply chains failed. But within three months, most of the products that we were missing were back on the shelves around the world, despite unprecedented demand shocks, supply shocks, and logistic shocks. 

Back to your question, how do you convince politicians and the public that this isn’t a problem, that this is actually the solution? The challenge is, how do you convince an average person in a country that they will be better off with a slightly smaller slice of a much, much bigger global pie, then a bit of a bigger slice of a smaller domestic pie? For a U.S. worker, if we protect an industry, say the steel industry, yes, you can sell to all kinds of companies in the United States, but you won’t be able to sell internationally to the 7.5 billion people that live outside of North America, because your steel is going to be too expensive. And you should be thinking about those bigger markets. And that’s where things like CPTPP and others that would open up access to markets for U.S.-based companies that don’t have that preferred access that many other countries do. You turn it around and say, the way to prosperity and to inclusive growth is engaging with international markets, not running away from them. 

The one thing I would say is having followed lots of pollsters on these issues, there is a strong majority of Americans who think trade is an opportunity, not a threat. There’s an opening there as people understand trade can be beneficial to them and their families, even if they’re not part of the jet set group.

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